CLAIMS LAW UPDATE
[Ref: Avoiding Bad Faith and Civil Liability in Handling Suspicious Claims]
Insurance companies come into possession of all sorts of items in the course of handling claims. Auto insurers arrange for repairs of vehicles damaged in accidents, or take possession of totaled autos. Liability insurers control the defense of their insureds, and therefore often take possession of documents or physical evidence. On the other hand, insurers are not in the business of warehousing and preserving voluminous documents, various defective or failed parts, or other evidence for an indefinite time. Once the insurer’s file is closed, it generally will dispose of the evidence at some point. But what if the insured wants to use the same evidence in a civil action, against the insurer or a third party? For example, suppose an insured is injured in a one-car accident, in which the insured’s auto is also damaged. The collision insurer has the car repaired, including a part that failed and contributed to the accident. Does the insurer have an obligation to preserve the failed part for the insured’s civil action against the manufacturer? Certainly an insurer would be subject to some kind of penalty where it deliberately destroys evidence favorable to its insured’s claim against the insurer itself. But, can an insurer be held liable for destroying evidence and thereby making it impossible for the insured to establish his or her claim against a third party?
The destruction or alteration of evidence is known in the law as “spoliation,” and the person who does so is known as a “spoliator.” The alteration or destruction of evidence that would be used against the spoliator is known as “first party” spoliation. If the evidence would be used against some third party, such as a manufacturer, its alteration or destruction is known as “third party” spoliation. As will be discussed, courts have long imposed various sanctions against parties who have engaged in first party spoliation. Such sanctions, however, are ineffective against third party spoliators, who are not parties to the lawsuit and are not subject to the authority of the court. This has led courts in some jurisdictions to recognize an independent tort claim for spoliation of evidence, either intentional or negligent. This article will describe the traditional remedies for spoliation, and will discuss the judicial creation of (and, in at least one state, retreat from) a civil cause of action for the spoliation of evidence.
TRADITIONAL REMEDIES
The oldest and most common remedy for first party spoliation is the “spoliation inference,” which is available in almost all jurisdictions. If a party to a lawsuit destroys, conceals, or fails to produce evidence under his control, the jury may infer that the evidence would have been unfavorable to that party. In most states, the spoliator must act intentionally, while in others, negligent destruction of evidence is a sufficient reason for the trial judge to instruct the jury that it may draw this inference. For example, in Hendricks v. Great Plains Supply Co., 609 NW2d 486 (Iowa 2000), the Hendricks’ newly built home was destroyed by fire. Investigation revealed that the fire was caused by improper construction of a fireplace and chimney flue, and improper packing of insulation in the attic near the flue. The remnants of the home were demolished about seven weeks after the fire. State Farm, the Hendricks’ homeowners insurer, then paid for the loss and filed a subrogation claim against the insulation and chimney contractors, who argued that the demolition of the burned out house was spoliation of evidence. The trial court refused to instruct the jury that they could infer that the lost evidence would have been unfavorable to the Hendricks and their insurer, and the jury found that the two contractors were each 50% at fault for the loss. The Iowa Supreme Court affirmed. Noting that an expert witness retained by State Farm took numerous photographs of the scene and preserved portions of the flue and insulation, all of which were available to the contractors, the court found no evidence that the plaintiffs had acted with an intent to deprive the contractors of evidence or impair their defense.
It is difficult to predict how a jury instruction on the spoliation inference might affect the outcome of a case. The jury is not instructed to infer any specific fact, but only that it may infer that the evidence would have been “unfavorable” to the party who destroyed the evidence. A number of courts, perhaps in an effort to impose a more effective sanction, employ a rebuttable presumption against a spoliator, shifting the burden of proof to that party on those issues to which the destroyed evidence was relevant. In Nichols v. State Farm Fire & Casualty Co., 6 P3d 300 (Alaska 2000), the plaintiff, Nichols, was using his neighbor’s ladder to assist the neighbor with roof repairs. The ladder collapsed, and Nichols was injured. When he filed a claim against the neighbor for negligently providing a defective ladder, Nichols told the adjuster for State Farm, the neighbor’s homeowners insurer, that the ladder had to be preserved as evidence. By the time the adjuster finally contacted the neighbor, however, the neighbor said he could not find the ladder, and that it must have been discarded with debris from a fire that occurred after Nichols’ injury. State Farm then advised Nichols that its liability investigation was complete, that its insured was not negligent, and that State Farm therefore would make no payment under the neighbor’s liability coverage. Nichols sued, alleging negligence against the neighbor and spoliation of evidence against State Farm.
The trial court granted State Farm’s motion for summary judgment, and Nichols
appealed. The Alaska Supreme Court refused to recognize an independent tort claim for the
negligent spoliation of evidence by an adverse party, on the grounds that Alaska law
already provided for a rebuttable presumption of negligence against a party guilty of such
conduct. (The court noted that, although State Farm technically was not a
“party” to Nichols’ suit against his neighbor, State Farm and the neighbor
were functionally one “party”and the case was one of first party spoliation.)
Thus, the summary judgment in favor of State Farm was affirmed.
No information is available regarding further proceedings in the Nichols case. Presumably, after the claims against State Farm were dismissed, Nichols pursued his negligence claim against the neighbor with the benefit of a rebuttable presumption that the neighbor was negligent in providing a defective ladder. (The case may have settled at that point.) But it is important to consider what the neighbor would have to do to rebut the presumption of negligence. There are two types of rebuttable presumption, and they differ in the amount of evidence a party must produce to overcome them. One type of rebuttable presumption can be overcome by producing “some evidence” to refute the presumed fact. If this type of presumption had applied in Nichols, the neighbor could have rebutted the presumption by producing some evidence that he was not negligent, and the evidence would not have to be sufficient to prove the point by a preponderance of the evidence, the typical standard of proof in civil cases. The jury would then consider all of the evidence as if no presumption existed. However, the presumption described in Nichols actually shifts the burden of persuasion to the spoliator. It cannot be overcome merely by producing “some evidence” contradicting the presumed fact. To rebut the presumption, the neighbor would have to produce sufficient evidence to prove, by a preponderance of the evidence, that he was not negligent.
Other sanctions a court may impose upon a first party spoliator are: the exclusion of some of the spoliator’s own evidence; monetary fines; and default judgment (where the spoliator is the defendant on the underlying claim) or dismissal of claims (where the spoliator is the plaintiff). Finally, a number of states have criminal statutes that prohibit the alteration, concealment or destruction of evidence for the purpose of impairing its availability in a judicial proceeding.
INTENTIONAL SPOLIATION
A tort of intentional spoliation has been recognized in Alaska, California, Kansas, Montana, New Jersey, New Mexico, and Ohio. California first recognized the tort in 1984, in a case where a wheel and tire flew off a van and smashed into the windshield of the plaintiff’s oncoming auto. The court of appeals permitted an intentional spoliation claim against the dealership that had installed the van’s customized wheels, agreed to preserve certain parts for investigation by the plaintiff’s attorney, and then lost or destroyed the evidence. Although this was a case of first party spoliation, the court’s ruling also permitted intentional third party spoliation claims. By the late 1990’s, however, the state’s supreme court was having second thoughts. It abolished the first party spoliation claim in 1998. Then, it abolished the third party claim in Temple Community Hospital v. Superior Court, 976 P2d 223 (Cal. 1999). In Temple, the plaintiff was injured when an oxygen tank exploded while she was undergoing surgery. She sued the hospital, two physicians, and the manufacturers of medical equipment used during the procedure, alleging in part that the equipment, including the oxygen tank, was defective. She also alleged that the hospital committed intentional spoliation by disposing of the oxygen tank, resulting in the dismissal of the plaintiff’s claim against the manufacturer. The trial court denied the hospital’s motion to strike the spoliation claim, and the hospital appealed, ultimately prevailing in the supreme court.
There were two main reasons for the supreme court’s retreat from recognizing this tort. First, the tort can result in a “spiral of lawsuits,” because the losing party in the underlying suit can claim that he or she was denied evidence that would have won the case. If the plaintiff loses the spoliation case, he or she might allege spoliation of evidence (perhaps concerning the defendant’s true intentions in destroying documents) that would have won the spoliation case, and so on. In addition to the sheer waste of judicial resources, this creates a risk of duplicative litigation and inconsistent results, because the jury in the spoliation case must, in effect, re-try the underlying claim in order to determine whether the missing evidence would have made any difference. Second, the court noted the uncertainty of proving that any harm resulted from the spoliation. No sane lawyer would ever guarantee a result in a trial, even with knowledge of what the evidence will be. It is even more speculative to go back and guess what the result would have been if a particular piece of additional evidence had been considered. There typically is no way to determine what the destroyed evidence might have shown, or how much weight it would have carried. Because of this uncertainty as to the “fact of harm” (as opposed to the amount of damages) resulting from the spoliation, a jury could find liability for spoliation where the missing evidence really wouldn’t have made any difference in the underlying claim. The availability of punitive damages for intentional spoliation makes this problem all the worse. These practical considerations also appear to be the main reasons why most jurisdictions have declined to recognize spoliation as a tort.
Despite these difficulties, none of the other jurisdictions that have recognized the tort
of intentional spoliation has subsequently abolished it. The most recent state supreme
court to recognize the tort was Montana’s (third party spoliation only), in Oliver v.
Stimson Lumber Co., 993 P2d 11 (1999). In that case, Oliver, an employee of Stimson, was
injured while operating a piece of equipment in the course of his employment. He received
workers’ compensation benefits from Stimson, and investigated the possibility of a
third party liability claim against the equipment’s manufacturer. Despite receiving a
specific written request to preserve the equipment for examination in connection with a
third party claim, Stimson had the equipment completely rewired, and computer and other
components replaced, about four months after the accident. When this was discovered,
Oliver sued Stimson and its insurer for negligent and intentional spoliation of evidence,
claims that had not previously been recognized in Montana. The court noted that, while the
traditional remedies were adequate safeguards against first party spoliation, those
remedies were ineffective against third party spoliators. The court recognized a tort
claim for third party spoliation, intentional and negligent, because “relevant
evidence is critical to the search for the truth,” and the destruction of such
evidence therefore “threatens the very integrity of our judicial system.”
Kansas permits a claim for intentional spoliation where there is a contract or agreement to preserve the evidence, a voluntary assumption of a duty to preserve by the defendant, or a special relationship between plaintiff and defendant. Although Kansas is sometimes listed among states that have rejected the tort, as a federal court later noted, a fair reading of the cases indicates that the tort would be adopted if one or more of these factors is present. New Jersey courts also appear to recognize spoliation as a tort while insisting that they do not. In Rosenblit v. Zimmerman, 766 A2d 749 (N.J. 2001), a patient sued her chiropractor for malpractice, and also for intentionally destroying or altering her medical records. The New Jersey Supreme Court refused to recognize an intentional spoliation tort, but ruled that the plaintiff could pursue her claim under the existing tort of “fraudulent concealment.” Although there are differences, the key element of fraudulent concealment – that the defendant intentionally withheld, altered or destroyed evidence with the purpose of disrupting the plaintiff’s pending or probable civil action – is also the key element of intentional spoliation.
The elements of the tort of intentional spoliation of evidence are as follows:
1. The existence of pending or probable litigation involving the plaintiff;
2. Defendant’s knowledge of the pending or probable litigation;
3. Intentional destruction or significant alteration of the evidence;
4. Intent to disrupt plaintiff’s pending or probable lawsuit;
5. Disruption of the lawsuit caused by the destruction or alteration; and
6. Damages.
NEGLIGENT SPOLIATION
A civil cause of action for negligent spoliation of evidence is available in at least four jurisdictions (Fla., Ill., Mont., and N.J.). The elements of this tort were listed by the Supreme Court of Montana, in Oliver v. Stimson Lumber Co., as follows:
1. Existence of a potential civil action;
2. A legal or contractual duty to preserve evidence relevant to that action;
3. Destruction of the evidence;
4. Significant impairment of the ability to prove the potential civil action;
5. Causation between the destruction of evidence and the impairment; and
6. Damages.
The striking thing about this cause of action for negligence is that it does not refer to
the exercise of reasonable care. Suppose all of the elements are present, including the
defendant’s duty to preserve the evidence, but the evidence is destroyed in a flash
flood. If the defendant has done everything a reasonable person could do to protect the
evidence, would he or she still be liable? It’s hard to believe that a court would
allow such a result, but the cases all list the elements of the claim in this manner. It
might be better to describe the second element as a duty to exercise reasonable care to
preserve the evidence, and the third element as the destruction of the evidence caused by
the failure to exercise such care.
One reason the reasonable care issue has not been resolved might be that, in the vast majority of cases, the courts find no duty to preserve the evidence in the first place, and never get to the issue of whether such a duty was breached. In fact, many courts confronted with the negligent spoliation tort have avoided the issue by ruling that, even if the tort were to be recognized, there was no basis for a duty to preserve in the particular case. The duty to preserve the evidence is the key element of negligent spoliation and the main reason such claims rarely succeed. In most states that recognize negligent spoliation, the duty to preserve arises only where the spoliator voluntarily undertakes to preserve the evidence, the spoliator enters an agreement to preserve, the other party has specifically requested that the evidence be preserved, or a duty exists by virtue of a statute or a special relationship between the spoliator and the victim. Only Illinois recognizes a duty to preserve based solely on the foreseeability that the evidence is material to a potential civil action.
Some courts refuse to recognize a “separate” tort of negligent spoliation, but permit the claim under traditional negligence principles. For example, in Gilleski v. Community Medical Center, 765 A2d 1103 (N.J. App. 2001), the plaintiff was injured in a hospital x-ray room when a chair collapsed. The hospital disposed of the chair, and the plaintiff sued for negligent spoliation. The court refused to recognize a separate tort, but described the elements of a cause of action under traditional negligence principles as (1) a duty of care owed by defendant to plaintiff, (2) breach of the duty, and (3) injury to plaintiff proximately caused by the breach. Regardless of whether the claim is viewed as a “new tort” or as an application of traditional negligence law, the key issue continues to be whether the defendant owed a duty to preserve the evidence.
CONCLUSION
From the perspective of a claims professional, the moral of the story is that you should be extremely careful when disposing of documents or physical evidence that comes into your possession in the course of your work, even where the claim files themselves have been closed. Virtually all of the cases on this subject state the “general rule” that there is no legal duty to preserve evidence for the benefit of another party, before carving out some exception to that rule. Unfortunately, as at least one commentator has observed, the cases contain virtually no discussion about when and under what circumstances a party is under a duty to preserve evidence relevant to a potential claim “that is not only not yet filed, but which may not yet have accrued.” Robert L. Tucker, The Flexible Doctrine of Spoliation of Evidence, 46 Defense Law Journal 587 (1997). Thus, if an insurer comes into possession of anything that could conceivably be used as evidence in a civil case, either against the insurer itself or a third party, the insurer should either preserve the evidence or refrain from disposing of it until the insured has been notified and given an opportunity to take possession of the evidence. An insurer that destroys evidence that could be used against the insurer will suffer some penalty in all jurisdictions, in the form of a spoliation inference, a rebuttable presumption, or some other sanction, and may even incur civil liability. If the evidence would be used only against a third party, then the insurer is immune from litigation-related sanctions, but may still incur civil liability in jurisdictions that recognize a tort of third party spoliation, intentional or negligent.
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