Crystal Point Condo. Ass'n, Inc. v. Kinsale Ins. Co.

• Decision Date: 04 March 2021
• Docket Number: DOCKET NO. A-4621-19
• Parties: CRYSTAL POINT CONDOMINIUM ASSOCIATION, INC., Plaintiff-Appellant, v. KINSALE INSURANCE COMPANY, Defendant-Respondent.
• Court: New Jersey Superior Court — Appellate Division

466 N.J.Super. 471

247 A.3d 405

CRYSTAL POINT CONDOMINIUM ASSOCIATION, INC., Plaintiff-Appellant,

v.KINSALE INSURANCE COMPANY, Defendant-Respondent.

DOCKET NO. A-4621-19

Superior Court of New Jersey, Appellate Division.

Argued January 11, 2021

Decided March 4, 2021

J. Randy Sawyer argued the cause for appellant (Stark & Stark, PC, attorneys; J. Randy Sawyer and John S. Prisco, Lawrenceville, of counsel and on the briefs).

Sean P. Mahoney argued the cause for respondent (White and Williams, LLP, attorneys; Sean P. Mahoney and Felix S. Yelin, on the brief).

Before Judges Messano, Suter, and Smith.

The opinion of the court was delivered by

SUTER, J.A.D.

Plaintiff Crystal Point Condominium Association appeals the June 23, 2020 order that dismissed its declaratory judgment complaint against defendant Kinsale Insurance Company with prejudice and required it to arbitrate its claims against defendant. For reasons that follow, we reverse the June 23, 2020 order, reinstate plaintiff's declaratory judgment complaint and remand for further proceedings consistent with this decision.

I.

Plaintiff is a nonprofit corporation that is responsible for "administering, managing, operating and maintaining the common elements" of a forty-two-story high-rise condominium building located in Jersey City. An inspection of the condominium's common elements by an engineering firm retained by plaintiff revealed there were construction defects or deficiencies with "the concrete balconies and slabs of the building."

In 2015, plaintiff sued several contractors involved in construction of the building seeking damages for these alleged construction defects. Nacamuli Associates, LLC (Nacamuli), the structural engineer for the condominium construction project, and Hawke Inspection and Testing (Hawke), a third-party inspector of the concrete balconies and slabs, were added as parties in 2017 and 2018, respectively. Neither Nacamuli nor Hawke filed an answer to the construction litigation complaint. A default was entered against Nacamuli in January 2018 and against Hawke in July 2018. Following a hearing, judgments were entered in favor of plaintiff against Hawke for $859,965.01 and against Nacamuli for $874,400.86. Plaintiff attempted to execute on the judgments. Only Hawke had a federal tax lien number. A bank account search using that number showed Hawke was out of business. Relevant here, plaintiff issued writs of execution against Nacamuli and Hawke to be served by the Hudson County Sheriff. The writs were not returned by the time this appeal was briefed.

Defendant is an excess and surplus lines insurer that is eligible to issue insurance policies in New Jersey.¹ Plaintiff alleges that defendant issued an architects and engineers professional liability policy to Nacamuli and Hawke for the periods from July 29, 2016 to July 29, 2017, and from July 29, 2017 to July 29, 2018.

Under the policy, the bankruptcy or insolvency of an insured does not relieve defendant from its obligations. The policy also provides that "[n]o action may be brought against us unless there has been full compliance with all of the terms of this [p]olicy and the ultimate amount of the ‘insured's’ responsibility has been finally concluded either by a trial judgment against the ‘insureds’ or by written agreement with the ‘insureds’, all claimants, and us ...." The policy provides for binding arbitration.

SECTION X — BINDING ARBITRATION

All disputes over coverage or any rights afforded under this [p]olicy, including whether an entity or person is a "named insured", an "insured", an additional insured or, the effect of any applicable statutes or common law upon the contractual obligations owed, shall be submitted to binding [a]rbitration, which shall be the sole and exclusive means to resolve the dispute. Either party may initiate the binding arbitration.

....

The decision of the arbitration is final and binding on the parties.

Defendant declined to defend or indemnify Nacamuli and Hawke in the construction litigation, and issued a coverage declination letter. Defendant disputes that Nacamuli is its insured.

On April 23, 2020, plaintiff filed a declaratory judgment complaint against defendant. Plaintiff requested a declaration that defendant was obligated to pay the judgments against Nacamuli and Hawke. The complaint also alleged defendant breached its contract with Nacamuli and Hawke by denying them a defense and indemnification under the policy. The complaint did not reference N.J.S.A. 17:28-2 (the direct action statute), nor whether Nacamuli and Hawke were bankrupt or insolvent.

On May 29, 2020, defendant filed a motion to compel arbitration under the policy and to stay proceedings in court.² It argued that any coverage dispute about the policy had to be resolved through binding arbitration. Defendant argued plaintiff was equitably estopped from enforcing the insurance contract at the same time it was trying to avoid the arbitration requirement.

Plaintiff opposed the motion arguing it was an incidental beneficiary of the policy. Plaintiff claimed for the first time that the direct action statute applied to its declaratory judgment action, invalidating any requirement to participate in binding arbitration. In response, defendant argued the direct action statute did not apply and the prerequisites for its application were not met, but if they were, arbitration was required because the statute used the phrase "under the terms of the policy."

The motion judge granted defendant's motion to compel binding arbitration on June 23, 2020, and dismissed plaintiff's complaint. The stay request was denied. In its written decision, the court found plaintiff was an "incidental third-party beneficiary" of the insurance policy and not a "third-party beneficiary." As a judgment creditor, it "stand[s] in the shoes of the insureds to collect the benefits of the contract" and must "accept the terms of the contract it finds distasteful." The motion judge found the direct action statute did not apply because there was no indication Nacamuli and Hawke could not pay the judgment due to insolvency or bankruptcy. Plaintiff, it was said, "must take the sweet with the sour."

Plaintiff's motion for reconsideration was denied as "unwarranted." The statute did not apply because plaintiff never showed Nacamuli and Hawke were insolvent. The court found enforcement of "the policies' arbitration clause [was] not inconsistent with the [d]irect [a]ction [s]tatute" because New Jersey's law favors arbitration and arbitration can be enforced against a non-party to a contract. The court granted plaintiff's motion to stay the June 23, 2020 order pending appeal.

On appeal, plaintiff raises the following issues for our consideration:

POINT I

THE TRIAL COURT ERRED IN COMPEL LING ARBITRATION AND DISMISSING THE ASSOCIATION'S DECLARATORY JUDGMENT ACTION IN CONTRAVENTION OF NEW JERSEY'S DIRECT ACTION STATUTE.

A. Standard of Review.

B. The Trial Court Improperly Concluded That The New Jersey Direct Action Statute, N.J.S.A. § 17:28-2, (the "Direct Action Statute") Did Not Apply To The Association's Claims.

C. The Trial Court Erred In Holding that the Policy Arbitration Clause Superseded the Direct Action Statute.

II.

"As a general rule, an individual or entity that is ‘a stranger to an insurance policy has no right to recover the policy proceeds.’ " Ross v. Lowitz, 222 N.J. 494, 512, 120 A.3d 178 (2015) (quoting Gen. Accident Ins. Co. v. N.Y. Marine & Gen. Ins. Co., 320 N.J. Super. 546, 553-54, 727 A.2d 1050 (App. Div. 1999) ). There is no such direct right unless a contractual or statutory section allows for a direct action against the insurer. See 12 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 150.08[2][a] (2020).

In New Jersey, a direct action against an insurer is permitted under N.J.S.A. 17:28-2. The statute provides,

[n]o policy of insurance against loss or damage resulting from accident to or injury suffered by an employee or other person and for which the person insured is liable, or against loss or damage to property caused by animals or by any vehicle drawn, propelled or operated by any motive power, and for which loss or damage the person insured is liable, shall be issued or delivered in this state by any insurer authorized to do business in this state, unless there is contained within the policy a provision that the insolvency or bankruptcy of the person insured shall not release the insurance carrier from the payment of damages for injury sustained or loss occasioned during the life of the policy, and stating that in case execution against the insured is returned unsatisfied in an action brought by the injured person ... because of the insolvency or bankruptcy, then an action may be maintained by the injured person ... against the corporation under the terms of the policy for the amount of the judgment in the action not exceeding the amount of the policy.

[ N.J.S.A. 17:28-2.]

Plaintiff contends the trial court erred by dismissing its complaint because the direct action statute permits it to sue defendant directly under the policy issued to Nacamuli and Hawke. Our review of a trial court's legal determination is plenary. D'Agostino v. Maldonado, 216 N.J. 168, 182-83, 78 A.3d 527 (2013) (citing Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378, 658 A.2d 1230 (1995) ).

The trial court found the direct action statute did not apply because there was no evidence Nacamuli or Hawke were bankrupt or insolvent. After the appeal was filed, however, the writs of execution to Nacamuli and Hawke were returned unsatisfied. They noted that service was unsuccessful because the "[c]ompany does not exist at this address." We granted plaintiff's motion to supplement the record to include these writs. The return of an "unsatisfied execution is prima facie evidence" of the insolvency of the insured. Universal Indem. Ins. Co. v. Caltagirone, 119 N.J. Eq. 491, 494, 182 A. 862 (E. & A. 1936). Defendant has not offered...