An insured should be able to overcome an insurer’s claim that the insured’s sale or disposal of property is not “spoliation” of evidence. There are many legitimate reasons why an insured may either sell their home or depose of damaged personal property after an insurer denies or fails to fully pay a claim. When an insurer does not fully pay to repair a home after it suffers significant damage, rendering the home inhabitable, an insured often does not have funds. Selling the property is often a more viable or the only solution to maintaining two households. As to damaged personal property that is a total loss, it often makes sense to dispose of the property rather than have it take up room in one’s home or pay for storage.

What happens, however, if, during litigation, the insurance carrier claims the sale or disposal of property is “spoliation” of evidence and seeks an adverse jury instruction, to bar evidence of damages or even have the case dismissed because it has been alleged deprived of conducting discovery as to the insured’s damages? Fortunately, an insurer’s obligation to fully investigate a claim should be sufficient to overcome spoliation claims.

In general, spoliation is the intentional destruction or alteration of evidence or the knowing failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.1 The elements of spoliation are:

  1. The party with control over the evidence had an obligation to preserve it at the time of destruction.
  2. The evidence was destroyed with a “culpable state of mind,” and
  3. The evidence was relevant to the party’s claim or defense.2

Spoliation’s specific elements may change from jurisdiction to jurisdiction, but the purpose of spoliation remedies remain the same, that a party was prejudiced because evidence is not available. However, in first-party insurance litigation, it is very difficult for an insurer to claim prejudice because the insurer has or should have already fully inspected the damaged property.

If an insurance carrier raises spoliation of evidence, the insured can demonstrate there is no prejudice based on the insurer’s claim investigation and or claim investigation duties. Look to the claim file to determine what actions the carrier took. The insurer likely had an adjuster come to the property, view the loss and damage, and prepare an estimate detailing what the insurer determined was the scope and cost of repairs. The insurer may have also retained consulting experts to reach professional conclusions regarding the claimed damages. In most situations, the carrier’s claim investigation should be more than sufficient to defeat a carrier’s claim of prejudice to its defense.

Carriers also have a duty to fully and thoroughly investigate their insured’s claim. The NAIC Model Unfair Trade Practices Act, which many states have adopted, sets forth specific insurer investigative obligations. Unfair insurer practices include:

  • Refusing to pay claims without conducting a reasonable investigation. (Section 4.F.)
  • Failing to affirm or deny coverage of claims within a reasonable time after having completed its investigation related to such claim or claims. (Section 4.G.)
  • Failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims arising under its policies. (Section 4.C.)

An insurer’s duty to thoroughly investigate a claim is also required under the insurance policy’s implied covenant of good faith and fair dealing.3

If an insurer claims it is prejudiced due to the sale or disposal of property, it is tantamount to an admission that it did not fully investigate the insured’s claim. In other words, the carrier is essentially using its alleged failure to undertake the required claim investigation as a shield from its erroneous claim decision. A recent court opinion for a denial of a major personal lines carriers’ spoliation motion clearly and concisely articulates why insurers’ carriers spoliation motions should be denied:

The defendant is a sophisticated insurer. It fully knew and evaluated all the facts and risks it took. Plaintiffs’ property was damaged by the fire. Thereafter Plaintiffs submitted a claim and the insurer inspected Plaintiffs’ home. The potential the home would be sold was always a possibility if not a probability. Sophisticated insurers would know that. The insurer cannot shift its legal claim investigation duties on its insureds and then blame them for any lack of diligence on its own behalf. To embrace this motion would be tantamount to ignoring the insurer’s duty and opportunity to promptly, thoroughly, and honestly investigate and comply with their contractual and legal responsibilities to the clear detriment of their insured.

Finally, simple requests to admit should be more than sufficient to defeat a spoliation motion. A carrier has no choice other than to deny that it failed to fully investigate its insureds damages during the claim, thus, making allegations of spoliation and prejudice completely toothless.
1 See Black’s Law Dictionary 1409 (7th ed. 1999); West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999) (citing Black’s).
2 In re Hitachi Television Optical Block Cases, No. 08-cv-1746, 2011 WL 3563781, at *5 (S.D. Cal. Aug. 12, 2011) (quoting Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 220 (S.D. N.Y. 2003).
3 Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 819 (1979).