SPOLIATION - HOW TO FORFEIT COVERAGE
Spoliation of evidence is a concept that every public adjuster must recognize and avoid. Spoliation involves the willful or negligent destruction of evidence. It can have devastating effects.
WHAT IS IT?
Spoliation arises when evidence material to an actual or anticipated litigation, that could not reasonably be obtained from another source, is destroyed to the prejudice of another party. Once evidence is destroyed, the parties to a dispute are at a substantial loss to determine the part that the destroyed evidence played in the underlying event. Remedies include a cause of action for destruction of the evidence, giving an adverse inference charge to a jury, trial sanctions precluding reference to the evidence or discovery sanctions before trial. The remedy depends in large part on the position of the party responsible for the destruction and the point in the litigation at which the destruction occurs or is discovered. Tartaglia v. UBS Paine Webber, Inc., 197 N.J. 81 (2008).
APPLICABILITY TO FIRST PARTY CLAIMS
You will remember that every policy of property insurance contains language providing that the insured will not do anything to interfere with the insurer's subrogation rights and that the insured will protect and preserve the property after a loss. Destruction of evidence constitutes a breach of these policy conditions and can lead to a forfeiture of coverage. The insured would probably also not be able to pursue its own claim against the party responsible for the loss.
A recent case in federal court in New York, Tropic Pollo I Corp. v. National Specialty Ins. Co., 818 F. Supp. 2d 559 (E.D.N.Y. 2011) illustrates the point. In that matter, a fire occurred in a restaurant selling rotisserie chickens. The insured gave notice and the carrier sent an expert to examine the scene. The expert concluded that the fire suppression system and ductwork played a role in the extent of the loss, the exact nature of which was beyond his expertise. The carrier requested a further inspection and gave notice to the potentially responsible parties. The inspection was delayed several times, including at the request of the insured. When the additional inspection was conducted some 7 weeks after the loss, the insured had already removed the damaged ductwork, replaced the fire suppression system and completely cleaned the fire scene. The carrier denied coverage because of the impairment of its subrogation rights and the insured's failure to protect the carrier's rights. The Court upheld the denial on both grounds.
ACTS OF THIRD PARTIES
If a potentially responsible party, such as a manufacturer or installer, takes the evidence and destroys it, both the insured and the insurer may have affirmative claims for damages against that entity. Indeed, sanctions may be imposed upon a party's representative (attorney, or even a public adjuster), if the representative cannot produce an item of evidence that was placed into the representative's custody. In Goldmark v. Mellina, reported in the June 25 edition of the New Jersey Law Journal, the Appellate Division imposed the costs and attorney's fees incurred in an adversary retaining an expert to find allegedly privileged emails that the adverse attorneys claimed to have lost.
The issue gets dicey when a third party not involved in the litigation destroys the evidence. A case in point is Aetna v. Imet, 309 N.J.Super.358 (App. Div. 1998). There a truck owned by Imet caught fire at a construction site and damaged the work. Aetna paid the general contractor for the loss. State Farm insured the owner of the truck and retained an alleged expert to examine the truck, which they did and prepared three (3) reports. Aetna hired its own expert who prepared a report. State Farm then disposed of the truck.
Aetna notified Ford as the manufacturer of the truck one year later that it intended to sue. Ford demanded that Aetna preserve the truck. Aetna sued one year later and Ford moved to bar any evidence relating to the truck because it could not examine the truck to refute any of the claims. The Court imposed a discovery sanction precluding the plaintiff's expert from testifying. Aetna conceded that it could not prove its case without the expert and thus the case was dismissed. There was no indication in the record that Aetna ever requested State Farm to preserve the truck.
POINTS TO REMEMBER
The lesson to be learned from these cases: DO NOT allow your insured to move forward with cleanup, repair and replacement unless and until all potentially responsible parties are notified, given the chance to inspect, and the carrier gives permission to commence repairs. This can interfere with an insured's business, but that should (but will not always) be covered by business interruption insurance.
Notice to the potentially responsible parties is key. As your standard operating procedure, we suggest that once it appears that some evidence is relevant to the cause of the loss, be sure that the potentially responsible parties are notified and allowed to inspect the property well prior to any destruction of the evidence. Do not discard or allow your insured to discard that evidence until you get assurance from the insurer that the claim will be honored and that it has no issue with the restoration of the property and the consequent destruction of the evidence for subrogation purposes. If the claim will not be honored, or if there is a coverage question that will take time to resolve, you should notify the potentially responsible parties of the happening of the loss, their potential involvement, offer an opportunity to inspect and advise of the anticipated date for the repair of the property which will necessarily destroy or impair the evidence. Note, if there is a discrete piece of evidence (a pipe, TV, toaster, coffee pot, etc.) that can be preserved, be sure that it is preserved.
If you or your insureds encounter any situations involving these issues, please feel free to contact us at 973-538-4100 or by email at email@example.com. We are here to help!