NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

PER CURIAM.

By leave granted, defendants QBE Specialty Insurance Company (QBE) and Certain Underwriters at Lloyd's, London (Lloyd's) appeal the Law Division's November 7, 2014 discovery order. We reverse and remand for further proceedings consistent with this opinion.

I.

We discern the following facts and procedural history from the record on appeal.

A.

Plaintiff Alden Leeds, Inc. (Leeds), a manufacturer and seller of pool chemicals, maintained a warehouse on Jacobus Avenue in South Kearny in October 2012. The warehouse was insured under a commercial property insurance policy underwritten by AmRisc, LP (AmRisc), as managing general agent. As it related to the warehouse, the policy covered "direct physical loss of or damage to the [c]overed [p]roperty caused by a covered [c]ause of [l]oss." Although the policy covered losses resulting from fire, it excluded coverage for flood damage. QBE and Lloyd's shared the risk under that aspect of the policy.

Between October 29 and October 30, 2012, during Hurricane Sandy, Leeds suffered a loss at the warehouse. Shortly thereafter, Leeds submitted a claim for a "total fire loss," but did not make any claim for flood damage.

AmRisc's claims department acknowledged receipt of the claim and forwarded it to Cramer Johnson Wiggins and Associates (CJW), a third-party administrator, for adjustment. CJW assigned the claim to Kathy Cristofoletti, one of its adjusters. CJW also retained Vericlaim to coordinate with Leeds's public adjuster, Adjusters International Public Adjusters (Adjusters International), and to perform an onsite investigation. Vericlaim, in turn, hired EFI Global, Inc. (EFI), to perform an investigation into the cause and origin of the fire and issue a report. The matter was assigned to EFI's investigator Henry Stormer.

On November 6, Marshall Austin of Vericlaim inspected the site with Adjusters International. He issued a preliminary report to Cristofoletti the following day. Austin described the loss as "a fire loss that occurred in connection with Hurricane Sandy on October 29." He noted that "[t]here was also flooding occurring at the [warehouse] when the fire department arrived[,] which hampered their efforts to put out the fire." He reported that he "requested [that] EFI try and determine a time line, if possible, when the flooding started to occur [versus] when the fire actually started." He also recommended that an initial claim payment be made in the amount of $500,000.

On November 19, Cristofoletti issued her initial report to QBE and Thompson Heath and Bond (THB), which had been hired by Lloyd's to administer the loss on behalf of the syndicate sharing its risk under the policy. Cristofoletti recommended payment of the initial $500,000. She suggested that QBE be responsible for seventy-five percent and that the remainder be allocated among the members of the Lloyd's syndicate.

Cristofoletti characterized the loss as a "fire loss." However, she noted that the warehouse had experienced both fire and flood damage, the cause of which was still being investigated "to establish [the] cause of [the] fire and to attempt to establish [a] time line for when the property started to flood versus when the fire started." On November 26, in an email to AmRisc, Cristofoletti again confirmed the "loss [had been] set up as a fire loss."

On November 27, Stormer issued a preliminary cause and origin report. He concluded that "[t]he cause of the fire [was] water creating the mixing of chemicals/oxidizers causing a chemical reaction leading to fire in the center/north section of [the warehouse]." On November 28, Cristofoletti sent another copy of the allocation sheet for the $500,000 advance to her contacts at QBE and THB. In response, a THB representative inquired whether he was "right in thinking that despite flood being excluded[,] the fact that it caused a fire would still be covered." Cristofoletti replied, "[F]ire is still [a] covered cause of loss despite flood being excluded."

On November 30, THB notified Cristofoletti in an email that one of the members of the Lloyd's syndicate had agreed to the release of its portion of the initial payment. The THB representative added: "Trust the above is in order and can advise that we will continue to obtain remaining underwriters[`] responses and work toward collecting our share of [the] requested advance payment." Later that day, Cristofolletti responded that the other syndicate members had agreed to the release of the initial payment. She advised that she was "waiting on QBE and funds to be wired" before she could release the payment. She added that she was seeking a chemical engineer in connection with the investigation. On December 4, CJW engaged Engineering Design and Testing Corp. (Engineering Design) to investigate the chemical aspect of the fire.

On December 10, Cristofoletti emailed her second report to her contacts at QBE and THB. She reported that "[t]he preliminary cause has been determined as thermal chemical reaction caused by the chemicals mixing in water leading to fire." On the same day, Austin emailed Cristofolletti regarding Stormer's report. Austin told her that he had spoken with Stormer regarding his conclusion that rusting and corrosion in the warehouse existed before the fire. Stormer had conceded he did not have any facts to support his conclusion. Austin told Cristofolletti that the oversight was "[m]inor[,] but it seems to always come[]back if suit would be filed."

On December 11, Austin issued his second report to Cristofoletti. He reported that the cause of the fire had yet to be determined. He did not recommend any changes to the estimated loss calculations until there was more information available.

On December 13, Cristofoletti emailed Harry Keith, a claims program manager at QBE, to request that it acknowledge responsibility for its share of the initial payment "in exchange for [an] executed [proof of loss]." She also expressed her opinion that the policy covered the fire damage. Keith responded that he was "reviewing the policy now and [would] let [her] know [his] thoughts." He offered the following opinion regarding coverage:

On December 19, Leeds emailed Austin and Adjusters International, advising them of the necessity of a "quick and fair agreement" and "full cooperation to avoid a massive [business interruption] claim." That same day, Cristofoletti sent Adjusters International a reservation of rights letter, informing them that QBE and Lloyd's were reserving their rights under the policy. Over the next few months, CJW and Adjusters International continued to exchange information regarding the claim.

On March 25, 2013, Cristofoletti sent a letter to Adjusters International and offered, among other things, the following assessment:

Cristofoletti added that "[the] investigation [was] still proceeding [and] no decision with regard to appropriate coverage [could] be made until the cause and origin report [was] completed."

On April 12, Thomas P. Jur, a chemical engineer for Engineering Design, sent his report to Cristofoletti. He detailed the results of his investigation, the objective of which "was to determine the cause of the fire." He reported that the warehouse stored chemicals that "decompose and release heat and toxic gases when exposed to small amounts of water." He further explained:

According to Jur, that sequence of events was consistent with "[t]he reported time of water intrusion [at] 10:00 p.m. on October 29[,] and the chemical [flume] ... observed at 3:00 a.m. on October 30." In addition, the fire deposits examined at the site were found to be "the products of combustion from the pool chemicals, and consistent with the corrosion products resulting from chemical reaction with the building metals."

On June 18, an attorney at Goldberg Segalla, counsel for QBE and Lloyd's, notified Leeds that his clients were denying coverage. The letter enclosed a copy of Jur's report. The letter explained that, based on the available information and the applicable policy provisions, QBE and Lloyd's had "concluded that there is no coverage under the terms of the [p]olicy for the damages asserted by [Leeds]." The letter further explained that "coverage for [f]lood is specifically excluded at [the warehouse] and the fire and pollution damages in question were a direct result of a flood at the subject premises."

B.

Leeds filed its complaint against QBE and Lloyd's in late June.1 The allegations of the complaint included breach of contract and breach of the implied covenant of good faith and fair dealing, in that "[t]he refusal of QBE ... and Lloyd's to provide coverage for the loss and adjust [Leeds's] claim is without reasonable cause and is in bad faith." Following QBE and Lloyd's answer, Leeds served initial discovery requests.

In March 2014, Leeds sought to strike QBE and Lloyd's answer, citing delays in their responses to discovery. QBE and Lloyd's subsequently provided discovery, but Leeds characterized the responses as deficient, noting that they did not include Cristofoletti's claim notes and other requested documents and communications. On July 23, Leeds filed a motion to compel the production of documents. On August 25, the judge signed an order partially granting Leeds's requests.

QBE and Lloyd's produced documents pursuant to the judge's August 25 order, along with privilege logs for documents withheld or redacted. The logs asserted the attorney-client privilege and the work-product privilege as grounds for redacting and withholding certain documents. Other grounds for withholding or redacting included, "[r]eserve information, proprietary and confidential," "[u]nderwriting information-proprietary and confidential," "personal identifying information," and "information not related to subject claim." QBE and Lloyd's also argued that their discussions regarding the reservation of rights were protected by the work-product privilege.

On October 8, Leeds filed a motion to compel production of the unredacted copies of withheld or redacted documents generated between November 7, 2012 and December 30, 2012. In the alternative, the motion sought to require QBE and Lloyd's to submit such documents to the motion judge for an in camera review.

Citing Cristofoletti's claim notes, Leeds argued that the relevant time period was between November 7 and December 30, because that was when the coverage issue was decided. Leeds emphasized the fact that Cristofolletti "inexplicably reversed her decision" on the coverage issue between December 13 and 19. Leeds argued that "[t]here [could] be no doubt that the communications and documents during this period go directly to the heart of the coverage issue and the investigation surrounding the cause and origin of the fire and coverage."

Leeds also asserted that Cristofoletti's deposition supported its position that there was a "substantial need" to obtain unredacted versions of emails exchanged during the subject time period. She testified that, around November 27, she understood the cause of the fire to be water mixing with chemicals, which raised an issue in her mind at the time that the claim may not be covered because of the flood exclusion. Leeds argued that the documents showed that on November 28 Cristofoletti believed that the loss was covered despite the flood being excluded. In addition, Cristofoletti was unable to recall during her deposition whether she obtained anyone's approval prior to sending the reservation of rights letter on December 19 or whether anyone assisted her in drafting the letter. Leeds argued that it was necessary to see unredacted versions of the emails and claim notes during this period so that it could determine what changed during the coverage investigation to alter Cristofoletti's opinion.

Leeds outlined twenty documents from the relevant period that had been redacted, consisting of Cristofoletti's claim notes, her first and second reports, Austin's first and second reports, handwritten notes on Stormer's report, and emails. Leeds further outlined approximately twenty-seven documents that were withheld during this period, consisting of a draft letter regarding reservation of rights, handwritten notes, correspondence, and additional emails.

QBE and Lloyd's opposed the motion. They argued that Leeds's motion was premised on incorrect assumptions about who had the authority to grant or deny the claim. According to Cristofoletti's deposition testimony, she did not have the authority to make a final determination on coverage because only insurers could make that determination. Keith testified that he was responsible for overseeing the CJW's work and that he made the ultimate decision to deny coverage. The defendants argued that there was no reversal of the coverage decision because those with authority to make it had not done so until the June 18 letter from Goldberg Segalla. QBE and Lloyd's also addressed the basis of their privilege claims and the assertion that litigation was anticipated early in the investigation.

The motion judge heard oral argument on November 7. Counsel for QBE and Lloyd's offered unredacted copies of some of the documents for in camera review, but the judge refused to accept them. After hearing arguments, the judge placed an oral decision on the record. He found that the withheld and redacted documents should be produced. He determined that (1) the attorney-client privilege should be pierced, relying on In re Kozlov, 79 N.J. 232 (1979); (2) the work-product privilege did not apply because the documents generated during the period in question were prepared in the ordinary course of business; and (3) QBE and Lloyd's reasons for non-production were not recognized in New Jersey. The judge entered an implementing order that same day, which was modified on November 18, to remove language concerning an in camera review and to add a provision staying the order for twenty days to permit an application for interlocutory appeal.

QBE and Lloyd's filed an emergent application for a stay pending the appeal, which we granted. We subsequently granted their motion for leave to file an interlocutory appeal.

II.

On appeal, QBE and Lloyd's argue that the motion judge abused his discretion in requiring the disclosure of privileged and confidential documents, especially without having conducted an in camera review of the documents before rendering a decision.

When a party challenges a trial judge's disposition of a discovery matter, we normally defer to the judge's exercise of discretion, unless there has been an abuse of that discretion. Payton v. N.J. Tpk. Auth., 148 N.J. 524, 559 (1997); Hedden v. Kean Univ., 434 N.J.Super. 1, 10 (App. Div. 2013). However, our deference to the judge's disposition of a discovery matter "is inappropriate if the [judge]'s determination ... is based on a mistaken understanding of the applicable law." Payton, supra, 148 N.J. at 559.

Rule 4:10-2(a) provides, in relevant part, that "[p]arties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party." It further provides that "[i]t is not ground for objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence." Ibid.

The privileges referred to in the rule include those delineated in N.J.R.E. 501(1) through N.J.R.E. 517. Pressler & Verniero, Current N.J. Court Rules, comment 2 on R. 4:10-2(a) (2015). N.J.R.E. 504 provides that, subject to certain exceptions, "communications between lawyer and [] client in the course of that relationship and in professional confidence, are privileged." See also N.J.S.A. 2A:84A-20(1).

In Hedden v. Kean University, 434 N.J.Super. 1, 10-12 (App. Div. 2013) (second, third, sixth, and seventh alterations in original) (citations and internal quotation marks omitted), we described the scope of the attorney-client privilege as follows:

However, the privilege extends to consultations with third parties whose presence and advice are necessary to legal representation. O'Boyle v. Borough of Longport, 218 N.J. 168, 187-88 (2014).

Even if the privilege is found to apply, it may be pierced in certain limited circumstances. In Kozlov, supra, 79 N.J. at 243-44, our Supreme Court articulated a three-part test that must be satisfied by a party seeking to pierce the privilege: (1) there is "a legitimate need ... to reach the evidence sought to be shielded"; (2) the evidence must be relevant and material to an issue in the case; and (3) there must be a finding, by a fair preponderance of the evidence, that the information sought cannot be obtained from a less intrusive source.

The Court subsequently made it clear, however, that the third prong of the Kozlov test should be construed narrowly:

The Court added that, in the context of a statutory privilege, "the privilege could not be overborne, except where specifically so provided by the Legislature or where the need arose out of a constitutionally based command." Id. at 538.

Rule 4:10-2(c)2 provides, in relevant part, that

The rule requires the motion judge to determine whether the documents for which the work-product privilege has been claimed were prepared in anticipation of litigation or in the ordinary course of business. Payton, supra, 148 N.J. at 554; Miller v. J.B. Hunt Transport, Inc., 339 N.J.Super. 144, 150 (App. Div. 2001). "[A] statement or other document will be considered to have been prepared in anticipation of litigation if the dominant purpose in preparing the document was concern about potential litigation and the anticipation of litigation was objectively reasonable." Miller, supra, 339 N.J. Super. at 150 (emphasis added) (internal quotation marks omitted). In Medford v. Duggan, 323 N.J.Super. 127, 135 (App. Div. 1999), we reversed a trial judge's finding that the work-product privilege "[did] not apply when the insurance carrier perform[ed] a routine investigation required by the file," adopting instead a "case-by-case, fact-sensitive analysis rather than ... a bright-line rule."

Rule 4:10-2(c) contains no suggestion that the work-product privilege can ever be pierced to obtain "the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation." In Laporta v. Gloucester Cnty. Bd. of Chosen Freeholders, 340 N.J.Super. 254, 264 (App. Div. 2001) (citing Jenkins v. Rainner, 69 N.J. 50, 55 (1976)), we stated that "mental impressions and strategy of counsel remain inviolate" under Rule 4:10-2(c).3

In contrast to an effort to pierce the attorney-client privilege, in which the burden is borne by the party seeking to do so, a party seeking to shield relevant work-product evidence from discovery has the burden of demonstrating that the privilege applies to particular evidence otherwise discoverable. See Payton, supra, 148 N.J. at 539 ("Although relevance creates a presumption of discoverability, that presumption can be overcome by demonstrating the applicability of an evidentiary privilege."); Seacoast Builders Corp. v. Rutgers, 358 N.J.Super. 524, 551 (App. Div. 2003) (noting that the party claiming the work—product privilege had the burden of persuading the court that the withheld document was work product).

In Rhone-Poulenc Rorer, Inc. v. Home Indemnity Co., 139 F.R.D. 609 (E.D. Pa. 1991), the plaintiff insurance policyholders sought discovery of their insurers' reserve information. Id. at 610-11. The judge denied the motion on the grounds that the information was of "very tenuous relevance, if any relevance at all," to the dispute and "constitut[ed] work-product material." Id. at 613. The judge explained:

In Leksi, Inc. v. Federal Insurance Co., 129 F.R.D. 99, 101-02 (D.N.J. 1989), the judge similarly found that "reserve information is only tenuously relevant to whether insurance coverage exists in this matter and this information is not discoverable at this time." Id. at 106. In so finding, the judge noted that a reserve amount was an estimate of liability that was not normally based on an evaluation of coverage through extensive factual and legal analysis. Ibid. Consequently, the discovery of reserve information must be based on a showing that the reserve information is more than just "tenuously relevant" to the issue on which it is sought.

Litigation seeking to enforce a claim under an insurance policy is normally a contract action, involving interpretation of the applicable policy's terms and applying them to the facts surrounding the claimed loss. In this case, the policy covers claims for damage resulting from fire and excludes claims for damages resulting from flooding. So, the primary issue in this litigation is whether some, all, or none of the damage on which Leeds's claim is based resulted from a covered fire or an uncovered flood.

Our law recognizes the intentional tort of bad faith denial of a claim. Pickett v. Lloyd's, 131 N.J. 457, 473 (1993). To prevail on such a claim, the plaintiff must "show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim." Ibid. (citation and internal quotation marks omitted). "[T]he knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless ... indifference to facts or to proofs submitted by the insured." Ibid. (internal quotation marks omitted). "If a claim is fairly debatable, no liability in tort will arise." Ibid. (citation and internal quotation marks omitted).

In Badiali v. New Jersey Manufacturers Insurance Group, 220 N.J. 544 (2015), the Supreme Court reiterated its holding in Pickett that, "to establish a first-party bad faith claim for denial of benefits in New Jersey, a plaintiff must show `that no debatable reasons existed for denial of the benefits,'" id. at 554 (quoting Pickett, supra, 131 N.J. at 481), and added that, "[u]nder the salutary `fairly debatable' standard enunciated in Pickett, `a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer's bad faith refusal to pay the claim,'" id. at 555 (quoting Pickett, supra, 131 N.J. at 473). In Pickett, the Supreme Court also held that, if the insured is unable to establish a right to the coverage claimed, the bad faith claim must be dismissed. Pickett, supra, 131 N.J. at 473.

In Procopio v. Government Employees Insurance Co., 433 N.J.Super. 377, 379 (App. Div. 2013), we addressed the issue of whether discovery should be bifurcated in cases in which there is a coverage claim and a claim for bad faith denial. We noted the benefits of severing and staying discovery on a bad faith claim:

We found that "[p]reserving the insured's ability to pursue his or her bad faith claim while deferring discovery thereon until resolution of the [underlying] claim best accommodates the varying interests involved." Id. at 383. We also recognized that bifurcation discouraged abusive pleading practice:

We concluded, "[w]hatever, therefore, the benefits of simultaneous discovery, they are substantially outweighed by the burdens exacted both institutionally and individually." Id. at 383-84.

We note that Leeds's bad faith claim is couched in terms of a claim for breach of the implied covenant of good faith and fair dealing, rather than the tort of bad faith denial. Because the specific allegations in this case are similar to those that would support a tort claim, we conclude that the desirability of bifurcated discovery applies in a case such as this.

Having reviewed the arguments of both sides to this appeal, in light of the record and applicable law, we conclude that the motion judge abused his discretion in ordering the production of the documents at issue. First, it was inappropriate in a case such as this to decide questions of privilege without a thorough in camera review. Pressler & Verniero, Current N.J. Court Rules, comment 6 on R. 4:10-2(e) (2015) ("If a claim of privilege is disputed, an in camera review by the court of the allegedly privileged material is ordinarily the first step in determining the issue."); see also Payton, supra, 148 N.J. at 550, 555 (remanding to the trial court for an in camera inspection where the record was "insufficient to resolve [the] issue").

Second, the judge's application of the Kozlov factors was not consistent with the more recent case law narrowing the scope of the third factor. As we held in Hedden, supra, 434 N.J. Super. at 17, the Supreme Court "severely curtailed" Kozlov, and "its general applicability [was] discarded" in Mauti.

Finally, the judge did not distinguish between evidence related to the underlying coverage claim and evidence related to the bad faith claim, which at this point may or may not be viable. Decisions to pierce the attorney-client or other privileges with respect to bad faith evidence should ordinarily be deferred until the viability of the bad faith claim has been established. Although we do not decide the issue, we note that Leeds's claim involves damage in a warehouse that experienced both flooding and a fire.

Consequently, the remand judge must focus first on whether the discovery sought relates to the merits of Leeds's claim under the policy or its bad faith claim. Discovery focused on the bad faith claim should be deferred until the underlying claim is either adjudicated or a decision is made as to whether it is a viable claim. To the extent that there is an argument that particular items of discovery relate to both, the judge must carefully determine whether such an assertion is merely an effort to obtain "the insurer's investigative files — showing exactly how the company processed the claim, how thoroughly it was considered and why the company took the action it did," by mixing discovery to support a claim of bad faith with discovery on the merits of the underlying breach of contract claim. Procopio, supra, 433 N.J. Super. at 383.

The judge will then have to conduct a careful in camera inspection of the documents sought, in light of the legal considerations outlined above, to determine whether the information sought is discoverable and, if so, whether it is protected by a privilege or other restriction, such as business confidentiality that may require a protective order. The judge will then have to determine whether the party bearing the burden to support or pierce any applicable privilege or consideration of confidentiality has done so. The judge must articulate his reasons as to each document or category of similar documents. Payton, supra, 148 N.J. at 550; Seacoast, supra, 358 N.J. Super. at 542. Finally, the judge should decide whether access to the documents should be restricted, and enter an appropriate protective order as necessary.

Reversed and remanded for further proceedings consistent with this opinion. We do not retain jurisdiction.