Preservation of Evidence When Conducting an Investigation: Your Rights and Duties

As discussed below, potential litigants have a duty to preserve relevant evidence. Insurance carriers, as sophisticated entities, arguably have an even higher burden of evidence preservation - both as to the cause of the loss and as to retention of damaged property. On the other hand, properly documenting your file with requests for retention of all potentially relevant evidence will become an asset in the event evidence is lost. Significant sanctions can be imposed by courts against parties that lose or destroy evidence.

This article will look at the parameters of the duty to preserve evidence followed by a short discussion of the potential discovery sanctions for failure to preserve the evidence. There will then be a discussion of the factors a court considers when fashioning a sanction and an illustration of the sanctions at issue using a party's failure to retain damaged personal property.

"Spoliation of evidence" refers to the destruction or loss of relevant evidence by a party, or potential party, to litigation. Hoffman v. Ford Motor Co., 587 N.W.2d 66, 71 (Minn.1998). A litigant's duty is to preserve evidence which it knows, or reasonably should know, is relevant. Fire Insurance Exchange v. Zenith Radio Corporation, 747 P.2d 911, 914 (Nev.1987). The duty arises as soon as a potential claim is identified and there is foreseeable harm if relevant evidence is lost or destroyed. Baliotis v. McNeil, 870 F.Supp. 1285, 1290 (M.D.Pa.1994). Notably for insurance carriers, sophisticated litigants are held to an even higher standard commensurate with their experience and expertise. Baliotis, 870 F.Supp. at 1292-93; Allstate Insurance Co. v. Sunbeam Corp., 865 F.Supp. 1267, 1278 (N.D. Ill. 1994).

Courts may impose sanctions for the spoliation of evidence pursuant to their inherent power to "manage their own affairs so as to achieve the orderly and expeditious disposition of cases." Chambers v. NASCO, Inc., 501 U.S. 32, 43, reh'g denied, 501 U.S. 1269 (1991); Campbell Indus. v. M/V Gemini, 619 F.2d 25, 27 (9th Cir. 1980); see also Unigard Sec. Ins. Co. v. Lakewood Eng'g & Mfg. Corp., 982 F.2d 363, 368 (9th Cir. 1992).

Courts may sanction parties who are responsible for spoliation in at least three different ways. First, a court can instruct the jury that it may draw an inference adverse to the party or witness responsible for destroying the evidence. Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993). Second, a court may exclude witness testimony proffered by the responsible party that was based on the destroyed evidence. Glover, supra, at 1329. Finally, a court may dismiss part or all of a claim that is premised on the spoliated evidence. Allstate Ins. Co. v. Sunbeam Corp., 53 F.3d 804, 806-07 (7th Cir. 1995). It is important to know that courts are required to give due consideration to the less drastic sanctions, such as an adverse inference instruction. Halaco Engineering Co. v. Costle, 843 F.2d 376, 381 (9th Cir. 1988), Therefore, the adverse inference instruction is the remedy that is most likely to be seen in litigation.

Parties have an affirmative duty to preserve relevant evidence within their control, and the appropriate sanctions for a violation of this duty vary depending on the importance of the evidence, the degree of fault attributable to the responsible party and the amount of prejudice to the non-responsible party. Souza v. Fred Carries Contracts, Inc., 191 Ariz. 247, 250-51, 955 P.2d 3, 6-7 (App. 1997); American States Ins. Co. v. Tokei-Seiki, Ltd., 704 N.E.2d 1280, 1283 (Ohio 1997). A party's destruction of evidence need not be in "bad faith" to warrant sanctions; rather, courts may sanction litigants for willfulness, fault, or merely by having notice that the destroyed evidence was potentially relevant to litigation. Unigard Sec. Ins. Co. v. Lakewood Eng'g & Mfg. Corp., 982 F.2d 363, 368 (9th Cir. 1992). Although the finding of fault alone can justify dismissal, Halaco Engineering Co. v. Costle, 843 F.2d 376, 380 (9th Cir. 1988), a finding of bad faith is not required in order to impose the sanction of dismissal or exclusion of evidence. Unigard, 982 F.2d at 368.

The adverse inference instruction is based on both evidentiary and prophylactic rationales. Akiona v. United States, 938 F.2d 158, 161 (9th Cir. 1991). The evidentiary rationale is nothing more than the common sense observation that a party who destroys relevant evidence is more likely threatened by the evidence. Id. The intended prophylactic and punitive effects are accomplished by deterring others in similar situations from destroying evidence. Id.

The adverse inference jury instruction would look something like this:

The usual measure of damages to personal property is the lesser of the cost to repair or replace. Valley Transportation System v. Reinartz, 67 Ariz. 380, 383-84, 197 P.2d 269, 271 (1948); Reckert v. Avra Valley Air, Inc., 19 Ariz.App. 538, 540, 509 P.2d 231, 233 (App. 1973). Personal property is often just that: personal. It is difficult to ascertain its value - and whether it can be economically repaired - without viewing the evidence. Therefore, items damaged in a water loss should be preserved so as to allow the other side to appraise the property and evaluate the damages. By failing to give the other side this access, one runs the risk of sanctions for the spoliation of evidence.

Similarly, when investigating the scene of a loss, if the adverse party is not available, the utmost care should be taken to properly document, photograph and videotape the scene so as to provide as much evidence as possible. Being over-inclusive in evidence preservation, documentation and providing a thorough and careful chain-of-custody will help an insurance carrier avoid such sanctions. Likewise, insureds should be put on notice of their duties so as to provide spoliation defenses should litigation become a reality.