The fire at your insured’s second-floor offices six months ago caused heavy damage to his business and to the company on the first floor. Since then, you and the claims adjuster for the downstairs firm, along with your cause and origin experts have inspected the scene. As suggested by the evidence (and mutually agreed upon by the experts), fire was electrical in nature and originated in one of your insured’s computers or was caused by an electrical cord or power strip connected to a computer. The wires, cords, computer, and power strip were photographed by both experts and retained by yours.
About two months after you settle the claim, your expert e-mails, asking for permission to discard the evidence he collected. After considering the many photographs taken and that the other claims adjuster has paid his insured—and you are incurring a monthly storage fee on the file—you e-mail your expert to report that the file is closed and that he may destroy the evidence.
Just Another Closed File?
Now fast forward two years to when a colleague working in liability claims calls and tells you she has received the subrogation lawsuit suit filed by the downstairs business’s carrier, alleging your (and her) insured should have known of the defective wiring and seeking the $500,000 paid to the company below. She is not happy to learn that the evidence her electrical engineer needs in order to evaluate the insured’s defense is long gone because you approved its destruction. Worse, she now has to face charges of spoliation from the plaintiff insurance company.
Spoliation is defined as “the destruction or material alteration of evidence or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation.” (Silvestri v. General Motors Corp., 271 F.3d 583, 590 (4th Cir.2001)) The doctrine that one who loses or destroys evidence must suffer consequences dates back to early 18th Century England.
In modern times, spoliation may occur through negligence or intent and includes electronic as well as tangible evidence. In some states it can be a separate tort. Most importantly, it can cause 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 legal process, just to name a few. More often than not it is unintentional, and can result from the careless actions of an insured or even a third party, such as an expert.
In the case of the discarded electrical cord and power strip, we find that a claims handler was not looking at the big picture or considering the possibility that his insured would be a subrogation defendant.
See the Big Picture
Let’s say you’re investigating the claim of a factory worker whose leg was crushed when he was pinned against a dumpster by a forklift. The forklift failed to stop although the operator applied the brakes. Workers’ compensation prevents a suit against the employer-owner of the forklift, and the claimant’s lawyer alleges that your insured, the company that serviced the forklift for the claimant’s employer two months before the accident, neglected to replace a worn out brake cylinder, which then malfunctioned.
Your outside adjuster visits the insured, inspects his service records, and interviews the shop manager and the technician who worked on the forklift before the accident and replaced the failed cylinder afterwards. The technician insists his work was performed according to the manual and maintains that an inspection of the cylinder shows a leak that would have developed after he worked on it, thus causing the accident. Had the forklift owner returned the truck for more servicing, the accident could have been prevented.
Your adjuster takes recorded statements from the manager and the technician, photographs the failed cylinder, and reports that the claim can be defended because the insured did everything properly. Moreover, the accident could have been prevented had the claimant’s employer called the insured for servicing when the leak developed.
Then you prepare a letter to the claimant’s lawyer stating that you will not make an offer because of no liability of the insured and you diary the file for the day after the statute of limitations expires. The insured, believing that his involvement with the matter has ended, discards the brake cylinder and goes about his business.
Imagine the phone conversation two years later when your insured is sued and the defense counsel you retained calls, asking about the cylinder that she now wants to have inspected by an expert. In these two examples—both true stories—where evidence was lost or destroyed while in the possession or control of the insured or his agent, the consequences are potentially severe.
To determine the appropriate sanction for spoliation, courts will generally look to the degree of fault of the party who destroyed or altered the evidence, as well to the prejudice to the opposing party or parties and whether there is a sanction less severe than dismissal of a defense or complaint that will avoid unfairness yet deter such conduct in the future.
At the very least, there will be an instruction at trial—called an “adverse inference charge”—that the jury may assume the destroyed (or altered) evidence would have been unfavorable to the party that controlled it. In other words, the jurors may assume, for example, that had the brake cylinder been available, it would have been shown to be improperly serviced by the defendant. At worst, the court may preclude a defendant from using a defense or even grant summary judgment for a plaintiff on the issue of liability.
The penalties imposed for spoliation are fact-sensitive and courts will try to avoid the most drastic action of dismissing a claim or barring a defense. If, for example, some e-mails or electronically stored documents that may have been helpful but were not crucial to either side were inadvertently deleted, there may be no action taken.
In the case of the discarded electrical items, the lawyer for the downstairs business (now the plaintiff in the third-party action against your insured) never requested the items or pursued this theory as a cause of the fire, and both sides had the opportunity 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 theory that might have bolstered your defense.
Consider, too, a professional liability claim scenario, insurance agent errors and omissions (E&O), for example, where the insured agent is sued by his former client for negligently failing to recommend business interruption coverage. An employee of the insured says she recalls a phone conversation with the client in which she specifically recommended this coverage and was told that the client was not interested. She put an electronic note in the file, but it was accidentally deleted. Now the client denies the conversation ever took place.
While it is unlikely that the court would impose any sanctions in this instance, at the very least the defense counsel has lost tangible evidence that corroborates key testimony. Moreover, not being able to produce the note could adversely affect the credibility 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. Claims professionals and defense counsel need to be alert for situations in which the doctrine may be used against a plaintiff. In the case of a products liability claim alleging foreign object in food, if the plaintiff (or his or her attorney) did not keep the object, then can you raise a defense that you are prejudiced because your insured and expert will not be able to inspect the object to determine if it could have infiltrated the manufacturing process at the insured’s plant? The answer will depend heavily on the laws of the jurisdiction of venue and on factors as to whether the object was discarded or lost by the plaintiff, his or her lawyer, or maybe a third party, such as a dentist’s office. Regardless, it is a defense that should be aggressively investigated and pursued where possible.
What about evidence that is under the control of a third party, such as MRI films of a plaintiff claiming a herniated disc that you would like to have viewed by a neuroradiologist for an opinion as to whether there is a herniation and if so whether it was caused by the subject accident? When your counsel learns that the radiology group that took the MRI is no longer in business or that the films have been misplaced, the plaintiff’s attorney will argue lack of fault of his client.
Some jurisdictions may hold the plaintiff responsible for the films, even if neither he nor his attorney ever possessed them, because they are his films and he is responsible for ensuring that third parties do not lose them.
Or, just consider a case where an insurance company paid a claim for water damage in a residence caused by an allegedly faulty condenser in the HVAC system and now has a subrogation lawsuit against your insured, the manufacturer of the system. A year or two later, while suit is pending, the property owner has the system replaced by a contractor not involved in the subrogation lawsuit, who then disposes of the unit, despite instructions from the plaintiff’s lawyer. You are prejudiced because your expert has lost the opportunity to inspect and test the condenser and there is a good argument to be made that the insurance company plaintiff is more sophisticated than its insured and should have known to take control of the HVAC equipment until its claim was resolved so third parties would not destroy or alter it.
The Real Costs of Spoliation
The headaches and potential costs of spoliation can be avoided in many cases by having well-documented procedures in place for retention of evidence, by communicating with your lawyers and instructing your experts and insureds in writing of the necessity or preserving evidence until instructed otherwise.
In a first party setting, all potential subrogation defendants should be put on notice in writing (certified and regular mail as well as fax or e-mail if available) as soon as possible when you intend to inspect evidence at a loss scene and given enough time to notify their carriers, retain counsel and experts, and travel to the scene. The same written notice should be given before any testing is done, and all parties should agree on the protocol of any destructive testing before heading to the lab.
In a third-party claim, insureds need to be instructed in writing not to discard evidence, including computer-generated and stored documents, as soon as you investigate the claim. As with the forklift cylinder, an insured unfamiliar with the legal process may believe he has fulfilled his duties under the policy after he has spoken with his agent or carrier. He needs to know that any potential evidence should be preserved until the statutes of limitation have expired.
The evidence belongs to the insured, meaning it’s his – and your – responsibility to safeguard it before and throughout the litigation. Even if the defendants had the opportunity to inspect and test the evidence, in some situations it may be needed for further examination, for example if a new theory of defense or liability comes up later, or to show the jury at trial.
If you or an outside adjuster visit an insured who still has evidence, such as the brake cylinder in the forklift, you or your expert should take possession of it immediately. If this is not possible– such as with a large piece of equipment - arrangements should be made to move the evidence to a secure storage facility immediately.
Finally, insureds should be routinely advised in writing as soon as a claim is reported to take care to safeguard any potential evidence, including documents and e-mails on their computers.
Human nature being what it is, spoliation issues will likely not go away any time soon. But awareness of the possible legal pitfalls of losing evidence and prompt communications with those responsible for potentially important pieces of evidence can help minimize the chances of having to go to court without your best defense.