New York and New Jersey Announce Mediation Program for Superstorm Sandy Related Insurance Claims

by McCarter & English, LLP

On February 25, 2013, New York Governor Andrew Cuomo and New Jersey Governor Chris Christie separately announced their respective states were setting up voluntary mediation programs to help resolve disputed Superstorm Sandy insurance claims.  Insurers will foot the bill for both programs, offering policyholders what may be an attractive alternative to costly and time-consuming litigation.  The New York and New Jersey programs will draw from similar mediation programs in Florida, Mississippi and Louisiana that proved successful after Hurricanes Andrew, Katrina and Rita.

New York

New York’s mediation program will handle open and disputed Sandy-related real and personal property insurance claims occurring in Bronx, Kings, Nassau, New York, Orange, Queens, Richmond, Rockland, Suffolk and Westchester counties.  The program, established by the New York Department of Financial Services’ (DFS) emergency amendment to Insurance Regulation 64, will not include automobile or flood insurance claims.  Insurers must notify policyholders within strict time frames of their right to commence mediation under the program.  

New York’s mediation program will be administered by the American Arbitration Association (AAA) under the supervision of and pursuant to procedures and standards approved by the DFS.  Participating insurers will fully fund the program and directly pay all of the AAA’s fees for the program.  The parties and the AAA can agree to conduct the mediation in person or by telephone or videoconference.  The program explicitly requires insurers to participate in "good faith."

The mediation is nonbinding and will not deprive policyholders of their other legal remedies, including the right to appraisal and to bring civil litigation.

New Jersey

New Jersey’s mediation program will permit policyholders to submit disputed homeowner’s, automobile and commercial property claims to a mediator who will facilitate settlement discussions.  Eligibility for the program will be limited to disputed claims where there is no reasonable suspicion of fraud that are worth more than $1,000, and which are or were made under policies in force at the time Sandy made landfall. At this time, the program will not include disputed claims under flood insurance policies, as they are handled through the federal National Flood Insurance Program.  The New Jersey Department of Banking and Insurance (DOBI) is exploring, however, the possible future expansion of the program to include disputed flood insurance claims.

All insurance carriers authorized and admitted to conduct business in New Jersey and the New Jersey Insurance Underwriting Association are obligated to participate in the program.  Surplus lines insurers and risk retention groups will have the option to participate on a case-by-case basis.  State-regulated carriers will be required to advise their policyholders with unresolved claims of the availability of the mediation program.  While costs for the mediators will be borne entirely by the participating insurers, policyholders are responsible for their own attorneys' fees.

The program is being established by DOBI, and it is accepting proposals until March 7 from companies seeking to provide mediation services.  DOBI anticipates the program may handle between 20,000 and 25,000 disputed claims, so the company selected must be experienced in the administration of voluminous claims.  DOBI expects the program to be up and running by early April.  Additional details and information about the program is expected to be released in the next few weeks.

Pennsylvania Federal Court Rejects Insurer's Attempt to Obtain Policyholder's Privileged Communications with Defense Counsel

Insurers who wish to deny or limit their coverage obligations to their policyholders routinely seek production of privileged communications between the insured and its independent counsel.  The information requested typically includes case evaluations, legal research memoranda and other analyses concerning the merits and value of the underlying plaintiff's claims, which the insurers hope will provide a basis to deny coverage.  Policyholders facing these types of discovery requests walk a tightrope between producing these documents, with the potential risk that they will fall into the hands of the underlying plaintiffs, and resisting discovery, with the risk that the insurer will claim a breach of the policy's cooperation clause.  In CAMICO Mutual Ins. Co. v. Heffler, Radetich & Saitta, LLP, No. 11-4753, 2013 WL 315716 (E.D. Pa. Jan. 28, 2013), the United States District Court for the Eastern District of Pennsylvania provided a measure of protection to policyholders by denying an insurer's motion to compel the production of communications between the policyholder and its independent defense counsel.

Defendant/policyholder Heffler, Radetich & Saitta, LLP ("Heffler") retained Conrad O'Brien P.C. ("O'Brien Firm") to defend it against a misappropriation claim ("Oetting claim").  Heffler's insurer, CAMICO Mutual Insurance Company ("CAMICO"), paid for the O'Brien Firm to defend its policyholder.  CAMICO subsequently filed a coverage action against Heffler, seeking a declaration that its liability to Heffler was capped at $100,000. Heffler opposed certain of CAMICO's discovery requests, which sought communications between Heffler and its independently retained defense counsel, claiming that these communications were protected by the attorney-client privilege. While CAMICO did not challenge the privileged nature of the communications, it nonetheless moved to compel the production of those documents, asserting the common interest and co-client exceptions to the privilege.

The court rejected CAMICO's common interest argument, which applies only where separate clients retain different attorneys who share information with each other pursuant to a common legal interest. Because CAMICO did not retain separate counsel who shared information with the O'Brien Firm, the "common interest" exception did not apply.

Next, the court rejected CAMICO's argument that the "co-client" exception to the attorney-client privilege applied because the O'Brien Firm represented the joint interests of Heffler and CAMICO.  Based on its review of Pennsylvania appellate court opinions, the Restatement of the Law Governing Lawyers and Third Circuit precedent, the court refused to recognize an absolute rule that an insurer who pays for its insured's defense is always a co-client of defense counsel.

Nonetheless, the court stated that CAMICO could obtain the requested documents if the evidence showed that the O'Brien Firm, in fact, jointly represented Heffler and CAMICO. In concluding that no joint representation existed, the court relied on statements by a member of the O'Brien Firm that the firm had been independently retained by Heffler and that it had never represented CAMICO.  Further, CAMICO had confirmed, in a letter to Heffler, that Heffler had selected its own counsel and, on at least three occasions, referred to the O'Brien Firm as "independent counsel."  Finally, the court rejected CAMICO's assertion that a shared interest in the outcome of the Oetting claim gave rise to a joint representation.

The Heffler decision provides support to policyholders whose carriers attempt to further their own interests at the expense of their insureds.  In a number of jurisdictions -- such as Pennsylvania -- an insurer who has reserved its right to deny coverage cannot rely on the cooperation clause to discover an insured's privileged communications with its defense counsel.  The mere fact that an insurer pays for a policyholder's defense does not entitle the insurer to use the insured's privileged communications against it.

Food Safety Modernization Act and Insurance Issues

On January 4, 2013, the Food and Drug Administration (FDA) announced that it would propose two additional rules to the Food Safety Modernization Act (FSMA).  The FSMA, passed by Congress in 2011, aims to prevent foodborne illness.  The proposed rules identify procedures and controls companies must undertake in order to avoid food contamination.  Companies should continue to consider insurance as a potential source of recovery to defray costs associated with compliance.    

Proposed Rules

The first rule would supplement the FDA's good manufacturing practice regulations in increasing the number of preventive control provisions required for companies manufacturing, processing, packing and/or storing food.  Preventive Controls for Human Food, 78 Fed. Reg. 11 (proposed January 4, 2013).  Companies would be required to maintain a food safety plan, perform a hazard analysis and institute preventive measures to mitigate the risks addressed by the analysis.  The second rule, the Produce Safety Rule, would establish minimum standards for nonexempt farms growing, harvesting, packing and holding produce.  Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Consumption, 78 Fed. Reg. 11 (proposed January 4, 2013).

The proposed rules are intended to guide the FDA in fulfilling its investigative duties.  The rules, in general, require more inspections.  The FDA would inspect food facilities classified as "high-risk" within five years of the FSMA's signing and then at least once every three years afterward.  Other facilities would be inspected within seven years and then once every five years.

Potential Insurance Issues

Food companies seeking to recover costs associated with FDA inspections may face resistance from their insurers.  Inspections under the FSMA are not necessarily the result of any actual or alleged wrongdoing, but are instead regulatory mechanisms aimed to prevent foodborne illness.  As such, the insurers may claim (among other things) that the inspections are preventive in nature, and costs associated with them are not covered.  Moreover, certain contractual indemnity policies exclude coverage for preventive inspections.

Depending on the circumstances, it may be possible for food companies to nevertheless recover costs associated with the inspections.  First-party property policies, for example, may contain mitigation provisions (sometimes referred to as "sue and labor" provisions) that may trigger coverage for costs associated with preparation for the inspections.  Product recall policies may similarly provide coverage.  Many of the product recall policies will at least partly fund the retention of loss prevention services, which could imply coverage for preventive actions.  Additionally, directors and officers policies may also provide coverage insofar as cases have supported an obligation to fund regulatory investigations.  Insurers, of course, probably will not agree that the FDA inspections can or should be considered "investigations," but this will turn on policy language, the facts and judicial interpretation.      

What You Should Do

If faced with an FDA inspection, it is important to locate and carefully review all insurance policies.  Look for different types of policies, and do not be conservative in the search for potentially available coverage.  Give timely notice and request coverage from insurers consistent with their policies' requirements.  Document costs carefully.  If your insurer is unresponsive or denies coverage (whether in whole or in part), consider retaining an attorney to assist with the claim.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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