New Jersey Appellate Division Says When Dealing With Discovery Dispute Between Insureds and Insurers Over Privileged Documents, In-Camera Review Must Be Conducted and Discovery as to Breach of Contract and Bad Faith Claim Bifurcated

On July 27, 2015, in Alden Leeds v. QBE Specialty Ins. Co., unpublished, No. A-2034-14T1 (App. 2015), the New Jersey Appellate Division rendered an important decision addressing discovery disputes between insureds and insurers over privileged documents.

Alden Leeds involved a coverage dispute with QBE Specialty and Certain Underwriters at Lloyd’s, London over whether a fire that destroyed Alden Leeds’s warehouse was a covered fire loss or an excluded flood loss. Alden Leeds, a manufacturer and seller of pool chemicals, stored chemicals in a warehouse insured by QBE and Underwriters. The warehouse was damaged by fire during Super Storm Sandy. The policy covered loss by fire but excluded loss by flood.

The insurers’ investigation into the cause of the fire revealed that it was caused by flood water entering the building, contacting the chemicals and causing them to ignite. Thus, the insurers denied coverage. Alden Leeds sued the insurers for breach of contract and bad faith.

During litigation Alden Leeds sought various documents that the insurers claimed were privileged. When ruling on Alden Leeds’s motion to compel, despite being asked by the insurers to do so, the motion judge refused to conduct an in-camera review of the documents and ordered them produced. The insurers appealed.

The appellate court reversed and held that the motion judge abused his discretion in ordering the production of allegedly privileged documents without first conducting a thorough in-camera review. The appellate court also recognized the desirability of bifurcating discovery in cases involving an alleged breach of contract and bad faith.

Accordingly, it instructed the motion judge to first focus on whether the discovery sought related to the merits of Leeds’s claim under the policy or its bad faith claim. If the discovery focused on the bad faith claim, then the court ordered that production of the documents should be deferred until the breach of contract claim was either adjudicated or a decision was made as to whether it was a viable claim.