Crystal Point Condo. Ass’n v. Kinsale Ins. Co., __ N.J. __, 2022 N.J. LEXIS 657 (July 18, 2022), provides a clear answer to one of the questions arising under New Jersey’s Direct Action Statute, N.J.S.A. 17:28-2 which, under certain circumstances, allows a judgment creditor to sue the judgment debtor’s insurer. The case arose when a condominium association obtained default judgments against defunct construction companies, sought to collect those judgments against the defendants’ insurance company, but did not want to honor the arbitration clause in the policy of insurance. Reversing the lower court, the supreme court held that such a judgment creditor is bound by the arbitration clause in the insurance policy.
Those following the case may have hoped for a ruling that developed the law more generally with regard to the rights and obligations of non-signatories to an arbitration contract. The appellate division opinion, 466 N.J. Super. 471 (App. Div. 2021), held that the plaintiff’s rights were derivative of those of the insured contractors under the policy and, therefore, that they generally would be bound by the policy’s arbitration clause. However, after considering the common law requirements regarding non-signatories, as described in Hirsch v. Amper Financial Services, LLC, 215 N.J. 174 (2013), the appellate division came to the opposite conclusion.
As explained by the supreme court in Crystal Point, the appellate division reasoned that Crystal Point was an incidental beneficiary of the insurance policy and an “injured party with no contractual relationship with the insured or insurer and whose only means to collect its judgment against the now defunct insured is through the pathway afforded by legislative mandate." The appellate division held that Crystal Point should not be burdened with the arbitration agreement in the policy. The appellate division rejected the notion that labeling a non-signatory as a third-party beneficiary of an insurance contract required the non-signatory to abide by the policy’s arbitration clause. “[T]he appellate court reasoned that although ‘a non-signatory to an arbitration agreement might be compelled to arbitrate based on principles of agency or other legal theories,’ no such theory applied here.” As a result, the appellate court declined to enforce the insurance policies' arbitration provisions.
The New Jersey Supreme Court reversed. It reasoned that the claim by Crystal Point was not a common law claim, such as discussed in Hirsch, but “a statutory claim” under the Direct Action Statute and that not enforcing the arbitration clause “would grant Crystal Point greater rights” than the insured. In other words, a non-signatory must take the good with the “bad,” and cannot pick and choose between rights under the policy and its obligations. Unstated, the lower court’s efforts to apply a more restrictive standard based on standard common law principles, such as assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary, agency, waiver, or estoppel, as described in Hirsch, do not fit situations in which a plaintiff is asserting derivative rights.
Although one might read Crystal Point to apply only in the special situation of the Direct Action Statute, where the claims are said to be “derivative,” rather than contractual, it may be more appropriate to read the case more broadly to other cases in which a non-signatory seeks to invoke rights under a contract that does not neatly fit into the established categories (noted above).