N.J. condo association may pursue insurer in construction defect case
The state’s supreme court ruled the association can assert direct claims against the insurer, but must arbitrate the case.
After obtaining default judgments for construction defects against a structural engineering firm and a construction inspection company, a New Jersey condominium association may directly sue those companies’ insurer, the New Jersey Supreme Court ruled.
At the same time, the court reversed the Appellate Division’s holding that those claims need not be arbitrated in keeping with the policy terms.
Crystal Point Condominium Association Inc., a nonprofit corporation that manages a high-rise residential building located in Jersey City, sought to assert direct claims against the companies’ common insurer, according to the high court’s opinion.
Crystal Point, after discovering construction defects in the property, filed an action against two contractors it deemed to be responsible for the issues. The opinion didn’t reveal the nature of the issues.
Crystal Point obtained default judgments and writs of execution against both the engineering firm, Nacamuli Associates LLC, and the construction inspection company, Hawke Inspections and Testing, the court said.
Following a proof hearing, the trial court entered final judgments against Nacamuli for $874,400.86, and against Hawke for $859,965.01, according to the opinion. However, Crystal Point alleged that it failed to recover the default judgments because both contractors are insolvent.
Under the Direct Action Statute, Crystal Point filed an action seeking declaratory judgment and breach-of-contract claims against the contractor’s insurer, Kinsale Insurance Co.
Kinsale, an excess and surplus lines insurer, provided coverage for both Nacamuli and Hawke, and the policies in question provided, “[a]ll disputes over coverage or any rights afforded under this Policy … shall be submitted to binding Arbitration,” according to the opinion.
At the trial court, Kinsale’s motion to compel arbitration was granted, and Crystal Point’s claim was dismissed after the court found the Direct Action Statute was not applicable.
The Appellate Division reversed that decision, and allowed Crystal Point’s claim under the statute and reversed the ruling compelling arbitration.
Justice Anne M. Patterson, in her written opinion for the unanimous Supreme Court, stated that the statute, first enacted in 1924, “authorizes an injured claimant holding an unsatisfied judgment against an insolvent or bankrupt policyholder to file a direct action against an insurer in certain settings. N.J.S.A. 17:28-2. That action must proceed ‘under the terms of the policy for the amount of the judgment in the action not exceeding the amount of the policy.’”
Patterson rejected Kinsale’s arguments that the statute applies only to “loss or damage to property caused by animals or by any vehicle drawn.” Patterson also rejected Kinsale’s claim that Crystal Point failed to prove the insolvency of the two contractors, agreeing with the Appellate Division’s determination that affidavits of service by the Union County Sheriff’s Office, noting that writs of execution were returned unsatisfied, were prima facie evidence of insolvency.
Patterson agreed with the Appellate Division decision that the direct claim against Kinsale is allowed under the Direct Action Statute, but reinstated the trial court order compelling arbitration.
“We concur with the Appellate Division that Crystal Point may assert direct claims against Kinsale pursuant to the Direct Action Statute in the setting of this case,” said Patterson. “Based on the plain language of N.J.S.A. 17:28-2, however, Crystal Point’s claims against Kinsale are derivative claims, and are thus subject to the terms of the insurance policies at issue, including the provision in each policy mandating binding arbitration of disputes between Kinsale and its insureds.”
The Insurance Council of New Jersey and the New Jersey Civil Justice Institute had submitted amici curiae briefs stating that “a third-party beneficiary seeking to pursue claims under the Direct Action Statute is subject to all terms of the insurance policy that it seeks to enforce, including any arbitration provision.”
Under the language of the statute, Patterson wrote, Crystal Point has “purely derivative” rights which could have been asserted by Nacamuli or Hawke.
“The Appellate Division’s decision, however, would grant Crystal Point greater rights than the rights that Nacamuli or Hawke could have asserted against Kinsale,” Patterson said. “Were we to concur with the Appellate Division that in contrast to the other provisions of the insurance policies, the arbitration clause is somehow unenforceable in Crystal Point’s action, we would contravene the Direct Action Statute’s plain terms.”
Chief Justice Stuart Rabner, Justices Lee Solomon and Fabiana Pierre-Louis, and Judge Jose L. Fuentes, temporarily assigned to the court, joined in Patterson’s opinion.
Sean P. Mahoney of Kennedys CMK represented Kinsale and could not be immediately reached for comment.
Likewise, counsel for Crystal Point, John Randy Sawyer of Stark & Stark, did not immediately return a request for comment.
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