Liability Insurer Owes Third-Party Claimant Duty Not to Spoliate Evidence by Repairing Insured’s Property

A fire in the insured’s mobile home caused damage to the plaintiff’s equipment that was in the adjacent space, in Coleman Constr., Inc. v. Diamond State Ins. Co., 2008 U.S. Dist. LEXIS 44735 (D. Mont. June 5, 2008). After adjusting its insured’s loss, the insurer promptly paid to have the fire-damaged property restored. The plaintiff, who did not file suit in the fleeting ten-day period within which this occurred, sued the carrier for spoliation on the theory that the carrier owed the plaintiff a duty not to spoliate evidence when it was on notice of the plaintiff’s damage and, therefore, the existence of a nascent claim. The Court agreed:

The overriding issue in this case is whether or not [insurer] Diamond State had a duty, under the circumstances of this case, to preserve evidence of the fire scene so as not to hamper the [plaintiff] Colemans in maintaining an action for damages against Kudrna, Diamond State's insured.

The relationship between a liability insurance carrier and a third party claimant supports [supports a finding of] the foreseeability of harm to the claimant caused by the loss of evidence.... [W]here it can reasonably be anticipated that an insured may have liability exposure, the insurer cannot credibly contend it was unaware of the potential importance of the evidence relative to the insured's liability.... The potential for litigation against the insured, and a third party claimant's inability to establish the underlying claim against the insured caused by the loss of evidence relative to the insured's liability, would be foreseeable to a liability insurer.

Imposing a burden upon a liability insurer to preserve a fire scene when the insurer knows that property damage has occurred to a third party is hardly onerous. In fact the burden pales in comparison to the burden which would be imposed upon the public if such a duty were not recognized. A rule to the contrary would have the undesirable effect of allowing a liability insurer to avoid responsibility by disposing of evidence prior to a third party presenting a claim to the insurer.... Under the rule advocated by Diamond State, the law would condone a liability insurer avoiding liability by simply disposing of evidence at the fire scene prior to the third-party claimant ever receiving notice of the destruction of his property. The untoward consequences which could result from such a rule are evident.

This opinion is written in the context of a state law claim for spoliation (under Montana law). How are the principles that it recites to be applied in situations in which the carrier is not a party? Is the carrier the agent of the insured/defendant? The insured (prospective defendant) owes the prospective plaintiff the duty to preserve relevant evidence once the insured is on notice of a claim. It cannot acquiesce in the destruction of evidence by the carrier. See also our posting of January 17, 2007 (noting the problems the carrier may face in pursuing a subrogation claim in these circumstances).

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