Spoliation: A Non-Party’s Potential Duty to Preserve Evidence

Kyle Staggs | Property Insurance Coverage Law Blog | December 2, 2019

It is not uncommon in a condominium complex for a unit to be damaged due to a failure in a neighboring unit. With units tightly packed together, water can quickly flow from one unit to another, causing damage along the way. Determining the cause of damage is often the first step in evaluating an insurance claim. If evidence relating to the cause of the damage, such as maintenance records or a breached window or door, is owned and controlled by a third-party, when is there a duty imposed on the third-party to preserve the potential evidence?

Typically the duty to preserve evidence is “based on the existence of a contract, statute, or properly served discovery request.”1 In Shamrock-Shamrock, Inc. v. Remark, the Fifth District Court of Appeal recently concluded that “no Florida court has yet recognized a common law duty for third-party preservation of evidence based on the knowledge or foreseeability of litigation.”2 However, the court considered what would be needed to establish that duty. Although the court did not discuss the duty to preserve evidence in the context of a water claim, the same standard could still apply.

In Shamrock-Shamrock, Inc. v. Remark, Shamrock sought to rezone its property and develop the property into a hotel and a marina. The City of Daytona Beach Zoning Department denied Shamrock’s rezoning request, and Shamrock appealed the decision to the Daytona Beach Planning Board. Before the Planning Board made its decision, Remark sent a letter to a Planning Board member opposing Shamrock’s rezoning request. Thereafter, Remark joined the Planning Board, took part in hearings on Shamrock’s re-zoning request, and ultimately the board upheld the City of Daytona Beach Zoning Department’s decision to deny Shamrock’s request.

During Shamrock’s subsequent litigation with the City of Daytona Beach and its Planning Board, Shamrock’s complaint alleged that Remark took part in the Planning Board’s decision despite having a bias against Shamrock’s project. Shamrock subpoenaed Remark and requested several documents. Following the initiation of the underlying litigation, but before the subpoena was served on Remark, Remark obtained a new computer and destroyed her old computer. Her old computer stored documents that were responsive to the subpoena. “Shamrock thereafter filed a two-count complaint against Remark, alleging that Remark either intentionally destroyed her old computer or ‘negligently destroyed [it] in bad faith.’”3 The trial court granted Remark’s summary judgment motion and found that at the time she destroyed her old computer, she “had no statutory or contractual duty to preserve evidence,” and no discovery requesting documents had yet been issued.

Shamrock appealed the trial court’s decision and relied on cases that the Fifth District Court of Appeal found did not address a non-party’s duty to preserve evidence. With its conclusion that “no Florida court has yet recognized a common law duty for third-party preservation of evidence based on the knowledge or foreseeability of litigation,”4 the Fifth District Court of Appeal considered “whether, and under what circumstances, a duty to preserve evidence arises,” for a non-party.

“In evaluating the existence of a common law duty, courts assess the interests of each party and society to determine whether a duty should be imposed.”5 The chief concern for non-parties regarding the preservation of evidence is property rights itself. An automatic duty to preserve any potential evidence would interfere with the custodian’s right to do what it wants with its property, including destroying the property.

In contrast, the chief concern for litigants is to ensure spoliation does not improperly impair their rights. However, the Fifth District Court of Appeal noted that litigants have other mechanisms to preserve and obtain evidence, such as issuing a subpoena duces tecum.

The appellate court found that

[T]here was no statute, contract, or discovery request that would impose a clearly defined duty on Remark to preserve any potentially relevant evidence. Thus, a duty would arise only through Remark’s purported knowledge of Shamrock’s pending litigation and her anticipation that something in her control could potentially be of use to that litigation.6

The court refused to impose a mere foreseeability standard to establish the common-law duty. The court noted,

There are innumerable circumstances in which a nonparty to litigation may have evidence relevant to a case and may know of its relevance. But that knowledge, by itself, should not give rise to a duty to safeguard the evidence in anticipation of litigation.7

The court declined to provide a clear line to when a common-law duty to preserve evidence may arise and affirmed the lower court’s decision that Remark did not have a legal duty to Shamrock.

Although the court did not provide a hard-line rule for when a non-party has a common-law duty to preserve evidence, the court did provide some guidelines. In the context of a condominium water loss event, a duty for a unit owner to retain evidence regarding the cause of a water loss would not be imposed just because the loss occurred. Some external stimulus is likely necessary to put the owner on notice that it is more than foreseeable that a neighboring condominium owner may need the potential evidence in litigation. It is not clear what the Fifth District Court of Appeal would need before imposing a common-law duty to preserve evidence, but the court would entertain imposing a common-law duty to preserve evidence under the right circumstances.
___________________________
1 Gayer v. Fine Line Constr. & Elec., Inc., 970 So.2d 424, 426 (Fla. 4th DCA 2007).
2 Shamrock-Shamrock, Inc. v. Remark, 271 So. 3d 1200, 1202 (Fla. 5th DCA 2019).
3 Id. at 1202.
4 Id. at 1205.
5 Id. (citing Rupp v. Bryant, 417 So.2d 658, 667 (Fla. 1982)).
6 Id. at 1206.
7 Id. (citing Mukamal v. Gen. Elec. Capital Corp. (In re Palm Beach Fin. Partners II, L.P.), 517 B.R. 310, 327 (Bankr. S.D. Fla. 2013)).

If I Start Making Repairs, Does It Affect My Insurance Claim?

J. Ryan Fowler | Property Insurance Coverage Law Blog | November 8, 2019

One question I get asked by clients after a storm has damaged their home is: “Can I start making repairs?” This can be a difficult question as the real-world factors of cost, time, availability of materials, and labor are important considerations. It is also important to understand how repairs can affect your insurance claim as most residential insurance policies I deal with include what appear to be contradicting duties to mitigate and the duty to allow the insurance company to inspect.

In a recent Hurricane Harvey case, Stokley v. Allstate Texas Lloyds,1 the trial court addressed whether starting repair work waived the insured’s right to demand appraisal. In Stokley, the insured filed an insurance claim, ultimately filed a lawsuit, and then invoked appraisal. Allstate refused to submit to appraisal, making several arguments why appraisal was inappropriate—one of which was that the insured had already repaired some of the damage, the fence.

The court looked at the fact that only part of the property had been repaired and that the repaired property was only part of the claim, and ruled repair of the fence did not negate the benefits to be gained by appraisal of other property damage.

Whether repairs to damaged property will harm your insurance claim is a fact question that is case-specific. Some of the considerations should be:

  1. Are the repairs temporary or permanent?
  2. Are the repairs needed to make the home livable?
  3. What part of the property damage is being repaired?
  4. Can the areas being repaired still be inspected?

It is always a good idea to keep invoices/receipts to show the cost of the repairs and take pictures of the damage before repairing.

___________________________
1 Stokley v. Allstate Tex. Lloyds, No. 2:19-cv-00197 (S.D. Tex Oct. 18, 2019).

Economic Loss Not Property Damage

Tred R. Eyerly | Insurance Law Hawaii | August 26, 2019

    The Fifth Circuit agreed with the district court that the insured subcontractor’s economic losses did not amount to covered property damage. Greenwich Ins. Co. v. Capsco Industries, Inc., 2019 U.S. App. LEXIS 23949 (5th Cir. Aug 12, 2019).

    Capsco Industries, Inc. was a subcontractor on the construction of a casino. Capsco subcontracted with Ground Control to install water, sewage, and storm-drain lines. Ground Control was terminated from the project by the general contractor for alleged safety violations and failed drug tests of its employees. Ground Control sued in state court against multiple parties, including Capsco, seeking payment for work on the project. The claims were dismissed on summary judgment because neither party had obtained the required certificates of responsibility from the state, making the parties’ contract void. The Mississippi Supreme Court agreed the contract was void, but reversed and remanded for further proceedings based solely on theories of unjust enrichment and quantum meruit.

    While the state case was on remand, Capsco’s liability insurers, Greenwich Insurance Company and Indian Harbor Insurance Company, filed a compliant for declaratory judgment in federal district court seeking a declaration that they did not owe a defense or indemnity to Capsco. The defendants were Ground Control, Capsco, the general contractor, and the casino owner. The latter two parties were dismissed. Ground Control counterclaimed for coverage of its claims against Capsco. The district court stayed proceedings until the state court litigation ended. 

    In state court, a jury awarded Ground Control over $825,000 in damages against Capsco, later reduced to $199,096 by remittitur. The district court then found the two insurers did not owe Capsco a duty to defend. 

    Subsequently, on summary judgment, the district court held that no indemnification was due and it entered final judgment. Ground Control appealed. Ground Control acknowledged that it had no evidence that would support indemnity during the period of Indian Harbor’s policy. Thus, its claim on the duty to indemnify applied solely to Greenwich.

    The Greenwich policy required the insured to pay for property damage, which the policy stated was either actual damage to physical property or the loss of its use. Purely economic losses were not included in the definition of property damage.

    Ground Control argued must of the work it performed under the void contract was to repair physical property. But the Mississippi Supreme Court limited Ground Control’s award to the value of what it expended in labor and supplies on the project. Ground Control claimed that under the void contract, it incurred expenses for labor and supplies to make repairs to physical property. There was no coverage for these expenses, however, unless the insured, Capsco, was legally obligated to pay those amounts “as damages because of . .  ‘property damage’ to which this insurance applies.” Capsco was obligated to pay the reasonable value of the services Ground Control provided. It was not paying for property damage or loss of its use; it was paying for labor and materials. Payment for work was a stop removed from paying for property damage that necessitated the work.

    Therefore, the district court was affirmed. 

Court Finds Animals Incapable of Vandalism or Malicious Mischief for Insurance Purposes (and all other purposes, too)

Alex Silverman | Property Casualty Focus | October 31, 2019

I am willing to go out on a limb and say that if asked whether an animal, say, a raccoon, is capable of committing malicious criminal acts, most humans would agree that the issue is beyond dispute. But, alas, most humans would be wrong (apparently it very much can be disputed). There is good news, however. The nation’s courts have been quietly tackling the issue, and, thankfully, they have been able to allay any fear of a raccoon uprising occurring in the near future. A federal court in Pennsylvania recently had occasion to address the issue, and it reconfirmed that animals are indeed incapable of committing “vandalism” or “malicious mischief,” both generally and for purposes of obtaining first-party insurance coverage. See Capital Flip, LLC v. Am. Modern Select Ins. Co., No. 2:19-cv-00180 (W.D. Pa. Sept. 19, 2019).

The Capital Flip case stems from a dispute between Capital Flip LLC and its insurer, American Modern Select Insurance Co. Capital Flip owned property in the Pittsburgh area insured under a “dwelling policy” issued by American Modern. In April 2018, Capital Flip discovered that raccoons (or, perhaps, one especially malicious raccoon) had entered the property and caused substantial interior damage. Capital Flip sought coverage for the damage under the American Modern policy, which covered specific “perils insured against,” including losses arising from “vandalism or malicious mischief.”

According to Capital Flip, the damage was covered because it resulted from “vandalism” or “malicious mischief” committed by the so-called culprit raccoon. American Modern denied the claim and advised Capital Flip that damage caused by animals cannot possibly constitute loss arising from “vandalism or malicious mischief” within the meaning of the policy. Unconvinced by this reasoning, Capital Flip commenced this action against American Modern, asserting claims for breach of contract and bad faith.

In its motion to dismiss, American Modern argued that Capital Flip’s claims failed as a matter of law because raccoons are incapable of committing “vandalism” or engaging in “malicious mischief.” But as noted, reasonable humans can apparently disagree in this respect. Indeed, Capital Flip reasoned, because the policy did not specifically define “vandalism” or “malicious mischief,” it was at least possible that these terms could encompass damage caused by animals. Alternatively, Capital Flip argued that the policy was ambiguous and must be construed in its favor given that these terms were undefined. At a minimum, Capital Flip asserted that this issue was unsuitable for resolution on a motion to dismiss because, unsurprisingly, no Pennsylvania court had ever decided whether an animal is capable of engaging in “vandalism” or “malicious mischief.”

After considering the parties’ arguments, the court declared for the first time in the history of the Commonwealth of Pennsylvania that animals are, as a matter of law, incapable of behaving in the manner required to implicate insurance coverage for “vandalism or malicious mischief.” While the policy did not define “vandalism” or “malicious mischief,” the court found Capital Flip’s reading of these terms to be untenable, and undermined by basic contract interpretation principles. As the court observed, the ordinary dictionary definitions of “vandal,” “mischief,” and “malicious” all require the subject to act with some level of conscious deliberation. The Pennsylvania penal code applicable to Criminal Mischief was similar in this regard. The court explained that accepting any contrary interpretation would require a determination that animals are capable of behaving in ways that simply defy the laws of nature. Refusing to accept such a reading, the court held that the terms “vandalism” and “malicious mischief” clearly and unequivocally presuppose conduct by a human actor.

Other courts have addressed whether damage caused by animals is included within the “vandalism and malicious mischief” coverage of an insurance policy. The Capital Flip court found that each of them has declined to interpret these terms as including animal behavior. Luckily for us humans, it appears that these courts found no evidence to suggest that animals are capable of forming the intent required to engage in the sort of willful conduct contemplated by the “vandalism or malicious mischief” language in insurance policies. Interestingly, in one such case, a New York court held that it only “reluctantly” concurred with other cases finding that coverage for vandalism or malicious mischief is limited to human acts. See Roselli v. Royal Ins. Co. of Am., 538 N.Y.S.2d 898 (Sup. Ct. Monroe Cty. 1989). The Roselli court may have been privy to information about animals these other courts were not, but it reached the same result nonetheless. The Capital Flip court also agreed with that result. Accordingly, it granted American Modern’s motion to dismiss, finding the sole premise of Capital Flip’s claims — that the dwelling policy covers damage caused by malicious raccoons — was legally unsustainable.

Having restored your understanding of nature and contract interpretation, we leave you with this poem by a New Mexico appellate court:

Alas, it is written in the law
That the animal with the paw
Does not have the mind
To do the damage of this kind.
And so, I’m sorry, the Plaintiff won’t get paid.
That’s how the contract was made.
This policy does not apply
When the [raccoon] runs awry.

Montgomery v. United Sers. Auto. Ass’n, 118 N.M. 742 (N.M. Ct. App. 1994).

Are Repair Costs Covered Damages Under a Liability Policy?

Larry P. Schiffer | Squire Patton Boggs | September 27, 2019

Liability policies cover sums an insured becomes legally obligated to pay to a third-party as damages for a loss. Typically, there is no coverage in a liability policy for expenses incurred by the insured to repair damage to the insured’s own property. Additionally, nearly every liability policy has an owned-property exclusion. In a recent case, the 5th Circuit addressed this subject and whether an exception to the owned-property exclusion applied.

In Eagle Water, L.L.C. v. Ash, No. 19-30056 (5th Cir. Sep. 26, 2019) (unpublished), the owner of a sewer system repaired that system following a localized collapse and sought to recover the cost of repair from its liability insurer. The insurer paid for property damage suffered by a homeowner when the sewer system backed up because of the collapse, but rejected the policyholder’s request to cover the cost for repairing the sewer system. As the court noted, without those repairs, there could have been additional backups or sewage spills.

The policy had the usual liability coverage grant providing coverage for “those sums that the Insured becomes legally obligated to pay as damages because of . . . property damage.” The policy also had the usual owned-property exclusion that precluded coverage for damage to property “owned by the Insured.”

After the insurer rejected the claim, the policyholder sued and the insurer moved for summary judgment. The district court granted summary judgment to the insurer reasoning that the repair costs were not covered by the liability insurance policy because those costs were not damages that the policyholder became legally obligated to pay.

In affirming, the circuit court held that the district court correctly determined that the policyholder’s sewer repair costs were not covered by its liability insurance policy. The court stated that when the policyholder paid to repair its sewer system, it was not compensating anyone for loss or injury, so the repair costs were not damages and not covered. Damages, held the court are money claimed by, or ordered to be paid to, a person as compensation for a loss or injury (citations omitted).

The appellate court rejected the policyholder’s argument that an exception to the owned-property exclusion should apply. That judicial exception, said the court, arises in situations where the costs expended are done so to prevent future harm to third parties. The court distinguished the operative case and noted that in that case the repairs were necessary to prevent imminent or immediate harm to third parties because actual damages had occurred. Notably, the court stated that concluding that an owned-property exclusion does not prevent coverage is not the same as concluding that coverage exists. The court concluded that no matter whether the owned-property exclusion applied, the policyholder’s repair costs were not covered by the policy, because those costs were not damages as defined by the liability policy.