A New Jersey appellate court recently addressed that state’s “direct action statute,” concluding that it did not prevent judgment creditors from pursuing a coverage action arising out of an LMX reinsurance spiral. The plaintiffs in the underlying action were former shareholders of certain insurance companies, and they sued the insurers’ managing general agent for professional negligence. The MGA, now defunct, failed to answer. On the eve of the damages hearing, the MGA’s professional liability and excess carriers (Travelers and ERSIC) asserted a variety of coverage defenses, and denied the claim. The plaintiffs obtained a $92 million judgment against the MGA.

After obtaining their judgment, the plaintiffs filed suit in New Jersey against Travelers and ERSIC seeking coverage under the two policies. The trial court dismissed the coverage case due to lack of standing. The trial court based its decision, in part, on New Jersey’s so-called “direct action statute,” N.J.S.A 17:28-2. That statute requires that certain types of policies (those addressing injury to a person and certain loss or damage to property) contain 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 insured person because of the insolvency or bankruptcy, then an action may be maintained by the injured person against the [insurer] under the terms of the policy.” The trial court accepted the defendants’ argument that the statute authorizes a direct action against an insurer only for the particular personal injury and property damage risk specified in the statute.

The appellate court disagreed, first noting the general principle that after an injured plaintiff obtains a judgment against an insured tortfeasor that remains unsatisfied due to insolvency, the plaintiff “stands in the shoes” of the insured with respect to the insurance policy and thus acquires standing to pursue an action against the insurer. The court rejected the “direct action statute” argument, holding that just because the statute mandates that certain specifically identified types of policies must contractually provide for the right to a post-judgment action, it does not follow that no such right exists in connection with other types of policies. The appellate court noted that “direct action statute” is a misnomer because the statute does not actually authorize direct actions. Rather, it prohibits insurers from contractually disclaiming, in the specifically enumerated policy types, an injured party’s right to sue the insurer for an unsatisfied judgment. The statute does not provide that derivative or post-judgment actions are available only in regard to those certain types of policies. Accordingly, the plaintiffs had standing to pursue their coverage action. Ferguson v. Travelers Indem. Co., Case No. A-3530-12T3 (N.J. Super. Ct. App. Div. August 4, 2014).