New Jersey Appellate Panel Orders Court to Conduct In Camera Review and Bifurcate Discovery in Hurricane Sandy Coverage Dispute

In Alden Leeds, Inc. v. QBE Specialty Insurance Company, the New Jersey Superior Court, Appellate Division, ruled that the Law Division erred by ordering production of an insurer’s documents without first conducting an in camera review to determine whether the attorney-client or work-product privileges applied. The Appellate Division further held that discovery relating to a claim of breach of the covenant of good faith and fair dealing should be bifurcated from discovery relating to a coverage claim.

Plaintiff, a manufacturer and seller of pool chemicals, originally submitted a claim for “total fire loss” after its warehouse sustained damage during Hurricane Sandy. However, the policy excluded coverage for flood damage. After determining that the loss was caused by flooding, the insurers denied coverage, and Plaintiff filed suit alleging breach of contract and breach of the implied covenant of good faith and fair dealing. During discovery, the Law Division ordered the insurers to produce previously withheld documents without performing an in camera review of the documents at issue. In reversing this decision, the Appellate Division reasoned that “it was inappropriate in a case such as this to decide questions of privilege without a thorough in camera review.” The Appellate Division further held that a court should bifurcate discovery in cases involving both breach of the covenant of good faith and fair dealing and breach of contract under an insurance policy and stay discovery on the breach of good faith and fair dealing claim until the coverage claim is resolved.