Understanding spoliation has become an increasingly integral and important aspect of effective subrogation efforts. Without the necessary evidence and investigation required for a subrogated insurance company to meet its burden of proving the origin and cause of a fire or that a product was defective, subrogation will fail. Spoliation has become one of the most common causes of failed subrogation efforts. It is a second cousin to a lack of timely and thorough subrogation investigations—which itself is the third-deadliest subrogation killer as reported on a few years ago in one of our most popular subrogation articles, “Ten Subrogation Mistakes Insurance Companies Keep Making.”
Spoliation occurs when someone with an obligation to preserve evidence with regard to a legal claim neglects to do so or intentionally fails to do so. Such a failure to preserve evidence can take place by destruction of the evidence, damage to the evidence, or losing the evidence. 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. First-party spoliation refers to the spoliation of evidence by a party to the principal litigation. Third-party spoliation refers to spoliation by a non-party. When a subrogation claim is destroyed due to spoliation, the subrogation professional must quickly ask whether or not the negligent party who lost the evidence can be sued—and the carrier’s subrogation target quickly changes.
Simply because a restoration company or forensic expert service misplaces a potentially defective product doesn’t automatically mean they are liable in place of the defective product’s seller or manufacturer. There must exist a third-party tort of spoliation in a particular jurisdiction, and there must be damages. Whether or not this means proving that the product was defective and would have led to a large subrogation recovery but-for the spoliation depends on the jurisdiction. But generally, as in Florida, to establish a cause of action for spoliation, a party must show: (1) the existence of a potential civil action, (2) a legal or contractual duty to preserve evidence which is relevant to the potential civil action, (3) destruction of that evidence, (4) significant impairment in ability to prove the lawsuit, (5) a causal relationship between the evidence destruction and inability to prove the lawsuit, and (6) damages. Jost v. Lakeland, 844 So.2d 656 (Fla. App. 2003).
In the state of Indiana, things have slowly changed with regard to spoliation causes of action. In 1991, Indiana declined to recognize a third-party spoliation claim. Murphy v. Target Prods., 580 N.E.2d 687 (Ind. App. 1991), trans. denied. Specifically, the court concluded that “in the absence of an independent tort, contract, agreement, or special relationship imposing a duty to the particular claimant, the claim of negligent or intentional interference with a person’s prospective or actual civil litigation by the spoliation of evidence is not and ought not be recognized in Indiana.”
In 1998, Indiana recognized a limited cause of action for third-party spoliation a case where a young child was mauled by a dog that had broken free of a cable that had been restraining the dog to its owners’ yard. Thompson ex rel. Thompson v. Owensby, 704 N.E.2d 134 (Ind. App. 1998), trans. denied. The child’s parents sought compensation from the dog owners and their landlords, but the landlords’ insurance company took possession of the restraining cable but subsequently lost it before it had been examined or tested. The court concluded that the insurance provider did have did not have an independent duty to the landlord, and therefore could not be sued.
In 2005, the Indiana Supreme Court declined to recognize a cause of action for first-party spoliation, concluding that the important considerations favoring the recognition of an independent tort of spoliation by parties to litigation were “minimized by existing remedies and outweighed by the attendant disadvantages.” Gribben v. Wal-Mart Stores, Inc., 824 N.E.2d 349, 355 (Ind. 2005). The plaintiff in such an action does not have an additional independent cognizable claim against the defendant/tortfeasor for spoliation of evidence but suggested that when evidence is destroyed or impaired by persons that are not parties to litigation and thus not subject to existing remedies and deterrence, such a cause of action should be considered.
In 2006, the Indiana Supreme Court considered the question of whether Indiana law recognized a tort claim for third-party spoliation, discussing both Murphy and Thompson. Glotzbach v. Froman, 854 N.E.2d 337 (Ind. 2006). In Glotzbach, the issue was whether an employee who had been injured on the job could bring a claim of third-party spoliation of evidence for the destruction of evidence. In concluding that the employee could not, the Court held that the disadvantages identified in first-party spoliation claims remain concerns as to third-party claims. Proving damages in a third-party spoliation claim becomes highly speculative and involves a lawsuit in which, much like in legal malpractice cases, the issue is the unknown outcome of another hypothetical lawsuit. The jury must somehow find all the elements of a product liability case, immediately determining whether a product defect caused the injury, as opposed to inadequate maintenance, or other intervening events. The jury would be asked to determine what the damages would have been had the evidence been produced and what the collectability of these damages would have been. The court described this as “guesswork.” Still, the court recognized that while evidentiary inferences are not available as a remedy for or deterrent to third-party spoliation, other remedies such as criminal sanction remain applicable.
In 2008, Indiana again rejected a claim for third-party spoliation of evidence in American National Property & Casualty Co. v. Wilmoth, 893 N.E.2d 1068 (Ind. Ct. App. 2008), trans. denied. Firefighters threw a couch and other items onto the front yard, where they remained for approximately six weeks. Eventually, the owners of the home discarded the couch and other items. The fire department ultimately concluded that the fire had been accidental and had been caused by an electrical space heater. Other experts determined that the fire had started “because of electrical arcing from an air conditioner power cord in the area of the sofa.” The court noted that in the context of the loss of evidence by an insurance carrier, the relationship between the carrier and a third-part claimant may warrant recognition of a duty if the carrier knew or should have known of the likelihood of litigation and of the claimant’s need for the evidence in the litigation. However, the court once again concluded that “the duty to preserve evidence had limits.” The court noted that the insurance company never had possession, “much less exclusive possession,” of the evidence and it was unforeseeable that the loss of the evidence might interfere with a future claim as there was no indication that the evidence was in any way at fault for the fire. To find a duty in this case would require insurers to preserve any potentially relevant evidence available after any potentially covered event. Retention and safekeeping of that amount of physical evidence would be a practical impossibility in most situations.
In 2017, a patient sued a doctor who had lost or destroyed her medical records that “he knew or should have known” were relevant to her personal-injury claim relating to a car accident. In Shirey v. Flenar, 89 N.E.3d 1102 (Ind. App. 2017), the court noted that Dr. Flenar had an “important relationship with Shirey,” “was aware that Shirey wanted her medical records,” and “had good reason to believe that she would be harmed if she did not receive them.” It allowed a third-party cause of action under those limited circumstances.
That brings us to May 23, 2023, when the Indiana Court of Appeals decided the case of
Safeco Ins. Co. of Indiana v. Blue Sky Innovation Group, Inc., 211 N.E.3d 564 (Ind. App. 2023). Safeco Insurance Company of Indiana filed suit against Michaelis Corporation, alleging claims of third-party spoliation and negligence after Michaelis, a restoration company, discarded certain evidence relating to a fire at the home of one of Safeco’s insureds. Michaelis argued that third-party claims for spoliation of evidence are only available in narrow and limited circumstances and that Safeco’s negligence claim was barred by the Economic Loss Doctrine.
Smith owned a Cabela’s 12 Tray Pro Series Digital Dehydrator and after the fire Safeco conducted a preliminary scene examination, during which it determined that the fire likely originated on the kitchen countertop, to the left of the sink, where the dehydrator was located. Either Smith or Safeco retained Michaelis to perform restoration work at the Property. A representative for Michaelis was present at the preliminary scene examination, during which “the need to preserve the kitchen was verbally communicated” to Michaelis’s representative. The entrances to the kitchen area were taped off with ‘caution tape’ so that the area could be preserved pending notice to the potentially responsible parties and the scheduling of a joint scene exam. Michaelis then demolished the kitchen and discarded the dehydrator. Safeco paid $510,861.46 and later filed a lawsuit alleging claims of negligence and strict products liability against the manufacturer and retailer of the dehydrator. Safeco also alleged claims of spoliation and negligence against Michaelis. The trial court dismissed the spoliation claim and Safeco appealed.
In Safeco Ins. Co. of Indiana v. Blue Sky Innovation Group, Inc., the Court of Appeals reversed the trial court and allowed the third-party tort of spoliation to go forward, because Michaelis was informed of the need to preserve the evidence and took steps to preserve it before ultimately discarding or destroying it. The court held that under these facts the plaintiff could pursue a claim of third-party spoliation.
Lee R. Wickert is a senior associate attorney in our Austin, Texas branch office. Lee was located in in our Wisconsin office, but transferred to our Austin, Texas branch office when it was opened in May 2019. Lee’s practice focuses on insurance litigation, subrogation, workers’ compensation, health insurance and ERISA, automobile insurance, property and casualty, and insurance coverage. Lee is a graduate of the University of Wisconsin-Milwaukee and obtained his law degree at Marquette Law School and his M.B.A. at Marquette University. Lee is licensed to practice in Texas and Wisconsin.