Mead v. Travelers Indemnity Co. of Conn., Inc., No. 14-2695, 2014 U.S. Dist. LEXIS 167912 (E.D. Pa. Dec. 4, 2014)

In this case arising from an insurance company’s denial of coverage for fire damage to a condominium on December 4, 2012, the plaintiffs sought sanctions when Travelers failed to produce evidence relating to the cancellation of the plaintiffs’ insurance policy.

Travelers claimed it canceled the plaintiffs’ policy on October 28, 2012 after the plaintiffs failed to pay the premium. But during discovery, Travelers failed to produce a “Notice of Intent to Cancel,” a document required by D.C. law and the plaintiffs’ insurance policy, that Travelers should have sent to the plaintiffs’ insurance broker at least five days before it sent the notice of cancellation to the plaintiffs. If Travelers did not send the notice, the plaintiffs’ insurance coverage would not have lapsed.

Travelers claimed its system automatically generated the notice on September 10, 2012. Later in discovery, Travelers claimed it sent the notice to the plaintiffs’ broker on the same day, but the broker did not have a copy of the notice. Following its records retention policy, Travelers destroyed the document 90 days after generating it. The date of destruction was December 9, 2012, four days after the plaintiffs filed their claim.

In the Third Circuit, bad faith is required for a finding of spoliation under Bull v. United Parcel Serv., 665 F.3d 68 (3d Cir. 2012). Given the timing of the destruction, the plaintiffs argued that litigation was reasonably foreseeable, and thus Travelers intentionally spoliated evidence. The court found that the timing of the destruction was “an insufficient basis” to find spoliation and acknowledged that “[a]t times documents are not retained or are destroyed in good faith.” In a footnote, the court noted that the spoliation claim was inconsistent with the plaintiffs’ assertion that the pre-cancellation alert never existed.

In addition, the plaintiffs argued for federal judicial estoppel, asking the court to preclude Travelers from offering any secondary evidence that it sent the notice to the broker. To justify estoppel, the plaintiffs had to establish three factors: (1) Travelers took “irreconcilably inconsistent positions”; (2) Travelers adopted these positions in bad faith; and (3) no lesser sanction would rectify the harm from Travelers’ conduct.

Again, the court found the plaintiffs could not establish bad faith. The court accepted Travelers’ amended discovery response that it mailed a hard-copy notice as merely a supplement consistent with its original response that it provided notice to the insurance agent on the company’s electronic portal. Therefore, the court denied the plaintiffs’ motion and would allow the jury to decide whether the notice existed and determine the circumstances of its transmittal or destruction.

 

Takeaways:

Although evidence was lost in this case, the court did not find spoliation because there was no indication the loss was intentional: the notice was destroyed as part of the company’s routine records disposal procedures. Although four days had elapsed since Travelers received the claim, that was an insufficient amount of time to infer bad faith.

Parties should be mindful that this standard may not apply in every case, and not every court will be as forgiving. Travelers is the second-largest writer of U.S. commercial property casualty insurance, and as such likely receives a high volume of claims. A smaller company may be held to a different standard.

Moreover, cases adjudicated outside the Third Circuit may not require bad faith for a finding of spoliation. If and when the amendments to the Federal Rules of Civil Procedure become effective, Rule 37(e) will implement a reasonableness test in determining whether a party took adequate steps to preserve evidence as well as require bad faith for the imposition of the harshest spoliation sanctions: termination and adverse inferences. Before this rule goes into effect, and even if it does not, parties should establish a preservation procedure that includes a series of steps, including the implementation of a legal hold, the training of employees on their preservation obligations, and the suspension of the automatic deletion of records.

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