Viewpoint: Spoliation By Insurer Can Destroy Subrogation Potential

Insurance companies, third-party adjusting companies, and subrogation vendors are increasingly undertaking subrogation investigation at an early stage of a claim’s life. Understanding that early recognition and action on third-party recovery potential is often won or lost in the first few days following an insurance claim or loss, companies are learning to obtain and retain key evidence necessary for proof of its subrogation case against a third party. However, if companies are going to undertake the role of safekeeping key evidence in large losses, it is important to remember the law regarding spoliation and do everything in its power to avoid committing losing, damaging, or compromising evidence necessary to win.

“Spoliation” of evidence occurs when someone with an obligation to preserve evidence with regard to a legal claim (including a subrogation action) neglects to do so or intentionally fails to do so. Such a failure to preserve or protect evidence can take place by destruction of the evidence, damage to the evidence, or losing the evidence altogether. When spoliation occurs, the party responsible may be held accountable in court through a variety of different sanctions. Those sanctions vary greatly from state to state—but none of them are good for the subrogation effort.

In 1984, California was the first state to recognize the tort of spoliation. Smith v. Superior Ct., 151 Cal. App.3d 491 (Cal. 1984). However, the majority of jurisdictions that have subsequently examined the issue have declined to create or recognize such a tort. Only Alabama, Alaska, Florida, Indiana, Kansas, Louisiana, Montana, New Mexico, Ohio, and West Virginia have explicitly recognized some form of an independent tort action for spoliation. California overruled its precedent and declined to recognize first-party or third-party claims for spoliation. Temple City. Hosp. v. Superior Ct., 20 Cal.4^th 464, 84 Cal. Rptr.2d 852, 976 P.2d 223, 233 (Cal. 1999); Cedars-Sinai Med. Center v. Superior Ct., 18 Cal.4^th 1, 74 Cal. Rptr.2d 248, 954 P.2d 511, 521 (Cal. 1998).

Generally, those states that have recognized or created the tort of spoliation in some form, limit such an action to third-party spoliation of evidence related to pending or actual litigation. First-party spoliation claims are those claims for destruction or alteration of evidence brought against parties to underlying litigation. Conversely, third-party spoliation claims are those destruction or alteration of evidence claims against non-parties to underlying litigation. Moreover, most of these states generally hold that third-party spoliator must have had a duty to preserve the evidence before liability can attach. The majority of states that have examined this issue have preferred to remedy spoliation of evidence and the resulting damage to a party’s case or defense, through sanctions or by giving adverse inference instructions to juries.

Sanctions can include the dismissal of claims or defenses, preclusion of evidence, and the granting of summary judgment for the innocent party. MWL has compiled a compendium of decisions for the states that have examined the issue of spoliation. It can be found HERE. The laws vary from state to state; as do the sanctions and repercussions for committing spoliation.

It should be remembered that, if a matter is pending in federal court, federal evidentiary rules, rather than state spoliation laws, may be applied. King v. Ill. Cent. R.R., 337 F.3d 550 (5^th Cir. 2003). A district court has discretion to admit evidence of spoliation and to instruct the jury on adverse inferences. United States v. Wise, 221 F.3d 140 (5^th Cir. 2000) (citing Higgins v. Martin Marietta Corp., 752 F.2d 492 (10^th Cir. 1985)). The adverse inference to be drawn from destruction of records is predicated on bad conduct of the defendant. The circumstances of the act must manifest bad faith. Mere negligence is not enough, because it does not sustain an inference of consciousness of a weak case. Vick v. Tex. Emp’t Comm’n, 514 F.2d 734 (5^th Cir. 1975). Therefore, one must show that the party alleged to have destroyed evidence acted in “bad faith” in order to establish entitlement to an adverse inference. A court will require even more compelling evidence of bad faith when asked to apply the more severe sanction of dismissal or summary judgment. Stahl v. Wal-Mart Stores, Inc., 47 F. Supp.2d 783 (S.D. Miss. 1998).

An insurance company or subrogation vendor who takes possession of a key piece of evidence has a duty to both protect the evidence and maintain proper chain of custody documentation. In product liability lawsuits it is often necessary to prove that the product at the time the product left the manufacturer’s control, the product possessed a characteristic that could cause damage and that the manufacturer failed to use reasonable care to provide an adequate warning of such characteristic and its danger to users and handlers of the product. Any plaintiff in a product liability suit has the burden to establish that the defendant’s product was the producing cause of damage or injury. Whether arguing a design defect, manufacturing defect, failure to warn, breach of warranty, or other product liability theory, the plaintiff must be able to demonstrate injury-causing feature of the product. That is hard to do without the product.

When investigating subrogation potential, investigation should include making wise decisions about which evidence must be retained for future litigation. This includes not only the product suspected of causing a loss, but also any product or instrumentality in the proximity and/or likely to be blamed by a desperate product manufacturer looking to avoid liability.

A recent Idaho federal court decision illustrates the problem all too well. In State Farm Fire and Casualty Company, as subrogee of George Adams v. General Motors, LLC, 524 F.Supp.3d 1124 (D. Idaho 2021), State Farm brought a subrogation action against General Motors, alleging that a fire which occurred at the insured’s home was caused by a defective vehicle which caught fire. The insured filed a claim for the property damage with State Farm and was paid for his loss. State Farm then filed a subrogation suit against General Motors, which promptly moved for sanctions due to spoliation, alleging that insurer wrongfully destroyed the automobile.

The facts were that on May 6, 2019, a State Farm Fire representative visited Adams’s house after the fire. The State Farm Fire representative had a telephone conversation with a State Farm Auto claims representative regarding the vehicle and received permission to allow State Farm Fire’s inspector to inspect the vehicle. The State Farm Fire representative also requested that the vehicle not be sent to Insurance Auto Auctions, Inc. (IAA) in Boise, but to a different holding facility. State Farm Fire’s inspector, Shane Hartgrove, prepared a report, including three photos of the vehicle, and “concluded that the fire must have been caused by ‘non-specific electrical failure’ at the connection point between the positive battery cable and the fuse block” of the vehicle.

On May 8, 2019, State Farm Auto towed the vehicle from Adams’ residence to IAA, and soon thereafter Hartgrove traveled to IAA to inspect the vehicle again. This time he prepared a Fire Cause Analysis Report for State Farm Fire on May 24, 2019. On either May 27, 2019, or June 28, 2019, the vehicle was sold at a salvage auction by IAA. State Farm Fire alleges that it had no knowledge of the sale at the time, and that it was informed sometime after June 28 that the vehicle had been sold. On August 21, 2019, almost a month after the vehicle had been sold, State Farm Fire notified General Motors of its claim for subrogation. General Motors moved for dismissal based on the disappearance of the key piece of evidence—the car.

The court held that the sale of the vehicle constituted spoliation under federal law, and that where spoliation occurs before litigation is filed, the sanctions are governed by the power of the court to make evidentiary rulings in light of the missing evidence. While the 9^th Circuit has not set forth a precise standard for determining when spoliation sanctions are appropriate, the majority of trial courts have adopted the following test:

(1) the party having control over the evidence has an obligation to preserve it at the time it was destroyed;

(2) the evidence w[as] destroyed with a culpable state of mind; and

(3) the evidence was relevant to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.

In this case, State Farm had an obligation to preserve evidence—in this case, the vehicle—which it knows or should know is relevant to a claim or defense of any party, or that may lead to the discovery of evidence relevant to anticipated litigation. Brown v. Reinke, 2016 WL 107926 (D. Idaho 2016). In this case, State Farm Fire argued that it did not have control over the vehicle which was in the hands of State Farm Auto. The court disagreed, holding that have affirmative duty to preserve evidence extends even to instances where that evidence is not directly within the party’s custody or control so long as the party has access to, or indirect control over, such evidence.

The court also ruled that State Farm had the requisite state of mind. Federal law provides that sanctions for spoliation may be imposed upon “simple notice of potential relevance to the litigation,” and a finding of bad faith is not required. Glover, 6 F.3d at 1329. In contrast, Idaho law requires a finding of bad faith and “the merely negligent loss or destruction of evidence is not sufficient to invoke the spoliation doctrine.” Courtney v. Big O Tires, Inc., 87 P.3d 930 (Idaho 2003).

The vehicle was obviously relevant to both parties’ claims, so the only real question for the court was the severity of the sanctions, which can range from minor sanctions, such as awarding attorneys’ fees, to more severe sanctions including permitting a jury to draw an adverse inference against a party responsible for the destruction of evidence, ordering the exclusion of evidence, or even dismissal of claims. Dickinson Frozen Foods, Inc. v. FPS Food Process Solutions Corp., 2019 WL 2236080 (D. Idaho 2019). Furthermore, a court considering dismissal as a sanction for a party’s spoliation of evidence must weigh several factors:

(1) the public’s interest in expeditious resolution of litigation;

(2) the court’s need to manage its dockets;

(3) the risk of prejudice to the party seeking sanctions;

(4) the public policy favoring disposition of cases on their merits; and

(5) the availability of less drastic sanctions.

For dismissal to be proper, the conduct must be due to “willfulness, fault, or bad faith.” A party’s destruction of evidence qualifies as willful spoliation if the party has some notice that the evidence was potentially relevant to the litigation before it was destroyed.

In the State Farm case, the judge noted that it involved the destruction of evidence that affected the very heart of the matter in dispute prior to General Motors even being notified of the claim against it, much less having had an opportunity to inspect. Because no lesser sanction would be fitting, the court dismissed the case as a sanction for State Farm’s actions.

When investigating subrogation potential, be certain to get all of the relevant evidence necessary for both the prosecution and defense of the case. Make sure the evidence is secured so that it won’t be lost, damaged, or tampered with, allowing you to prove that the condition in which the expert and jury see the product is the condition of the product at the time of the loss. Losing or damaging evidence is the quickest way to say good-bye to any and all subrogation potential—a big price to pay for simply not understanding your obligations to avoid spoliation.