Judgment Against a Tortfeasor is a Condition Precedent to an Injured Party's Direct Suit Against Tortfeasor's Insurer
January, 2005
The New York Court of Appeals held in Lang v. Hanover Ins. Co., 3 N.Y.3d 350, 787 N.Y.S.2d 211 (2004), that an injured party must first obtain a judgment against the tortfeasor before the injured party may invoke its statutory right to bring a direct suit against the tortfeasor's insurer.
Plaintiff, David Lang, was injured after he was struck in the eye while playing paintball at the home of John and Elizabeth Durbin. The paintball was fired by the Durbins' houseguest, Richard Bachman. The Durbins' homeowners' liability carrier, Hanover Insurance Company, disclaimed coverage for the accident because Mr. Bachman was not an “insured” under the terms of the policy.
Plaintiff sued Mr. Bachman, but discovered that Mr. Bachman had filed for bankruptcy. Plaintiff then brought a declaratory judgment action against Hanover, seeking a declaration that Hanover was required to defend and indemnify Mr. Bachman in the underlying personal injury suit. Hanover moved to dismiss the complaint on the ground that Plaintiff lacked standing because he had not yet obtained a judgment against Mr. Bachman.
The trial court denied Hanover's motion. The Appellate Division reversed, holding that an injured party must obtain a judgment against the tortfeasor as a condition precedent to the injured party's right, under Insurance Law § 3420, to bring a direct action against the tortfeasor's insurer. The Court of Appeals affirmed the Appellate Division.
The Court of Appeals began its analysis by noting that at common law, an injured party had no right to seek relief directly from a tortfeasor's insurer. The inequitable result was that insurers could avoid paying judgments for covered losses simply because an insured's insolvency prevented an injured party from pursuing available insurance proceeds.
The legislature enacted Insurance Law § 3420 to remedy this situation, granting an injured party a statutory right to sue the tortfeasor's insurer under limited circumstances: the injured party must first obtain a judgment against the tortfeasor, serve the insurer with a copy of the judgment, and await payment for thirty (30) days. Compliance with these requirements is a condition precedent to bringing a direct action against the insurer. Inasmuch as it was undisputed that Plaintiff never obtained a judgment against Mr. Bachman, the Court concluded that Plaintiff's declaratory action was premature.
The Court rejected Plaintiff's argument that Mr. Bachman's discharge in bankruptcy prevented Plaintiff from obtaining a judgment against him. The Court noted that the permanent injunction that follows a discharge in bankruptcy does not bar a Plaintiff in a personal injury action from obtaining a judgment against a bankrupt defendant for the limited purpose of pursuing payment from defendant's insurer. Thus, Mr. Bachman's bankruptcy was not an impediment to Plaintiff's ability to satisfy the statutory condition precedent to a direct action against Hanover.
Learning Point:
As the Court of Appeals urged in its opinion, insurance companies are well advised to seek a declaratory judgment where coverage is arguable. Otherwise, insurers take the risk that an injured party will obtain a judgment against a purported insured and then seek payment under Insurance Law § 3420. Having chosen not to participate in the underlying lawsuit, the insurer may litigate only the validity of its disclaimer and cannot challenge the liability or damages determination in the underlying suit. •
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