Thought Leadership

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.