NJ Supreme Court Adopts the Common Interest Rule
Recent Sixth Circuit Decision Reminds Excess Carriers to Monitor Primary Carriers' Denials of Coverage Diligently
NY Federal Court Refuses to Compel Arbitration by a Non-Signatory to Arbitration Agreement
Risperdal Manufacturer Defeats Claims for Punitive Damages Under NJ Law
NJ Supreme Court Adopts the Common Interest Rule
In a landmark decision on July 21, 2014, the New Jersey Supreme Court adopted the common interest rule in a case involving an Open Public Records Act (“OPRA”) request made to the Borough of Longport, New Jersey. The case, O’Boyle v. Borough of Longport, No. A-16-12 (N.J., July 21, 2014), represents a significant development in New Jersey’s law on the attorney-client privilege.
The attorney-client privilege protects confidential communications between an attorney and his client that are made for the purpose of seeking or providing legal advice. Generally, if such communications are shared with, or overheard by, a third-party, the privilege between the attorney and his client is lost. An exception is the “common interest” rule, which allows parties with a “common interest” in actual or anticipated litigation to share information with each other without the risk of losing the privilege vis-à-vis their adversaries. This rule has already been recognized in many jurisdictions, and the O’Boyle decision marks its adoption in New Jersey.
This development may be particularly important in the context of insurance coverage and defense matters, where counsel for multiple insurers must often coordinate with each other regarding defense strategies under multiple policies or layers of coverage. In such situations, the risk of waiving attorney-client privilege or work product protection may hinder the exchange of information that is critical to common defense objectives. Following the O’Boyle decision, however, communications between counsel for such insurers may be protected from disclosure by the common interest privilege. This, in turn, will allow insurers with a common interest to engage in candid communications regarding litigation, without fear of forfeiting the privilege that protects such discussions.
O’Boyle involved an OPRA request made by Martin O’Boyle, a Longport resident, for documents relating to recent zoning and land use decisions. Two years prior to the OPRA request, Mr. O’Boyle had filed lawsuits against a former zoning board member and two Longport residents, challenging certain zoning decisions. In response to the OPRA request, Longport produced some documents but withheld others. The latter included a joint strategy memorandum and correspondence which had been prepared by the private attorney who defended the prior lawsuits and shared with Longport’s own municipal attorney. Longport withheld the documents on the grounds of privilege, asserting that the private attorney had shared the documents with Longport’s counsel in order to coordinate a joint defense to the lawsuit they anticipated Mr. O’Boyle would file against Longport.
The New Jersey Supreme Court agreed with Longport that the documents were privileged. In doing so, the Court adopted the reasoning of an Appellate Division decision, LaPorta v. Gloucester Cnty. Bd. of Chosen Freeholders, 340 N.J. Super. 254 (App. Div. 2011), which had previously articulated the elements of the common interest privilege. The Court wrote:
We, therefore, expressly adopt the common interest rule as articulated in LaPorta. The common interest exception to waiver of confidential attorney-client communications or work product due to disclosure to third parties applies to communications between attorneys for different parties if the disclosure is made due to actual or anticipated litigation for the purpose of furthering a common interest, and the disclosure is made in a manner to preserve the confidentiality of the disclosed material and to prevent disclosure to adverse parties.
O’Boyle appears to interpret the privilege broadly, explaining that it is not limited to parties involved in the same litigation and with identical interests. As the Court explains, “[t]he common interest rule is designed to permit the free flow of information between or among counsel who represent clients with a commonality of purpose. It offers all parties to the exchange the real possibility for better representation by making more information available to craft a position and inform decision-making in anticipation of or in the course of litigation.” Thus, under O’Boyle, the privilege protects any information shared in anticipation of litigation among parties that have a “common purpose” against a “common adversary.”
A “joint defense” agreement, of course, is one mechanism by which insurers can memorialize their common interest and ensure that privileged information shared in anticipation of litigation remains protected. O’Boyle, however, posits that such an agreement is not essential to preserve the privilege, as long as information is shared in a manner intended to prevent disclosure to others. Thus, while it remains prudent for parties with a common interest in actual or anticipated litigation to enter into a written “joint defense” agreement, O’Boyle ensures that such may be able to share privileged information with each other without the risk of losing the privilege vis-à-vis their adversaries.
The full text of the decision can be accessed via Rutgers School of Law, New Jersey Courts Search page located at http://njlaw.rutgers.edu/collections/courts/search.php.
Recent Sixth Circuit Decision Reminds Excess Carriers to Monitor Primary Carriers' Denials of Coverage Diligently
A recent decision by the U.S Court of Appeals for the Sixth Circuit, IMG Worldwide Inc. et al. v. Westchester Fire Insurance Co. et al., should serve as a reminder to excess carriers to closely monitor primary carriers’ denials of coverage. On July 15, 2014, the Sixth Circuit held that an excess insurer was responsible to reimburse its insured for nearly $8 million in defense costs in connection with an underlying suit over a failed real estate project, where the primary carrier wrongfully refused to defend the insured. Westchester Fire Insurance Co., the excess carrier, was held liable for reimbursing the defense costs of its insured, IMG Worldwide, Inc. The Court held that Westchester should have stepped in when IMG’s primary CGL carrier, Great Divide Insurance Co., wrongfully denied coverage under a $1 million per occurrence limit primary policy.
The case turned upon language in the Westchester excess policy obligating Westchester to defend the insured in the event that underlying insurance “does not provide coverage,” or when the limits of the underlying insurance have been exhausted. The Court concluded that whether the underlying policy “provides” coverage was susceptible of more than one meaning – that is, it could reasonably mean either “provide” coverage or “undertake to deliver” coverage. The Court reasoned that, under the latter interpretation, if Great Divide wrongfully denied coverage, Westchester would be responsible for defending IMG. Because the Court concluded the language was susceptible of more than one meaning, it was held to be ambiguous and therefore was construed against the drafter, Westchester. The Court thus found that Westchester breached its duty to defend, despite being “repeatedly offered a full and fair opportunity to defend IMG.”
The Sixth Circuit also faulted Westchester for failing to seek a judicial declaration of its rights – notwithstanding the ample opportunity it had to defend IMG under a reservation of rights while simultaneously filing a declaratory judgment action. The Court’s ruling did, however, offer one small silver lining: it held that Westchester could still seek reimbursement from Great Divide under various equitable principles, including equitable contribution and equitable subrogation.
The case illustrates an important lesson for excess carriers. An excess insurer cannot assume that its coverage obligations will only be triggered upon exhaustion of underlying coverage. Rather, excess carriers should be sure to evaluate, thoroughly and independently, their potential obligations to defend and/or indemnify an insured at the outset of litigation, and to closely monitor how a primary carrier handles claims and lawsuits against the insured. As evidenced by the $8 million defense obligation imposed on Westchester Fire (not to mention liability for most of the $5 million settlement paid by its insured), simply relying on the primary carrier’s coverage determination can have negative consequences, where the primary carrier’s determination turns out to be wrong. The case also highlights the dangers of forging ahead with a denial of coverage rather than defending the insured and filing a declaratory judgment action on disputed coverage issues, early on.
The case is IMG Worldwide Inc. et al. v. Westchester Fire Insurance Co. et al., case numbers 13-3832 and 13-3837, in the U.S. Court of Appeals for the Sixth Circuit. The Sixth Circuit’s opinion is available for download at http://www.ca6.uscourts.gov/opinions.pdf/14a0513n-06.pdf.
NY Federal Court Refuses to Compel Arbitration by a Non-Signatory to Arbitration Agreement
On July 22, 2014, a New York federal court denied Transatlantic Reinsurance Co.’s (“TRC”) petition to compel National Indemnity Co. (“NICO”), a subsidiary of Berkshire Hathaway, Inc., to arbitrate disputes over reinsurance billings under reinsurance contracts between TRC and American International Group Inc. (“AIG”). The case is Transatlantic Reinsurance Co. et al. v. National Indemnity Co., No. 14-cv-02109 in the U.S. District Court for the Southern District of New York.
At issue were 40 reinsurance treaties under which TRC provided reinsurance coverage to AIG for insurance policies issued to AIG insureds between 1978 and 1985. NICO was not a signatory to any of these treaties. Through a loss portfolio transfer (“LPT”) on January 1, 2011, however, NICO was alleged to replace AIG as TRC’s contractual counter-party under the treaties. Following that transaction, NICO began issuing reinsurance billings to TRC, which demanded that TRC pay NICO directly for amounts that NICO asserts are owed under the treaties. TRC refused to honor these billings, arguing that the LPT constitutes a material breach of the treaties and relieves TRC of its obligations thereunder.
In its petition to compel arbitration of these disputes, TRC argued that “NICO is an interloper in the TRC-AIG reinsurance relationship and the LPT it entered into with AIG and its performance have materially breached the Treaties.” TRC further argues that “AIG’s entry into the LPT violates various provisions of the Treaties, constitutes a material breach of the Treaties and excuses TRC from any further performance under the Treaties.” In response, NICO argued, among other things, that it cannot be compelled to arbitrate because it did not sign any of the treaties and thus did not agree to arbitrate, and that TRC can raise its defenses to payment in arbitration with AIG itself, to which NICO is not a necessary party.
In an Order without an accompanying opinion, U.S. District Judge Edgardo Ramos rejected TRC’s arguments and denied its petition to compel arbitration. Apparently, the Court favored NICO’s arguments that it cannot be forced to arbitrate disputes pursuant to an agreement it did not sign.
Although TRC may challenge this ruling on appeal, the decision raises an important concern for reinsurers and cedents. If disputes over reinsurance of amounts that may become the subject of an LPT are to be arbitrated, the parties should recognize that, absent language in the LPT agreement to that effect, non-signatories may not be obligated to the arbitration agreements contained in the parties’ reinsurance contracts.
Judge Ramos’s order can be accessed here.
Risperdal Manufacturer Defeats Claims for Punitive Damages Under NJ Law
Janssen Pharmaceuticals Inc., a unit of Johnson & Johnson, had an important victory upheld on July 18, 2014, when a Pennsylvania judge refused to reconsider his earlier ruling barring nearly 500 plaintiffs from recovering punitive damages from Janssen in connection with their claims alleging injuries from Risperdal, an antipsychotic drug. The case is In re: Risperdal Litigation, Case No. 100300296, in the Philadelphia Court of Common Pleas.
Judge Arnold New declined to revisit his earlier May 2014 ruling in which he found that New Jersey law applied to the issue of punitive damages, and, therefore, that the New Jersey Products Liability Act – which does not allow punitive damages for tort claims related to drugs that are subject to pre-market approval or licensing by the U.S. Food & Drug Administration – barred recovery of such damages against Janssen. This ruling vindicated Janssen’s argument that any potential punitive conduct over the allegedly tortious marketing of Risperdal would have occurred at its headquarters in New Jersey. Plaintiffs, on the other hand, argued alternatively that either Pennsylvania law should govern the question of punitive damages, or that the issue had to be determined on a case-by-case basis (with courts looking to the laws of each individual plaintiff’s state). While the decision was a short one-paragraph Order which does not address the basis for the court’s determination, it appears that the court accepted Janssen’s argument and agreed that the critical factor in a choice of law inquiry involving punitive damages for tortious conduct is the state in which the allegedly tortious corporate decisions are made. The Pennsylvania court thus joined various other courts, both inside and outside New Jersey, in what appears to be an emerging consensus: the state in which the allegedly tortious conduct giving rise to a claim of punitive damages occurs is the state whose law governs the question of punitive damages applicable to such conduct – even if the place of injury or the plaintiff’s domicile is outside that state.
Further, as the Risperdal case illustrates, the application of New Jersey punitive damages law in the pharmaceutical context can have a particularly powerful effect. For insurers with pharmaceutical manufacturer policyholders that are based in New Jersey, In re Risperdal provides an important roadmap for the defense of punitive damages claims against such insureds, in any cases involving drugs that were subject to pre-market approval or licensing by the FDA.
