dissenting.
In this case plaintiffs allege that their insurance carrier fraudulently induced them to enter into an agreement that divided the proceeds of a subrogation claim in a manner grossly disproportionate to the interests of the parties. The Appellate Division set aside the agreement, concluding that it was manifestly inequitable, and in derogation of settled principles of subrogation law. We granted certification and now reverse, holding that the plaintiffs’ cause of action is barred by res judicata. I disagree with the majority’s application of res judicata to bar a cause of action that the trial court in the subrogation case adamantly refused to entertain because it incorrectly believed plaintiffs’ claim was subsumed by the settlement of the subrogation action. I therefore dissent.
I.
The Culvers, homeowners and plaintiffs in this case, suffered a fire loss estimated at $185,000. They submitted a claim to their insurer, INA, which subsequently paid to them the policy, limit of $83,373.12. Thereafter, INA instituted a subrogation action, in the Culvers’ name, against the alleged tortfeasors, General Electric Company (General Electric), manufacturer of the Culvers’ gas stove, and Better Living Department Stores, Inc. (Better Living), seller and installer of the stove. INA largely controlled that litigation.
The Culvers, after obtaining separate counsel, entered into an agreement with INA to proceed jointly against the tortfeasors. The parties also agreed to share any recovery. obtained from either or both of the tortfeasors, in the proportion of eighty percent for ÍNA and twenty percent for the Culvers.
The trial court bifurcated the issues of liability and damages in the subrogation action. In the liability phase, INA settled its claims with General Electric for $25,000, and the jury determined that Better Living was solely responsible for plaintiffs’ *466loss. Before the trial on damages began, INA settled with Better Living for $135,000.
In accordance with its agreement with the Culvers, INA proferred plaintiffs $23,583.33, which constituted twenty percent of the settlement proceeds, leaving INA with $92,000, or eighty percent of the proceeds, as well as $44,416.67 for legal fees and costs. Thus, the Culvers would recover approximately half of their alleged loss, while INA would recover almost $10,000 more than the amount it paid the insured, excluding legal fees.
INA moved in the pending subrogation action for an order directing disbursement pursuant to the agreement. The Culvers opposed the motion, based on a certification in which Mrs. Culver alleged fraud and breach of fiduciary duty by INA and its counsel. Specifically, she alleged that she had signed the agreement only because INA represented that she would not be entitled to any money from the subrogation action until INA had been reimbursed for its payment to the Culvers, and received interest at the rate of twelve percent.
The trial court refused to permit the Culvers to attack the subrogation agreement, apparently on the ground that Mrs. Culver had testified in open court that the terms of the settlement with the third-party tortfeasors was acceptable to her.
THE COURT: [S]he [Mrs. Culver] came into my courtroom and she testified in my courtroom and she agreed to this settlement. And the settlement will stand, and there will be a payout by Mr. Psak [attorney retained by INA], We can’t relitigate cases. I am convinced that this woman’s rights were completely protected by Mr. Psak, and that she was given every opportunity to communicate with Mr. Kropf [the Culvers’ attorney], and that she represented to him that she did communicate with Mr. Kropf. And who she communicated with is irrelevant.
MR. BERGENFIELD: Judge, if you have already ruled.
THE COURT: I have already ruled.
MR. BERGENFIELD: Thank you, your Honor.
When plaintiffs filed their complaint in the present action, the trial court dismissed the complaint on the basis of res judicata. The trial judge, who had presided in the subrogation action, *467again based his decision on the fact that Mrs. Culver had consented in open court to the settlement with the third-party tortfeasors:
THE COURT: You understand, Mr. Bergenfield, great many hours were spent by counsel in the original case in settlement of this case. For some reason more than in most. The Court played little or no part in that and certainly the Court as, I recall it, exercised very little pressure on either attorney in this matter. The Court was also aware at all times that there was a dual claim and most of the conferencing was done between Mr. Psak, who is the nominal attorney for Mrs. Culver because he was retained by I.N.A., and her in the corridor of the courthouse in plain view. I saw them myself out there. There was another attorney whose name escapes me as I sit here right now who represented Mrs. Culver. I don’t know whether he ever came in the courthouse but I know that she was in communication with him and as a result she assented to the settlement of this case. And you simply want to relitigate this thing over and over and over again.
********
Nobody broke this lady’s arm to get on that witness stand and say that this case was settled. * * * This is awful.
MR. BERGENFIELD: Judge, I don’t disagree with the Court’s view that there is something awful about the way this came about. I think one of them, though, Judge, is the question to be litigated in this case. It’s not the question that was litigated in the underlying case. The question there was a negligence and I think a products liability suit—
THE COURT: And here, all the claims that you would now make were asserted in that case and would have been asserted in a damage suit. There is no question about that, and she agreed that this was the end of it and that she agreed to a split of the settlement money between herself and I.N.A., period. Now, that’s what she agreed to. (Emphasis added.)
The Culvers’ attorney pressed his contention that the fraud claim against INA had never been litigated in the prior action, but his arguments were rejected by the court:
MR. BERGENFIELD: Judge, the point I’m trying to make, though, is the question in this case, and the point that the Court is I think making to me about the fact that the, that no one twisted her arm when she took the stand is the question to be litigated in this case. The underlying case was a products case or a negligence case. The question here is the validity of her assent and what the Court is saying was litigated.
THE COURT: She agreed to settle whatever claims she had with I.N.A. And she agreed to take a certain percentage of the money being paid by the defendant in that case as satisfaction of her independent claims. And that’s what she did. This is going to relitigate that, whatever those claims may have been.
*468MR. BERGENFIELD: But that wasn’t litigated, Judge, that’s my only point.
THE COURT: The Court is granting this motion. (Emphasis added.)
The Appellate Division concluded that the trial court erred in holding that the Culvers’ claim was barred by res judicata. It held that the subrogation agreement between the Culvers and INA was unenforceable because it “violated every concept of fair play which underlies the whole doctrine of subrogation.” Culver v. Insurance Co. of N. Am., 221 N.J.Super. 493, 503 (1987). While acknowledging that common law subrogation principles may be modified by contract, the court maintained that “since ‘subrogation is an offspring of equity * * * its equitable principles apply even when the subrogation is based on contract, except as modified by specific provisions in the contract.’ ” Id. at 500 (quoting Providence Washington Ins. Co. v. Hogges, 67 N.J.Super. 475, 482 (App.Div.1961)). The court further found that “[a]s a matter of equitable principle, the right of subrogation does not arise until the injured party has been made whole.” 221 N.J.Super. at 500.
We granted certification, 110 N.J. 305 (1988). The majority opinion in this case acknowledges that the question of the allocation of proceeds in a subrogation action, absent an agreement, is unsettled in New Jersey and susceptible to various approaches. See ante at 458 n. 2 (“The rule adopted by the Appellate Division is just one of five possible rules that can govern what happens if an insurer seeks recovery from a third-party tortfeasor where the insured’s total loss has not been repaid in full.”). Nevertheless, the majority concludes that plaintiffs are precluded by res judicata from proving their claim that they were misled by INA into signing the agreement.
II.
The preclusionary principles of res judicata and collateral estoppel serve to insulate courts from the relitigation of claims and issues, and to prevent harassment to parties and their privies. See Restatement (Second) of Judgments § 19 comment a (1982) (“The rule that a defendant’s judgment acts as a *469bar to a second action on the same claim is based largely on the ground that fairness to the defendant, and sound judicial administration, require that at some point litigation over the particular controversy come to an end.”).
Justice Brennan articulated these basic principles in Bango v. Ward, 12 N.J. 415 (1953):
When a party who is afforded a fair opportunity to litigate a claim or cause of action before a court which has jurisdiction over the parties and the subject matter suffers a final judgment adverse to him on the merits, parties in whose favor the judgment is entered, and their privies, may assert the judgment as a bar in a subsequent action on the same claim or cause of action. The public interest in putting an end to litigation, which underlies the principle of res judicata, as well as the interest of parties requires that the loser in such case shall be denied a second chance to litigate the matters determined by the final judgment. [Id. at 420 (citations omitted) (emphasis added).]
Restatement, supra, § 19, states the general rule of res judicata as follows: “A valid and final personal judgment rendered in favor of the defendant bars another action by the plaintiff on the same claim.” The commentary adds:
The prototype case continues to be one in which the merits of the claim are in fact adjudicated against the plaintiff after trial of the substantive issues. [Restatement, supra, § 19 comment a.]
Furthermore, the application of res judicata in a subsequent action between the same parties traditionally has been limited to cases in which those parties were “adverse” to one another in the prior action. See Fishgold v. Sullivan Drydock & Repair Corp., 328 U.S. 275, 291, 66 S.Ct. 1105, 1114, 90 L.Ed. 1230, 1243 (1946) (“A fair application of res judicata bars a party in a second litigation only if that proceeding involves the same issues as the first litigation between the same adverse parties or privies.”) (Black, J., dissenting); Pearlman v. Truppo, 10 N.J. Misc. 477, 478 (Sup.Ct.1932); Desmond v. Kramer, 96 N.J. Super. 96, 100-101 (Union County Ct.1967); cf. Restatement, supra, § 38 comment a (“The concept of adversarial litigation is that determination of issues is not full and fair unless a party has an opportunity to present proofs and argument specifically directed to the matters in controversy.”).
Although the majority bases its decision on the doctrine of res judicata, the related doctrine of collateral estoppel also *470may be implicated. Collateral estoppel is “that branch of the broader law of res judicata which bars relitigation of any issue which was actually determined in a prior action, generally between the same parties, involving a different claim or cause of action.” State v. Gonzalez, 75 N.J. 181, 186 (1977). Collateral estoppel, or “issue preclusion,” has been restated as follows:
When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim. [Restatement, supra, § 27.]
“A judgment is not conclusive in a subsequent action as to issues which might have been but were not litigated and determined in the prior action.” Restatement, supra, § 27 comment e; see also Plainfield v. Public Serv. Elec. and Gas Co., 82 N.J. 245, 257 (1980) (quoting Washington Township v. Gould, 39 N.J. 527, 533 (1963)) (“It is well-settled that where a judgment of a court of competent jurisdiction directly determines a right, question or fact distinctly put in issue, such judgment estops the parties or their privies from thereafter relitigating the same issue in a subsequent proceeding between them, regardless of its nature or form.”); New Jersey-Philadelphia, etc. v. New Jersey State Bd. of Higher Educ., 654 F.2d 868, 876 (3d Cir.1981) (collateral estoppel “precludes relitigation only of questions ‘distinctly put in issue’ and ‘directly determined’ adversely to the party against which the estoppel is asserted”).
III.
The trial court’s disposition of the Culvers’ motion in the subrogation action cannot support the application of either res judicata or collateral estoppel. A fair interpretation of the trial court’s position is that it believed that the Culvers’ challenge to the subrogation agreement necessarily included a challenge to the settlement with the third-party tortfeasors, to which Mrs. Culver assented in open court. As a result, the *471court refused to entertain the Culvers’ claim that the agreement was procured by fraud. In fact, the Appellate Division suggested that the trial court misapprehended the nature of the Culvers’ argument in the subrogation suit:
[Plaintiffs’ challenge to their agreement with INA was not actually adjudicated in the earlier proceedings. It is our distinct impression that the court’s concern with preserving INA’s settlement with the two tortfeasors misled it as to the actual grievance plaintiffs were attempting to present. It was not that settlement they were questioning but only their distribution agreement with INA. Had the court so appreciated, we are confident that it would have afforded plaintiffs the opportunity they should then have had of demonstrating their right to be relieved of it. Instead, the court made no inquiry as to either the terms of that agreement or the basis of plaintiffs’ challenge to it and made no findings in respect thereof at all. [221 N.J. Super, at 505.]
It is noteworthy that INA and the Culvers were aligned as plaintiffs in the first action against the tortfeasors who allegedly caused the destruction of their home. While the suit was brought in the Culvers’ name, the litigation was controlled by INA and its attorneys. The essential “claim” in the first action was the negligence of the third-party tortfeasors; on that issue, of course, the Culvers and INA were not adversarial, a traditional component of the application of either res judicata or collateral estoppel. Although the Culvers and INA were in an adversarial posture in respect of INA’s motion to enforce the distribution agreement, it is not at all clear from the record that the trial court distinguished between their adversity concerning distribution of the settlement proceeds and their common interest in negotiating the settlement. Cf. Restatement, supra, § 27 comment e (“Sometimes the party against whom preclusion is asserted is covered by an insurance policy and represented by insurance company counsel in the prior action but not in the subsequent action. In such instances, preclusion with respect to unlitigated issues seems particularly unfair.”).
As noted, res judicata and collateral estoppel are intended to conserve judicial resources by barring duplicative litigation of claims or issues already determined. But as the record in this case reveals with such striking clarity, the trial court was under the impression that Mrs. Culver’s consent in open court to the terms of the settlement encompassed any latent claims against *472INA. Thus, when plaintiffs first attempted to assert such a claim, the trial court refused to permit the issue of INA’s misrepresentations to be litigated, believing that that claim was embraced by plaintiffs assent to the settlement. In that context, the majority’s holding applying res judicata appears to overlook the fact that the doctrine’s most critical element — the litigation of the underlying issue — simply did not occur in this case.
The result works a harsh inequity on the plaintiffs. More importantly, it subverts the policies underlying the preclusionary rules of res judicata and collateral estoppel. Cf. Restatement, supra, § 27 comment e (“The interests of conserving judicial resources, of maintaining consistency, and of avoiding oppression or harassment of the adverse party are less compelling when the issue on which preclusion is sought has not actually been litigated before.”). I would hold that because plaintiffs were not afforded a fair opportunity to litigate their claim in the first action, res judicata should not act as a procedural bar to the present action.
STEIN, J., dissenting.
For affirmance — 1.
For reversal — Chief Justice WILENTZ and Justices CLIFFORD, HANDLER, POLLOCK, O’HERN and GARIBALDI-6.