The fire at your insured's second-floor offices six months agocaused heavy damage to his business and to the company on the firstfloor. Since then, you and the claims adjuster for the downstairsfirm, along with your cause and origin experts have inspected thescene. As suggested by the evidence (and mutually agreed upon bythe experts), fire was electrical in nature and originated in oneof your insured's computers or was caused by an electrical cord orpower strip connected to a computer. The wires, cords, computer,and power strip were photographed by both experts and retained byyours.

About two months after you settle the claim, your experte-mails, asking for permission to discard the evidence hecollected. After considering the many photographs taken and thatthe other claims adjuster has paid his insured—and you areincurring a monthly storage fee on the file—you e-mail your expertto report that the file is closed and that he may destroy theevidence.

Just Another Closed File?

Now fast forward two years to when a colleague working inliability claims calls and tells you she has received thesubrogation lawsuit suit filed by the downstairs business'scarrier, alleging your (and her) insured should have known of thedefective wiring and seeking the $500,000 paid to the companybelow. She is not happy to learn that the evidence her electricalengineer needs in order to evaluate the insured's defense is longgone because you approved its destruction. Worse, she now has toface charges of spoliation from the plaintiff insurancecompany.

Spoliation is defined as “the destruction or material alterationof evidence or the failure to preserve property for another's useas evidence in pending or reasonably foreseeable litigation.”(Silvestriv. General Motors Corp., 271 F.3d 583, 590 (4th Cir.2001))The doctrine that one who loses or destroys evidence must sufferconsequences dates back to early 18th Century England.

In modern times, spoliation may occur through negligence orintent and includes electronic as well as tangible evidence. Insome states it can be a separate tort. Most importantly, it cancause big problems in defending or pursuing a claim.

Spoliation has numerous causes, such as simple carelessness,lack of information, and failure to fully understand the legalprocess, just to name a few. More often than not it isunintentional, and can result from the careless actions of aninsured or even a third party, such as an expert.

In the case of the discarded electrical cord and power strip, wefind that a claims handler was not looking at the big picture orconsidering the possibility that his insured would be a subrogationdefendant.

See the Big Picture

Let's say you're investigating the claim of a factory workerwhose leg was crushed when he was pinned against a dumpster by aforklift. The forklift failed to stop although the operator appliedthe brakes. Workers' compensation prevents a suit against theemployer-owner of the forklift, and the claimant's lawyer allegesthat your insured, the company that serviced the forklift for theclaimant's employer two months before the accident, neglected toreplace a worn out brake cylinder, which then malfunctioned.

Your outside adjuster visits the insured, inspects his servicerecords, and interviews the shop manager and the technician whoworked on the forklift before the accident and replaced the failedcylinder afterwards. The technician insists his work was performedaccording to the manual and maintains that an inspection of thecylinder shows a leak that would have developed after he worked onit, thus causing the accident. Had the forklift owner returned thetruck for more servicing, the accident could have beenprevented.

Your adjuster takes recorded statements from the manager and thetechnician, photographs the failed cylinder, and reports that theclaim can be defended because the insured did everything properly.Moreover, the accident could have been prevented had the claimant'semployer called the insured for servicing when the leak developed. Sanction for Spoliation

Then you prepare a letter to the claimant's lawyer stating thatyou will not make an offer because of no liability of the insuredand you diary the file for the day after the statute of limitationsexpires. The insured, believing that his involvement with thematter has ended, discards the brake cylinder and goes about hisbusiness.

Imagine the phone conversation two years later when your insuredis sued and the defense counsel you retained calls, asking aboutthe cylinder that she now wants to have inspected by an expert. Inthese two examples—both true stories—where evidence was lost ordestroyed while in the possession or control of the insured or hisagent, the consequences are potentially severe.

To determine the appropriate sanction for spoliation, courtswill generally look to the degree of fault of the party whodestroyed or altered the evidence, as well to the prejudice to theopposing party or parties and whether there is a sanction lesssevere than dismissal of a defense or complaint that will avoidunfairness yet deter such conduct in the future.

At the very least, there will be an instruction at trial—calledan “adverse inference charge”—that the jury may assume thedestroyed (or altered) evidence would have been unfavorable to theparty that controlled it. In other words, the jurors may assume,for example, that had the brake cylinder been available, it wouldhave been shown to be improperly serviced by the defendant. Atworst, the court may preclude a defendant from using a defense oreven grant summary judgment for a plaintiff on the issue ofliability.

The penalties imposed for spoliation are fact-sensitive andcourts will try to avoid the most drastic action of dismissing aclaim or barring a defense. If, for example, some e-mails orelectronically stored documents that may have been helpful but werenot crucial to either side were inadvertently deleted, there may beno action taken.

In the case of the discarded electrical items, the lawyer forthe downstairs business (now the plaintiff in the third-partyaction against your insured) never requested the items or pursuedthis theory as a cause of the fire, and both sides had theopportunity to inspect and photograph the electrical evidence.Chances are, there won't be summary judgment against your insured.Nevertheless, you have lost the opportunity to investigate a theorythat might have bolstered your defense.

Conflicting Accounts

Consider, too, a professional liability claim scenario,insurance agent errors and omissions (E&O), for example, wherethe insured agent is sued by his former client for negligentlyfailing to recommend business interruption coverage. An employee ofthe insured says she recalls a phone conversation with the clientin which she specifically recommended this coverage and was toldthat the client was not interested. She put an electronic note inthe file, but it was accidentally deleted. Now the client deniesthe conversation ever took place.

While it is unlikely that the court would impose any sanctionsin this instance, at the very least the defense counsel has losttangible evidence that corroborates key testimony. Moreover, notbeing able to produce the note could adversely affect thecredibility of the witness.

Alertness and Aggressive Investigation

Spoliation is not just a potential problem for the defense.There are times when it may actually serve in their benefit. Claimsprofessionals and defense counsel need to be alert for situationsin which the doctrine may be used against a plaintiff. In the caseof a products liability claim alleging foreign object in food, ifthe plaintiff (or his or her attorney) did not keep the object,then can you raise a defense that you are prejudiced because yourinsured and expert will not be able to inspect the object todetermine if it could have infiltrated the manufacturing process atthe insured's plant? The answer will depend heavily on the laws ofthe jurisdiction of venue and on factors as to whether the objectwas discarded or lost by the plaintiff, his or her lawyer, or maybea third party, such as a dentist's office. Regardless, it is adefense that should be aggressively investigated and pursued wherepossible.

What about evidence that is under the control of a third party,such as MRI films of a plaintiff claiming a herniated disc that youwould like to have viewed by a neuroradiologist for an opinion asto whether there is a herniation and if so whether it was caused bythe subject accident? When your counsel learns that theradiology group that took the MRI is no longer in business or thatthe films have been misplaced, the plaintiff's attorney will arguelack of fault of his client.

Some jurisdictions may hold the plaintiff responsible for thefilms, even if neither he nor his attorney ever possessed them,because they are his films and he is responsible for ensuring thatthird parties do not lose them.

Or, just consider a case where an insurance company paid aclaim for water damage in a residence caused by an allegedly faultycondenser in the HVAC system and now has a subrogation lawsuitagainst your insured, the manufacturer of the system. A yearor two later, while suit is pending, the property owner has thesystem replaced by a contractor not involved in the subrogationlawsuit, who then disposes of the unit, despite instructions fromthe plaintiff's lawyer. You are prejudiced because yourexpert has lost the opportunity to inspect and test the condenserand there is a good argument to be made that the insurance companyplaintiff is more sophisticated than its insured and should haveknown to take control of the HVAC equipment until its claim wasresolved so third parties would not destroy or alter it.

The Real Costs of Spoliation

The headaches and potential costs of spoliation can be avoidedin many cases by having well-documented procedures in place forretention of evidence, by communicating with your lawyers andinstructing your experts and insureds in writing of the necessityor preserving evidence until instructed otherwise.

In a first party setting, all potential subrogation defendantsshould be put on notice in writing (certified and regular mail aswell as fax or e-mail if available) as soon as possible whenyou intend to inspect evidence at a loss scene and given enoughtime to notify their carriers, retain counsel and experts, andtravel to the scene. The same written notice should be givenbefore any testing is done, and all parties should agree on theprotocol of any destructive testing before heading to thelab.

In a third-party claim, insureds need to be instructed inwriting not to discard evidence, including computer-generated andstored documents, as soon as you investigate the claim. Aswith the forklift cylinder, an insured unfamiliar with the legalprocess may believe he has fulfilled his duties under the policyafter he has spoken with his agent or carrier. He needs toknow that any potential evidence should be preserved until thestatutes of limitation have expired.

The evidence belongs to the insured, meaning it's his – and your– responsibility to safeguard it before and throughout thelitigation. Even if the defendants had the opportunity toinspect and test the evidence, in some situations it may be neededfor further examination, for example if a new theory of defense orliability comes up later, or to show the jury at trial.

If you or an outside adjuster visit an insured who still hasevidence, such as the brake cylinder in the forklift, you or yourexpert should take possession of it immediately. If this is notpossible– such as with a large piece of equipment – arrangementsshould be made to move the evidence to a secure storage facilityimmediately.

Finally, insureds should be routinely advised in writing as soonas a claim is reported to take care to safeguard any potentialevidence, including documents and e-mails on their computers.

Human nature being what it is, spoliation issues will likely notgo away any time soon. But awareness of the possible legalpitfalls of losing evidence and prompt communications with thoseresponsible for potentially important pieces of evidence can helpminimize the chances of having to go to court without your bestdefense.