Spoliation prompts dismissal as sanction

An insurance company’s bid to recover payments for a fire loss was thrown out of court this month because the company failed to preserve the fire scene.

U.S. District Judge Michael F. Urbanski of Roanoke said he dismissed the insurer’s lawsuit against a power company as a sanction for spoliation of evidence. The insurance company’s conduct was so prejudicial it substantially denied the defendant the ability to defend itself, the judge ruled.

Urbanski’s April 8 decision is Nautilus Ins. Co. v. Appalachian Power Co. (VLW 021-3-176).

Demolition approved

The dispute centers on a workshop for a business known as “Electro Finishing Inc.” in Rural Retreat. The shop was damaged by fire on June 3, 2018.

With coverage on the business, Nautilus Insurance called on expert John Moore to inspect the property, according to the judge’s review of evidence offered for summary judgment. Moore examined the site five days after the fire. He reported in a deposition that he told a Nautilus official that evidence at the scene needed to be preserved so that Appalachian Power Co. – which provided electric service to the site – could conduct its inspection as well. He assumed Nautilus would arrange for a joint inspection.

But the Nautilus official later told Moore not to retain any evidence from the scene. In July 2018, the official told Moore he could close his file.

Moreover, the Nautilus official told the business owner he could demolish the building. The building was razed in July or August 2018. It was not until October of that year that Nautilus sent a letter to Appalachian placing it on notice of a potential claim for the fire.

Appalachian’s expert arrived to inspect the scene on Dec. 19, 2018, only to find the building gone.

‘Most extreme sanction’

Nautilus filed a subrogation action against Appalachian in 2019 claiming the power company’s electrical conductor caused the fire. Appalachian responded that the opinions of Nautilus’ expert should be excluded as unreliable and his evidence could not support any claim.  The utility also argued the action should be dismissed because Nautilus allowed the building and all evidence to be destroyed except for Moore’s photographs and observations.

Urbanski agreed.

While he recognized that dismissal without deciding the merits is the “most extreme sanction” for failing to preserve evidence, Urbanski found Nautilus responsible for spoliation of “critical evidence.”

Nautilus sought to show that Appalachian ignored the opportunity to do its own inspection, the judge said. The insurer claimed the power company was on notice of a potential claim when it came to the site to repair and replace the electrical cables after the fire.

But Nautilus did not dispute that it first notified Appalachian of the potential claim two months after the building was razed.

“Nautilus essentially suggests that any time Appalachian receives a call to terminate electrical service at a fire scene, it is on notice that a claim might be asserted against it and it should hire a fire cause and origin expert to conduct an investigation. The Fourth Circuit has recognized that this sort of implied notice is insufficient to avoid sanctions for spoliation,” Urbanski wrote.

The spoliation is “entirely the result of the client’s actions,” the judge said, observing that the Nautilus official approved removal of the building despite the company’s own expert urging preservation of the fire scene.

“There is no suggestion that Nautilus took these actions upon counsel’s recommendation. Rather, Nautilus approved demolition of the building and spoliation of the fire cause and origin evidence,” Urbanski wrote.

“Appalachian argues that no other remedy besides dismissal will truly level the playing field given the fact that Appalachian will be forced to rely on a record developed by Nautilus’ expert,” the judge said. “The court agrees that nothing short of dismissal will do.”

Urbanski said a lesser sanction would “reward improper conduct, place Appalachian at a significant disadvantage, and unacceptably hinder fair adjudication.”

Nautilus was represented by Johneal M. White of Roanoke, who was unavailable for comment. Appalachian was represented by Mark D. Loftis of Roanoke, who deferred to an Appalachian spokesperson who was unavailable for comment.