Spoliation of Evidence: Are Insurers Losing Out?

Introduction

In simple terms, spoliation is the destruction or alteration of evidence through intention or ignorance (a more comprehensive definition is provided later).

The spoliation of evidence in a property insurance claim, whether occurring intentionally or unintentionally, can significantly adversely affect the rights of the insurer providing cover. When an insurer receives a property insurance claim, assuming there is valid insurance cover in place, one of the first tasks of the insurer will be to determine whether the claim is covered under the policy or not. This sometimes requires investigation into the origin and/or cause of the loss (e.g. in a fire claim or a machinery breakdown claim). If evidence crucial to determining the origin and/or cause of the loss has been spoliated, the ability of the investigator to accurately determine the origin/cause will be compromised and may result in the investigator having to report cause as ‘undetermined’. This puts the insurer between a ‘rock and a hard place’ in regard to making a coverage decision. Does the insurer admit the claim knowing there could be a risk that the claim should be excluded and, therefore, an additional risk of paying the claim when perhaps it should not have been paid? Alternatively, does the insurer exclude the claim and not pay out, knowing there is a risk that it actually might have been a legitimate claim? Most prudent insurers would follow the former course of action but what if the claim really should have been excluded.

Secondly, assuming the claim is covered and ultimately paid, the insurer may seek to recover the amount paid from a third party, if there are grounds to indicate a third party may have been responsible for the loss occurrence, under the insurer’s right of subrogation. However, the ability of the insurer to be successful could be severely jeopardised if relevant evidence has been spoliated.

Thirdly, spoliation of evidence may also restrict the ability of an insurer to defend a third party liability claim, although as the defendant they may have a strong case to have the action thrown out if evidence has been spoliated, assuming the Courts take a strong view on spoliation.

In a practical sense in regard to a property insurance claim, there are a number of ways that evidence can be spoliated. The obvious way is if one party has destroyed or misplaced discoverable evidence that the other side needs to prove or defend its position. Another way is if one party’s expert has examined discoverable evidence which he/she subsequently materially alters (e.g. via destructive tests) or even discards before it can be examined by the other side’s expert. This latter way regularly occurs in Singapore and throughout Asia.

What if the parties are not in litigation at the time of the destruction of what would later be determined to be discoverable evidence? What if the parties are in litigation, but there is no court order requiring the preservation of certain evidence?

Spoliation in More Detail

Quoted from Duhaime's Law Dictionary:

“Spoliation Definition: The intentional destruction of relevant evidence when litigation is existing or pending. A problem in law since times immemorial: the intentional destruction of potential evidence by one of the parties of a claim at law; the evidence being destroyed generally being disfavourable to the person destroying - known as the spoliator.”

The above definition explicitly states ‘intentional destruction’ implying perhaps that unintentional destruction may not be spoliation. However, in reality, spoliation is generally accepted as including unintentional actions. Two such definitions follow:

  1. ASTM E 860-07 “Standard Practice for Examining and Preparing Items That Are or May Become Involved in Criminal or Civil Litigation” defines spoliation as “The loss, destruction, or material alteration of an object or document that is evidence or potential evidence in a legal proceeding by one who has the responsibility for its preservation. Spoliation of evidence may occur when the movement, change or destruction of evidence, or alteration of the scene significantly impairs the opportunity of other interested parties to obtain the same evidentiary value from the evidence as did any prior investigator.”
  2. NFPA 921 “Guide for Fire and Explosion Investigations” also defines spoliation as “Loss, destruction, or material alteration of an object or document that is evidence or potential evidence in a legal proceeding by one who has the responsibility for its preservation.”

In Silvestri vs GM, Mark Silvestri filed a products liability action against General Motors Corporation, alleging that the airbag in a 1995 Chevrolet Monte Carlo he was driving did not deploy as warranted when he crashed into a power pole and that, as a result, his injuries from the accident were enhanced. Silvestri wanted to sue General Motors but then sold the car before the litigation started. General Motors asked the Court to dismiss the lawsuit alleging the plaintiff's spoliation of the evidence (the car being sold). The Court agreed, Justice Niemeyer of the United States Court of Appeal, Fourth Circuit adopting these words:

"Spoliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation.”

Spoliation of evidence can occur in a number of ways. Documents can be shredded. Computer files can be erased. Physical items can be disassembled, destroyed, or otherwise disposed of. Modifications can be made to the evidence. Evidence can be altered or destroyed in order to create other types of evidence, such as an expert report. Evidence can also be sold or transferred to a third party, and thereby rendered unavailable for discovery or trial (as in Silvestri vs GM). Finally, evidence can be suppressed in any number of ways. In each of these instances, a litigant, a potential litigant, or the justice system at large can suffer uncertainties, costs, and prejudice due to the actions of a spoliator.

In the US, spoliation of evidence is taken extremely seriously by the courts. Courts may issue monetary, evidentiary, issue or even terminating sanctions to punish and deter spoliation by a party to litigation. Criminal and disciplinary penalties have developed to punish those involved in spoliation, including attorneys. Where there is a duty to preserve evidence, spoliation may be punishable in future litigation, even if no case is pending when it occurs. Some jurisdictions recognise spoliation as an independent tort. Where a party, or even a non-party, intentionally destroys evidence, it is subject to judicial punishment. In addition, courts have recently held that a cause of action may be stated against a party or non-party who only negligently causes the spoliation of evidence. The negligent loss or destruction of electronic evidence, in addition to physical and documentary evidence, has become widely punishable. In states where spoliation is not a separate tort, sanctions against parties who lose or destroy evidence are still potentially sought.

What is Physical Evidence?

It is of interest to define what ‘physical evidence’ actually is in relation to a property claim. Physical evidence is any material object that plays some actual role in the matter that gave rise (or may give rise) to the litigation, introduced in a trial, intended to prove a fact in issue based on the object's demonstrable physical characteristics. Physical evidence can conceivably include all or part of any object.

If we consider an insurance fire claim, NFPA 921 defines physical evidence as

“…any physical or tangible item that tends to prove or disprove a particular fact or issue. Physical evidence at a fire scene may be relevant to the issues of the origin, cause, spread, or the responsibility for the fire.”

Examples include wiring, electrical plugs and sockets, electrical safety devices (e.g. fuse and circuit breakers), appliances, machinery, thermally damaged or burnt items that display burn patterns, or a multitude of other physical items that help to identify the origin, cause and/or those responsible in regard to the loss.

Who owns the Evidence?

This is a very important question and a question that arises at nearly every insurance claim site investigation. Generally, the owner of the specific item of physical evidence is just that. If one has been appointed, the expert representing the owner (or the owners’ insurer) will become the first custodian of the evidence.

Ownership becomes a little more complicated when the claim involves leased or rented premises and equipment. For rented equipment is the owner of the evidence the operator of the equipment (the lessee) or is it the lessor? In a tenanted building evidence could either be owned by the building owner or the tenant. In a multi-tenanted strata title building with rented units the evidence may be the tenant’s, the landlord’s, or the body corporate (for items common to the building). For example, in a tenant-occupied unit, if an electrical extension cord and an electric appliance were desired as physical evidence, the expert representing the tenant (or their insurance company) would become the custodian. But, in the same situation, if a length of electrical fixed wiring and its associated circuit breaker in a distribution panel were desired as physical evidence, the expert representing the building owner would become the custodian.

It can become further complicated if governmental agencies are involved in an investigation. In the Singapore context, this could be the Singapore Civil Defence Force (e.g. in a fire investigation) or the Ministry of Manpower (e.g. in a crane collapse investigation). In this situation, it appears the governmental organisations have jurisdiction to take possession of evidence and to carry out testing, including destructive testing, on that evidence. If that evidence is not returned to the owner, or is returned in a damaged or destroyed condition (e.g. following destructive testing) then this is, in essence, spoliation of evidence and can easily jeopardise the ability of an insurer to make decisions regarding coverage, subrogation and defence of a possible liability claim.

Verbal discussions at site examinations may vary who takes custodial possession of evidence, due to specific circumstances. For example, if the evidence is very large or heavy, one expert may have more appropriate storage facilities or equipment to handle the evidence. In this case, agreements between the experts and their clients may allow a change in the normal protocol.

One extremely important point that is covered further later is that all changes in custody should be documented on an evidence change of custody form, signed off by both the giver and receiver. This process should be followed for every change of custody.

For a machinery claim, let’s say the collapse of a crane, physical evidence would include, for example, items such as wire ropes, bearings, sheaves, Load Moment Indicator (LMI), limit switches, bolts, weldments, etc., but could also include data downloaded from an LMI, and documentation, such as load test certificate, service and maintenance records, etc.

How can spoliation be avoided?

There is no simple rule to be followed when carrying out an investigation. What is potential evidence can be difficult to ascertain early on so it can be hard to know what to preserve and what not to in order to avoid a later charge of spoliation. Some basic steps can be followed, however, that will remove or minimise the risk of spoliation. These are:

  1. Ensure the investigation is carried out by suitably qualified and experienced personnel.
  2. Conduct any investigation onsite in a manner that preserves evidence that may have caused the loss, but also items that you may initially consider did not.  It may be that during the course of investigation at a later stage evidence that you considered not relevant at the time might become relevant.
  3. Allow potentially adverse parties (“the other side”) to also investigate the site.  If there is to be a multi-party investigation, ideally all parties should be present at the same time, or at least provided with the opportunity to be present. 
  4. Save and preserve all physical evidence identified by the other parties as being relevant.
  5. Label all evidence onsite and ensure that a documented chain of custody is followed when removing evidence from site.
  6. Preservation of evidence from deterioration is very important.  The evidence should be well wrapped and protected from, amongst other things, impact damage, dust contamination, vermin and insects, and corrosion.
  7. There is usually no problem with agreeing a change in custodial possession so long as the chain of custody is preserved and documented.
  8. Avoid destructive testing of evidence unless all parties are present, or at least prior to reasonable notification to attend being provided to all parties.
  9. If destructive testing is carried out when other interested parties are not present, document and photograph (videotape if practical) the testing process, and retain and preserve all tested samples.

Summary and Conclusion

Spoliation of evidence can be a very real issue for insurers on property claims (as well as other types of claims), as it can restrict the insurer from accurately determining coverage, pursuing recovery through subrogation rights, and defending a liability claim. Certain countries, such as the US, take spoliation of evidence very seriously with harsh penalties meted out by the Courts when justified. Singapore, on the other hand, has a more relaxed approach and, in regard to insurance claims at least, spoliation occurs reasonably regularly. This is manifesting as a financial burden on the insurance industry. One of the challenges facing the Singapore insurance industry is in regard to the jurisdiction afforded to government authorities investigating incidents that have insured interests. While this jurisdiction is not being questioned here, perhaps more should be done by the insurance industry to find a means for working more closely with these authorities, as is already starting to occur in a very limited way, so that evidence and the results of testing are more readily accessible to insurers and their appointed agents. These factors equally affect other insurers throughout South East Asia and Oceania.

In our modern society IT systems are taken for granted with regards to how many things they control, that is until they fail. This was found out the hard way in a busy Scottish hotel when their systems went down and they lost all access to their accounting and POS system, as well as phonelines in the whole hotel.

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