Spoliation of Evidence: The Next Frontier for Insurance Coverage Battles

Fremont Casualty Insurance Co. v. Ace-Chicago Great Dane Corp.—"No Coverage for Spoliation under Employers Liability Policy"

On July 26, 1991, Grossman, an employee of Ace-Chicago Great Dane Corporation ("Ace"), fell from a ladder manufactured by Berg Ladders ("Berg"). On the date of the accident, an Ace employee took the ladder and stored it for safekeeping. Ace later disposed of the ladder without notifying Grossman or his attorney.

Grossman filed an action against Berg, seeking damages for his injuries from the fall and later joined Ace as a defendant asserting against it a claim for negligent spoilation of evidence. Ace tendered the defense of the Grossman action to Casualty Insurance Company, which had issued a workers compensation and employers liability policy to Ace. Casualty accepted the defense subject to a reservation of rights. Ace also tendered the defense of the Grossman action to Potomac Insurance Company, its CGL insurer from July 29, 1990, to July 29, 1991. Potomac denied coverage.

Casualty, later purchased by Fremont Casualty Insurance, filed a declaratory judgment against Ace and Grossman seeking a declaration that it did not have a duty to defend or indemnify Ace. Ace filed a third-party complaint naming Potomac. Ace sought a judgment declaring that Casualty was obligated to defend and indemnify, or in the alternative, that Potomac was obligated.

The trial court dismissed Ace's claim against Potomac. It found that the claim for alleged spoliation was caused by an occurrence after the Potomac policy terminated. The trial court, however, found that Fremont had a duty to defend Ace and reserved the question of whether Fremont had a duty to indemnify Ace.

In the first appeal, the undisputed evidence showed that the occurrence of spoliation did not fall within the Potomac policy period. Therefore, Potomac was not under a duty to either defend or indemnify. [304 Ill App 3d 734, ___ NE2d ___ (1st Dist 1999).]

In the second appeal, the court reviewed the employers liability provisions in the Casualty policy. Coverage was limited to damages for "bodily injury by accident" or "bodily injury by disease." Thus, the court only considered whether the damages sought in the negligent spoliation of evidence claim against Ace constituted damages for "bodily injury by accident" or "bodily injury by disease."

Based on the Illinois Supreme Court case that created the cause of action for negligent spoliation, Boyd v Travelers Ins Co., supra, the Fremont court concluded that the damages from Ace's losing a piece of evidence left the plaintiff unable to prove his negligence and products liability action against Berg. The measure of damages in the negligent spoliation claim was the amount that the plaintiff could have recovered against Berg for his personal injury.

The court found, however, that the measure of damages did not establish the nature and basis of liability for those damages. It held that the damage allegedly suffered as a result of the breach of duty to preserve evidence is "an inability to prove a cause of action against Berg, not bodily injury by accident or disease."

Accordingly, the appellate court reversed the trial court's order and ruled that the insurer had no duty to defend or indemnify. [___ NE2d ____, 1-00-0342, 1st Dist, 4th Div, October 26, 2000.]

Norris v. Colony Insurance Company—"No Coverage for Beneficial Interest in Cause of Action"

Norris, the victim of an assault at a gas station, sued the gas station for negligent maintenance of the premises and negligent destruction of a surveillance videotape that may have recorded the assault. Colony Insurance Company had issued a CGL policy to the gas station. It declined to defend Norris's suit because the policy excluded damages "arising from" assault and battery from coverage.

Norris entered into a settlement with the gas station by which the court entered a judgment for $175,000 against the gas station. Norris agreed not to execute on that judgment, and the station assigned its rights against Colony to Norris. As the gas station's assignee, Norris then sued Colony for breach of the duty to defend and for indemnity. Based on the assault and battery exclusion, the trial court entered summary judgment for Colony on both the duty to defend and indemnity issues for both causes of action.

On appeal, the Florida District Court of Appeal held that the assault and battery exclusion did not apply because the original complaint did not allege that the injuries resulted from an assault. Therefore, Colony owed the gas stations a duty to defend. As to the duty to indemnify, however, the appellate court determined that the policy did not cover Norris's claim for negligent maintenance of the premises because it alleged bodily injury "arising from" an assault.

Turning to the claim for spoliation of evidence, the appellate court analyzed whether the loss of the videotape constituted "property damage." In DiGuilio v Prudential Property & Cas. Co., 710 S2d 3 (Fla App), review denied, 725 S2d 1109 (Fla 1998), claims for spoliation of evidence derived from a claimant's beneficial interest in the preservation of property. Applying that rule to the facts at hand, the court concluded that Norris's claim involved damage to an intangible right. He was deprived of the use of the surveillance videotape that he claimed could have demonstrated the gas station's negligence. Therefore, his damages for spoliation did not come within the policy's definition of "property damage," which included "physical injury to tangible property." [760 S2d 1010 (Fla App 2000).]

Why Spoliation Is Covered

Obviously, neither of the above two cases deals with spoliation where the injured plaintiff has lost a valuable piece of evidence necessary for the pursuit of a products liability claim. In the products liability case, spoliation of evidence destroys the ability of the plaintiff to prove his claim. Without the product, the plaintiff will not be able to prove the elements of an action for products liability. The plaintiff's expert will not be able to examine the product; the plaintiff will not be able to meet its burden of proving a defect existed; and the plaintiff will not be able to display the product to a judge or jury. The solution for plaintiffs is to pursue a claim of spoliation of evidence.

The insurance question is whether the defendant in the spoliation action is entitled to coverage. This question is answered by examining the language of the insuring clause, the definition of "occurrence," and the definition of "property damage" in the CGL policy. The CGL insuring clause reads:

We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any occurrence and settle any claim or suit that may result. [Insurance Services Office, Inc., commercial general liability (CGL) insurance policy, 1998 edition.]

The definition of "occurrence" provides:

occurrence means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured. [Insurance Services Office, Inc., commercial general liability (CGL) insurance policy, 1973 edition.]

The definition of "property damage" provides:

1. Physical injury to tangible property, including all resulting loss of use of that property; or
2. Loss of use of tangible property that is not physically injured. [Insurance Services Office, Inc., commercial general liability (CGL) insurance policy, 1998 edition.]

To meet the insured's burden to prove that coverage exists, the insured must prove that the insurer is legally obligated to pay (1) damages that result from property damage that (2) happened during the policy period and (3) resulted from an occurrence. Taking these elements in order, the insured can prove that there is coverage.

The Element of Property Damage

In a products liability case, the property damage alleged may be physical injury to tangible property or loss of use of tangible property. Physical injury to tangible property means damage to property that can be touched. [2 Allan D. Windt, Insurance Claims & Disputes 184 (3d ed. 1995).] Physical injury to tangible property does not include damage to stocks or bonds. [Windt, supra, at 185.] However, loss of use of computer code has been held to constitute "tangible property." [Retail Systems, Inc. v CNA Ins. Co., 469 NW2d 735 (Minn App 1991).]

The second prong of the definition refers to "loss of use" of tangible property that has not been damaged. Loss of use is the "physical inability" to use property. [Windt, at 185.] In a spoliation of evidence claim, the plaintiff is physically unable to use that evidence. The plaintiff's damage is not merely interference with a property or beneficial right in a cause of action. The plaintiff's damages constitute an inability to use tangible property that is not otherwise damaged.

Using Fremont as an example, plaintiff's damage is the loss of use of the ladder. The "use" of the ladder, however, has been redefined. Before the accident, the ladder was used to reach high places. Its post-accident use is as a piece of evidence in a products liability lawsuit. By losing the ladder, Ace has lost the use of a highly relevant and arguably vital piece of evidence in the products liability litigation. The "property damage" definition is satisfied by the "loss of use" of the product.

Trigger of Coverage

When a piece of evidence is lost or destroyed negligently, the loss of use "occurs" at the moment it becomes unavailable for use as plaintiff's evidence in the underlying products liability case. This timing of when the damage occurs is referred to as the "trigger of coverage."

The trigger issue in the spoliation context creates an interesting dilemma and one that was played out in the first appeal of Fremont v Ace-Chicago. The loss of use of the ladder, as evidence, occurred at a different time from the occurrence that injured the plaintiff. The spoliation claim triggered a different insurance policy from the bodily injury claim. No doubt, the "spoliation" insurer will argue that the spoliation damages are "derivative" of the original occurrence, to trigger the same policy that was in effect at the time of the original accident.

Element of an Occurrence

The CGL policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Courts have generally defined "accident" to mean an:

unanticipated event; it is that which occurs not as the result of natural routine but as the culmination of forces working without design, coordination, or plan. [Windt, at 185.]

In other words, damage caused by an occurrence is damage that is unexpected or "fortuitous." The focus is on the intent to cause damage, however, not whether the conduct that caused the damage was intentional. [Pekin Insurance Company v Richard Marker Associates, Inc., 289 Ill App 3d 819, 682 NE2d 362, 224 Ill Dec 801 (2nd Dist 1997); Federated Mutual Ins. Co. v Grapevine Excavation, Inc., 197 F3d 720 (5th Cir 1999).]

In a products liability case, an accident or unanticipated event causes the plaintiff's bodily injury. Regarding the spoliation of evidence case, the occurrence is a different accident. If the key piece of evidence is intentionally lost or destroyed, the resulting damage may be said to be "expected or intended" by the insured. In the negligent spoliation case, however, the plaintiff alleges neglect, inadvertence, and mistake. Neither the conduct nor the resulting damage can be said to be "expected or intended."

Conclusion

Under the language of the CGL policy's insuring clause, insured defendants are covered for suits alleging negligent spoliation of evidence or ordinary negligent spoliation in the context of an underlying products liability case. Property damage as defined as "loss of use" resulting from a spoliation occurrence can be measured as damages suffered by the plaintiff in the original event. As more jurisdictions adopt spoliation of evidence as a specific tort, products liability defendants will certainly adopt the above arguments.