Supreme Court says condo association can sue insurer in construction defect case, but must arbitrate
After obtaining default judgments for construction defects against a structural engineering company and a construction inspection company, a New Jersey condominium association can directly sue those companies’ insurer, the Supreme Court has ruled from New Jersey.
At the same time, the court reversed the Appeals Division’s decision that these claims did not need to be arbitrated under the terms of the policy.
Crystal Point Condominium Association Inc., a not-for-profit corporation that manages a high-rise residential building in Jersey City, has 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 suit against two contractors found responsible for the problems. The notice did not reveal the nature of the problems.
Crystal Point obtained default judgments and writs of execution against the engineering firm, Nacamuli Associates LLC, and the construction inspection firm, Hawke Inspections and Testing, the court heard.
Following an evidentiary 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 were insolvent.
Under direct action law, Crystal Point filed an action seeking declaratory judgment and breach of contract claims against the contractor’s insurer, Kinsale Insurance Co.
Kinsale, an overage and excess lines insurer, provided cover for Nacamuli and Hawke, and the policies in question provided, “[a]All disputes regarding coverage or rights granted under this policy…shall be submitted to binding arbitration,” according to the notice.
In the trial court, Kinsale’s motion to compel arbitration was granted and Crystal Point’s claim was dismissed after the court found that direct action law was not applicable.
The Appeals Division reversed that decision, granted Crystal Point’s application under the statute, and reversed the decision binding arbitration.
Justice Anne M. Patterson, in her written opinion for the unanimous Supreme Court, said the law, first enacted in 1924, “permits an aggrieved plaintiff holding unsatisfied judgment against an insolvent or bankrupt insured to bring an direct action against an insurer within certain parameters NJSA 17:28-2 This 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 law only applies to “property loss or damage caused by animals or any drawn vehicle”. Patterson also rejected Kinsale’s claim that Crystal Point had failed to prove the insolvency of the two contractors, accepting the Appeals Division’s decision that affidavits of service from the County Sheriff’s Office Union, noting that the writs of execution had been returned unsatisfied, constituted prima facie evidence of insolvency. .
Patterson accepted the Appeals Division’s decision that the direct claim against Kinsale is permitted under the Direct Action Act, but reinstated the trial court’s order compelling arbitration.
“We agree with the Appeals Division that Crystal Point may assert direct claims against Kinsale pursuant to the Direct Action Statute in this matter,” Patterson said. “However, based on the plain language of NJSA 17:28-2, Crystal Point’s claims against Kinsale are derivative claims and are therefore subject to the terms of the insurance policies at issue, including the provision of each policy requiring binding arbitration of disputes between Kinsale and its policyholders.
The New Jersey Insurance Board and the New Jersey Civil Justice Institute had submitted amici curiae briefs stating that “a third party beneficiary seeking to sue under the direct action law is subject to all conditions of the insurance policy it seeks to enforce, including any arbitration clause.
In the language of the law, Patterson wrote, Crystal Point has “purely derivative” rights that could have been asserted by Nacamuli or Hawke.
“The Appeals Division’s decision, however, would give Crystal Point greater rights than any rights Nacamuli or Hawke could have asserted against Kinsale,” Patterson said. “If we agreed with the Appeals Division that, unlike other provisions of the insurance policies, the arbitration clause is somehow unenforceable in Crystal Point’s action, we would be in breach of the clear terms of the direct action law.
Chief Justice Stuart Rabner, Justices Lee Solomon and Fabiana Pierre-Louis, and Justice Jose L. Fuentes, temporarily assigned to the court, joined Patterson’s opinion.
Kennedys CMK’s Sean P. Mahoney was representing Kinsale and could not immediately be reached for comment.
Likewise, Crystal Point attorney John Randy Sawyer of Stark & Stark did not immediately return a request for comment.