New Jersey Appellate Court Concludes Third Parties Have Standing to Bring Action Against E&O Insurer

In an unpublished opinion, a New Jersey appellate court has held that third-party claimants have standing to bring an action against an insolvent insured’s E&O carriers, even in the absence of policy language providing that right.  Ferguson v. Travelers Indemnity Co., 2014 WL 3798524 (N.J. App. Div. Aug. 4, 2014)

The carriers issued primary and excess E&O policies to an underwriting management company.  An insurance company retained the insured to assist with the evaluation and implementation of a reinsurance program.  The insured allegedly failed to recognize or disclose substantial flaws in the program and, as a result, the reinsurance program exposed the insurance company to significant risk.  The insurance company ultimately was sold at a substantial loss. As part of the sale, the insurance company assigned its rights against third parties to the shareholders of the insurance company’s parent entity.  Following the assignment, the shareholders filed an action against the insured underwriting management company seeking damages as a result of the insured’s evaluation and implementation of the reinsurance program.  The action was uncontested, and the shareholders obtained a $92 million judgment against the insured.

The insured was insolvent and unable to satisfy the judgment and the shareholders sued the insured’s E&O carriers in attempt to satisfy the judgment from policy proceeds.  The carriers moved to dismiss, contending that the shareholders lacked standing to bring the action under New Jersey law.  The trial court held in favor of the carriers, and the shareholders appealed.

The New Jersey appellate court reversed, concluding that the shareholders had standing.  The court noted that, “[i]t appears well settled in New Jersey . . . that an injured plaintiff, having obtained a judgment against an insured tortfeasor which remains unsatisfied due to insolvency, ‘stands in the shoes’ of the insured with respect to the insurance policy and thus acquires standing to pursue an action against the insurer.”  In so finding, the court rejected the carriers’ argument that N.J.S.A. 17:28-2, New Jersey’s “direct action” statute, authorizes a third-party action against an insurer only in particular personal injury and property damage lawsuits.  According to the court, “[s]imply because the statute mandates that those specifically identified types of policies contain a contractual provision establishing the right to a post-judgment action, it does not follow that no such right therefore exists in other, non-listed insurance policies.”  Accordingly, the court concluded that the shareholders had standing to bring the action against the E&O carriers.


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