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

• Decision Date: 18 July 2022
• Docket Number: A-76 September Term 2020,085606
• Citation: 251 N.J. 437,277 A.3d 1059
• Parties: CRYSTAL POINT CONDOMINIUM ASSOCIATION, INC., Plaintiff-Respondent, v. KINSALE INSURANCE COMPANY, Defendant-Appellant.
• Court: New Jersey Supreme Court

251 N.J. 437

277 A.3d 1059

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

v.KINSALE INSURANCE COMPANY, Defendant-Appellant.

A-76 September Term 2020

085606

Supreme Court of New Jersey.

Argued January 3, 2022

Decided July 18, 2022

Sean P. Mahoney argued the cause for appellant (Kennedys CMK, attorneys; Sean P. Mahoney, of counsel and on the briefs, and Michael E. DiFebbo, on the briefs).

John Randy Sawyer argued the cause for respondent (Stark & Stark, attorneys; John Randy Sawyer, Lawrenceville, of counsel and on the brief).

Kayla Elizabeth Rowe argued the cause for amici curiae the Insurance Council of New Jersey and the New Jersey Civil Justice Institute (Rowe Law, attorneys; Kayla Elizabeth Rowe, of counsel and on the brief).

JUSTICE PATTERSON delivered the opinion of the Court.

The Direct Action Statute 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." Ibid.

In a construction defect case, plaintiff Crystal Point Condominium Association obtained default judgments against two entities that it contends are insolvent. Crystal Point alleges that defendant Kinsale Insurance Company insured the two entities for the construction claims brought here. It relies on insurance policies issued by Kinsale, each providing for binding arbitration of disputes arising from the policies.

After Crystal Point failed to recover on the default judgments, it brought a declaratory judgment and breach of contract action against Kinsale pursuant to the Direct Action Statute, demanding that Kinsale satisfy the judgments. Kinsale argued that the Direct Action Statute did not govern Crystal Point's claims. It asserted that even if the Direct Action Statute were held to apply, the statute's provision that the terms of the policy govern the action mandates that the parties’ dispute be resolved in arbitration, not in a court proceeding.

The trial court concluded that the Direct Action Statute did not apply. It granted Kinsale's motion to compel arbitration and dismissed Crystal Point's complaint. The Appellate Division reversed the trial court's determination, authorized Crystal Point to assert claims against Kinsale under the Direct Action Statute, and ruled that the parties’ dispute was not arbitrable. Crystal Point Condo. Ass'n, Inc. v. Kinsale Ins. Co., 466 N.J. Super. 471, 481-87, 247 A.3d 405 (App. Div. 2021).

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. 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. Crystal Point's claims against Kinsale are therefore subject to arbitration.

Accordingly, we reverse the judgment of the Appellate Division and reinstate the trial court's order compelling arbitration of the parties’ dispute.

I.

A.

1.

Kinsale is an excess and surplus lines insurer. It is undisputed that Kinsale issued Architects and Engineers Professional Liability insurance policies, effective from July 29, 2016 to July 29, 2018, that provided insurance coverage to Nacamuli Associates LLC, a structural engineering firm. Crystal Point alleges that Kinsale also provided insurance coverage to Hawke Inspections and Testing LLC, a construction inspection company, pursuant to an Architects and Engineers Professional Liability policy effective during the same policy period.

The relevant policies issued by Kinsale included the following language addressing the bankruptcy or insolvency of an insured:

SECTION VII - GENERAL CONDITIONS

A. Bankruptcy

Bankruptcy or insolvency of any "insured" or any "insured's" estate will not relieve us of our obligations under this Policy.

B. Legal Action Against Us

1. No action may be brought against us unless there has been full compliance with all of the terms of this Policy 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;

2. No person or organization has any right under this Policy to join us as party into any suit to determine the liability of any "insured".

The policies also contained an arbitration provision that identified the disputes to be arbitrated and set forth a procedure for the arbitration:

SECTION X - BINDING ARBITRATION

All disputes over coverage or any rights afforded under this Policy, 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 Arbitration, which shall be the sole and exclusive means to resolve the dispute. Either party may initiate the binding arbitration.

The arbitration forum and process shall be agreed to by the parties. In the event the parties cannot agree on an arbitration forum and process, the matter shall be submitted to the American Arbitration Association. The Arbitration shall be before a panel of three arbitrators, unless the parties agree to one arbitrator, all of whom shall have experience in insurance coverage of the type afforded by this Policy. If the parties select a panel of three arbitrators, each party shall select an arbitrator and the chosen arbitrators shall select a third arbitrator. The American Arbitration Association shall decide any disputes concerning the selection of the Arbitrators. The potential arbitrators from which the arbitrators shall be selected shall not be confined to those provided by the American Arbitration Association. Each party shall bear the costs of its arbitrator and shall share equally the costs of the third arbitrator and arbitration process. In the event of a single arbitrator, the cost shall be shared equally by the parties. The decision of the arbitration is final and binding on the parties.

2.

Crystal Point is a nonprofit corporation that manages, operates, and maintains the common elements of a high-rise residential building in Jersey City. After discovering what it alleges to be construction defects in the building, it filed an action against the contractors that it contended were responsible for those defects. Among the defendants named in Crystal Point's action were Nacamuli, which provided engineering and other services for the construction of the building, and Hawke, which served as a third-party inspector of the building's concrete balconies and slabs.

Crystal Point alleges that Nacamuli and Hawke put Kinsale on notice of the construction defect action and tendered their defenses, and that Kinsale declined to defend or indemnify either defendant. Neither Nacamuli nor Hawke filed an answer in Crystal Point's construction defect action.

Crystal Point sought and obtained default judgments against Nacamuli and Hawke. After a proof hearing, the trial court entered final judgment against Nacamuli in the amount of $874,400.86, and final judgment against Hawke in the amount of $859,965.01.

Crystal Point identified a Federal Tax Lien Number for Hawke and determined that Hawke was no longer in business, but it did not identify a Federal Tax Lien Number for Nacamuli. It obtained writs of execution against Nacamuli and Hawke and requested that sheriff's officers execute the writs.

B.

1.

Crystal Point filed a declaratory judgment action against Kinsale. It alleged that the insurance policies that Kinsale issued to Nacamuli and Hawke covered the claims asserted against them. Without invoking the Direct Action Statute in its complaint, Crystal Point alleged that it was entitled to recover the amounts owed by Nacamuli and Hawke under the insurance policies issued by Kinsale. It sought a declaration that the policies covered its claims against the policyholders, and that Kinsale was obligated to satisfy the judgments in accordance with those policies. Crystal Point also asserted a breach of contract claim against Kinsale, alleging that Kinsale had breached its obligations under the insurance policies by disclaiming coverage.

Kinsale filed a motion to compel arbitration and to stay the proceedings, asserting that Crystal Point's claims were subject to binding arbitration in accordance with the arbitration clauses in the insurance policies. Kinsale argued that the Direct Action Statute did not apply because Crystal Point had not demonstrated that either Nacamuli or Hawke was insolvent or bankrupt. In the alternative, Kinsale contended that even if the Direct Action Statute were to apply, it would not preclude enforcement of the arbitration provisions in the policies.

Crystal Point opposed the motion. It asserted that the arbitration provisions did not apply to its claims and that the Direct Action Statute precluded enforcement of those provisions.

The trial court granted Kinsale's motion to compel arbitration but denied its motion to stay the proceedings. The court noted that as a general rule, insurance policies are enforced as written when clear and unambiguous, and that the New Jersey Arbitration Act, N.J.S.A. 2A:23B-1 to -32, expresses the Legislature's policy in favor of arbitration. The trial court held that the arbitration provisions in the insurance policies were clear and unambiguous and that they governed the dispute between Crystal Point and Kinsale. The court viewed the Direct Action Statute to be inapplicable because there was no evidence in the record before it that either Nacamuli or Hawke was insolvent or bankrupt.

The trial court ordered the parties to arbitrate their...