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“Direct Action Statute” Can Permit Judgment Claimants to Collect from Debtors’ Insurance Policies

Jul 27, 2022 | Written by: Jacob A. Papay, Jr., Esq. |

Pursuant to the Direct Action Statute, NJSA 18:28-2, a personal injury or property damage judgment claimant who is unable to collect the judgment from an insured judgment debtor may seek to collect the judgment directly against the insurance policy of the judgment debtor or the policy of a party responsible for the tortfeasor’s actions.  This may occur consistent with the insurance policy terms, provided the tortfeasor is insolvent or bankrupt and the efforts to execute upon the judgment were returned unsatisfied due to the insured tortfeasor’s insolvency or bankruptcy.  

This situation generally arises from a default judgment in which the tortfeasor fails to answer the complaint and a default judgment is entered. The Direct-Action Statute, NJSA 18:28-2 was passed in 1924 to eliminate liability policy conditions that barred insolvent or bankrupt tortfeasors from accessing their liability insurance policy benefits to pay tort judgments against them.  The Act mandated that liability insurance policies cannot deny payment of tort damages caused by an insured who is insolvent or bankrupt, and permits a judgment creditor to directly seek collection from the insurance policy of the tortfeasor or of the party liable for the tortfeasor if the judgment was uncollectible because of the insured’s bankruptcy or insolvency.   

Because of the era in which the statute was enacted, it contained what now appears to be a meaningless distinction of the applicable claims.   The original statute provided the Act applied to liability insurance policies to pay personal injury and property damage claims caused by the negligence of an insolvent or bankrupt insured, and for such damages caused by an insolvent bankrupt insured’s animal, carriage, or vehicle.  I am not sure why the Legislature considered claims for personal injury or property damage caused by an insured’s vehicle or animal a separate category of torts from the general group of personal injury and property damage torts caused by an insured, other than the drafting was consistent with the conditions of life and language of the era.  Nonetheless, what now appears clear recently required a ruling that the statute’s separate reference was simply another type of tort to which the Act applied, and not a limiting condition that the Act only applied to injuries caused by an insured’s vehicle or animal. Crystal Point Condominium Association, Inc. v. Kinsale Insurance Company, ___N.J. ___, decided July 18, 2022.

In Crystal Point, the Condominium Association obtained two default judgments for construction defect claims against a structural engineer and its companion construction inspection entity.  The default judgment defendants could not be located and efforts to execute upon the default judgments were returned uncollectible.  The Association then filed a Declaratory Judgment action to recover the judgments against Kinsale Insurance Company, the liability carrier for the default judgment defendants.  Kinsale denied responsibility under the Direct Action Statute claiming: a) The Direct Action Statute did not apply because the Association failed to prove Kinsale’s insureds were bankrupt or insolvent; b) the Direct Action Statute only applied to personal injury or property damage claims caused by an insured’s vehicle or animal; and c) if the Direct Action Statute applied, the plaintiff’s exclusive remedy against Kinsale policy proceeds was through binding arbitration per the terms and conditions of the Kinsale policies.

The Trial Court held the Direct Action Statute did not apply because the Association failed to prove the defaulted judgment defendants were insolvent or bankrupt.  However, the trial court granted Kinsale’s motion to compel arbitration of the Association’s claims. 

The Association appealed and the Appellate Division reversed, finding the unsuccessful execution of the default judgments constituted prima facie proof the defaulted judgment defendants were insolvent, but finding the order compelling arbitration was void.  

Kinsale appealed the reversal of the Court Order compelling arbitration under the terms of Kinsale’s policies, and the NJ Supreme Court granted certification.  The NJ Supreme Court ruled the Direct Action Statute was applicable because: a) the Direct Action Statute was not limited to torts caused by an insolvent or bankrupt insured’s vehicle or animal; and b) the Association’s unsuccessful return of the Association’s execution of judgment attempts was sufficient to demonstrate the failure to execute was because the default judgment defendants were insolvent.  The Supreme Court reinstated the order compelling arbitration, as the Direct Action Statute expressly stated the claim for recovery of an insolvent or bankrupt insured’s liability insurance proceeds is limited to the terms of the liability policy, and Kinsale’s policy arbitration conditions were clear and unambiguous.   

A Direct Action Statute claim against an insurance company/policy is a derivative claim. The claimant has the same, and no greater, rights than the carrier/policy’s insured, and all clear and unambiguous policy conditions not otherwise in violation of law or public policy are applicable to the Direct Action Statute claimant. 

Jacob Papay, Jr.


Jacob A. Papay, Jr. is a partner with Gebhardt & Kiefer, PC, and practices primarily in the areas of construction defect claims, construction injury claims,  first-party insurer claims, insurance coverage disputes, subrogation, provider health care law, commercial law, defense of professional negligence, and public entity general liability.  He represents numerous insurers, Third Party Administrators, medical groups, and businesses, and he has successfully defended public entity officials and employers in wrongful death, discrimination, excessive force and other civil rights claims.  In addition, Mr. Papay represents small businesses in mergers, acquisitions, trade secrets, employment and unfair trade practice claims. 

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Any statements made herein are solely for informational purposes only and should not be relied upon or construed as legal advice.