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Defense Digest

Who Are We Defending? Conflicts and the Rules of Professional Conduct in New Jersey Workers’ Compensation Cases

Defense Digest, Vol. 28, No. 12, December 2022

December 1, 2022

Key Points:

  • The carrier’s duty to defend extends to the named employer company, not its principals.
  • It does not create a conflict of interest to hire counsel to defend a workers’ compensation claim brought against an employer by one of its principals.
  • Corporations retain individual rights as separate entities from their officers and shareholders that include defenses against claims.

In Robert Alam v. Ameribuilt Contractors, 2022 WL 15540098 (N.J. Super. App. Div. Oct. 28, 2022), the New Jersey Appellate Division addressed whether a conflict existed for a law firm handling a workers’ compensation claim brought against an employer company by one of that company’s principals. The petitioner was injured while allegedly in the course and scope of his employment. Additionally, the injured worker was also the acting president and 50% owner of the respondent employer. The carrier retained counsel to defend the respondent, but the Workers’ Compensation Judge entered an order disqualifying the assigned counsel on the basis of a perceived conflict between the workers’ compensation carrier and the insured and its principal.

Robert Alam was involved in a motor vehicle accident on March 27, 2018. He alleged the accident occurred while he was performing work for the respondent, which is a pre-requisite for a successful workers’ compensation claim. Notably, Mr. Alam was the acting president and 50% owner of Ameribuilt. Travelers provided Ameribuilt with workers’ compensation coverage with Ameribuilt NJ Inc. as the sole named insured. Travelers thereafter hired defense counsel to defend Ameribuilt’s interests against the claim.

The respondent filed an answer acknowledging coverage and employment, however, it indicated that compensability remained under investigation as there was a dispute whether the injury occurred during the course and scope of employment. Due to the compensability issue, the parties engaged in settlement negotiations to resolve the matter under N.J.S.A. 34:15-20, which allows for resolution of matters in dispute in lieu of a trial. After the parties reached the agreement, they sent the proposed agreement to the judge of compensation for approval. The judge, however, declined to enter the order and instead entered an order for defense counsel to be removed because of an inherent conflict between the insured, Ameribuilt, and the carrier, Travelers. The judge’s order went on to indicate that because Ameribuilt was 50% owned by Mr. Alam, the denial of compensability was in conflict with its own insured due to Mr. Alam’s ownership interest. The judge further ordered Travelers to assign counsel for itself as well as Ameribuilt. Ameribuilt then appealed the judge’s order. Following the appeal, the judge of compensation clarified the order to add that defense counsel assigned by the carrier does not represent the interest of the carrier but, rather, the interests of the insured.

On appeal, the respondent argued, in part, that the judge’s order must be reversed because corporations are separate legal entities from their shareholders. The Appellate Division found that the judge of compensation disqualified defense counsel on the basis of a violation of R.P.C. 1.7, which states, “A lawyer shall not represent a client if the representation involves a concurrent conflict of interest.” However, the Appellate Division agreed with the argument that corporations are regarded as separate entities distinct from its individual officers, directors and agents.

Based on its finding that corporations represent their own distinct entities, the Appellate Division concluded the judge of compensation erred in finding a conflict between Travelers and Mr. Alam, despite his role as president and 50% owner. While the appellate court agreed with the judge of compensation that insurance counsel is required to represent the insured’s interest, it did not agree that defense counsel or the carrier’s positions were adverse to the insured. Rather, the Appellate Division held that defense counsel’s course and scope defense argument was beneficial to Ameribuilt, though not so to Mr. Alam.

This case reinforces the relationship between carriers, insureds and defense counsel. The Appellate Division here reiterated the role of the corporation as its own entity and the rights it retains as such. As outlined earlier, the policy between Travelers and Ameribuilt in this case provided for coverage to Ameribuilt NJ, Inc., solely. The policy did not extend to Ameribuilt’s officers or shareholders. Despite the somewhat unique set of facts of this case—the injured worker happened to be the president and 50% owner of the insured—it did not create a conflict when the carrier and defense counsel offered a defense position that was adverse to that person individually. Accordingly, respondents should continue to strive for their strongest defenses and best outcomes regardless of who is bringing the claim, and defense of the insured should remain at the forefront for carriers and defense counsel.

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The Supreme Court of Ohio has clarified that an administrative appeal under Ohio Revised Code Chapter 2506 does not bar a separate action for damages and declaratory relief that could not have been pursued in the administrative appeal. The Ohio Supreme Court considered Sheetz, Inc. v. Centerville (2026-Ohio-3531) as a result of a certified question from the Southern District of Ohio. The question was whether Sheetz, the gas station/convenience store brand, was barred from seeking damages in a separate action since damages were not sought in their administrative appeal. Ultimately, the Ohio Supreme Court ruled that res judicata does not bar a separate action for damages after ruling on an administrative appeal because R.C. Chapter 2506 is limited to judicial review and cannot grant affirmative relief. The case arose after Centerville’s city council rejected a site plan proposed by Sheetz, Inc. that had received unanimous approval from the City’s planning commission. Sheetz filed an administrative appeal pursuant to R.C. 2506 in the Montgomery County Court of Common Pleas, and two months later filed a complaint for damages and declaratory relief under 42 USC § 1983 as a takings action with the city, city council, and other objectors as improper takings and a violation of due process, as well as interference with business and contractual relationship. The city and city council removed the § 1983 action for damages to federal court. Montgomery County Court of Common Pleas reversed the city council’s denial, and allowed the Sheetz project to move forward. Upon that ruling, the federal court issued a show-cause order questioning whether the § 1983 action was barred by the doctrine of res judicata via claim preclusion (which includes all theories of recovery).  Sheetz argued that Ohio courts of common pleas do not have authority to award damages or declaratory relief as party of the R.C. Ch. 2506 appeal, therefore res judicata could not be triggered to apply to the § 1983 action. Additionally, Sheetz moved to certify the issue to the Ohio Supreme Court, citing differing results between the second and sixth districts on this same issue. Centerville approached the question, not from a claim preclusion standpoint, but from the holding in Grava v. Parkman, Twp which states that a final judgment rendered on the merits bars all subsequent action based on the same transaction or occurrence.  In yet another approach, an objector argued that claim preclusion was satisfied because Sheetz could have raised its damages claims in the administrative appeal – Sheetz disagrees. In their analysis, the Supreme Court of Ohio broke down the elements of a claim preclusion analysis: 1) a prior final, valid decision on the merits by a court of competent jurisdiction; (2) a second action involving the same parties, or their privies, as the first; (3) a second action raising claims that were or could have been litigated in the first action; and (4) a second action arising out of the transaction or occurrence that was the subject matter of the previous action. The Court held that R.C. Ch. 2506 does not permit a party to argue damages as R.C. Ch. 2506 limits the common pleas jurisdiction as if it were sitting on appeal, and therefore can only affirm, reverse, vacate, or modify the appealed order, or can remand the case to the administrative body. Further, the Court held that Grava’s conclusion that a final judgment precludes additional litigation for different relief is inapplicable under this fact pattern because it was meant only to apply to those matters in which the plaintiff brings the exact same case twice, but for new relief. The Court found Grava was inapplicable because Sheetz could have requested damages or declaratory relief in the R.C. 2506 appeal. Therefore, Grava would be nothing more than dicta if it even did apply. Going further, the Ohio Supreme Court disavowed Sixth Circuit precedent which, in reliance on Grava and other district court decisions, permitted an owner to seeking relief under 42 U.S.C. § 1983 alongside an administrative appeal. See Moore v Hiram Twp., 988 F.3d 353 (6th Cir.2021). The Ohio Supreme Court found that the Sixth Circuit had disregarded a critical decision in Community Concerned Citizens, Inc. v. Union Twp. Bd. of Zoning Appeals, 1993-Ohio-115, which clearly held that a R.C. Ch. 2506 appeal cannot be combined with a complaint seeking other claims for relief. Id. at ¶ 11. To that end, the Ohio Supreme Court has determined that the decisions Moore relied on (outside of Grava) are no longer good law, and that Moore was wrongly decided. The decision draws a clear procedural boundary: Chapter 2506 provides judicial review of an administrative decision, not a forum for independent claims seeking affirmative relief. Although Grava may place claims arising from a single transaction within the potential scope of claim preclusion, those claims are not barred unless the complete claim-preclusion test is satisfied. Because Sheetz could not have pursued damages or declaratory relief in its Chapter 2506 appeal, the separate action was not precluded. The remaining question for practitioners looking to apply or defend against this exception is when does the statute of limitations begin to run on damages and declaratory relief claims related to an administrative decision on appeal? A takings action in federal court has a 2-year statute of limitations, or as a state claim, 4 years (like the other tortious claims raised therein). Correlating this case with others, an administrative appeal will not likely toll the statute of limitations on claims based on a final decision by a municipal authority. Therefore, practitioners should look for these cases to be brought simultaneously.

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