Foran Glennon Palandech Ponzi & Rudloff

August 2015

Subrogation Investigations: Spoliation in the New E-Discovery Era

George M. Ferreti and F. Todd Weston

Every subrogation investigation presents different challenges. However, the one constant in all investigations is the need to prevent spoliation of evidence.  Coinciding with the rapid expansion of electronically stored data and emails, collectively referred to as Electronic Stored Information (“ESI”), the potential for potential spoliation missteps has grown exponentially.

Spoliation is the destruction, material alteration or failure to preserve evidence in pending or reasonably foreseeable litigation. Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497, 515-16 (D. Md. 2010).  See also Silvestri v. Gen. Motors Copr., 271 F.3d 583,590 (4th Cir. 2001).  Determining exactly what electronic evidence must be retained is difficult to ascertain as there is no “one size fits all” answer to the question.  The leading cases dealing with a party’s duty to retain ESI are a series of rulings from an employment discrimination lawsuit from the Southern District of New York known as Zubulake I-V. See Zubulake v. UBS Warburg LLC, 229 F.R.D 422 (S.D.N.Y 2002).  Zubalake and its progeny have changed the way litigants approach the retention of ESI and sparked the growth of the e-discovery industry, consisting of consultants and software vendors specializing in the collection and storage of electronic data.

The basic premise of the Zubulake rulings provides that “while a litigant is under no duty to keep or retain every document in its possession… it is under a duty to preserve what it knows, or reasonably should know, is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.” Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 217 (S.D.N.Y. 2003).  Even under the narrowest interpretation of the ruling, it is easy to envision the need to preserve vast amounts of data and information in any new loss in which subrogation could be viable.

The dangers spoliation poses to subrogation efforts have increased with the growth of ESI.  If Insurers do not take the right ESI preservation steps during subrogation investigations, they run the risk of being accused of spoliation.  Insurers investigating subrogation face a particularly difficult challenge in this regard because they must take steps to ensure that their insured’s ESI is preserved, even though Insurers do not have direct access or control over any such electronic data.  Unfortunately, this duty to preserve is “heightened for an insurer because it is a sophisticated entity experienced in litigation.”  Workman v. AB Electrolux Corp., No. 03-4195-JAR, 2005 WL 1896246, at *5 (D. Kan. Aug. 8, 2005).

Potential spoliation sanctions vary across jurisdictions, but can include adverse jury instructions at trial (Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 113 (2d Cir. 2002)); the preclusion of vital evidence or expert testimony (Fire Ins. Exch. v. Zenith Radio Corp., 103 Nev. 648, 652, 747 P.2d 911, 914 (1987)); and in extreme cases, dismissal (Silvestri, 271 F. 3d at 583).  Any sanction short of dismissal, however, will most likely prove to be dispositive to any subrogation effort, because “in practice, an adverse inference instruction often ends litigation – it is too difficult a hurdle for the spoliator to overcome.” Apple Inc. v. Samsung Electronics Co., 888 F. Supp. 2d 976, 994 (N.D. Cal. 2012).

For guidance, Insurers and their counsel should turn to the Sedona Principles for ESI best practices.  The Sedona Conference, a non-profit legal policy research and education organization comprised of judges, attorneys and e-discovery professionals who publish related literature, including the Sedona Principles, which sets forth judicially accepted instructions for ESI issues.  Aguilar v. Immigration & Customs Enforcement Div. of U.S. Dep’t of Homeland Sec., 255 F.R.D. 350, 355 (S.D.N.Y. 2008) citing Autotech Technologies Ltd. P’ship v. Automationdirect.com, Inc., 248 F.R.D. 556, 560 (N.D. Ill. 2008).  Generally speaking, in investigations in which subrogation could be potentially viable, insureds should follow these steps with respect to the preservation and collection of ESI:

(1) Determine what ESI is relevant;

(2) Identify where it is stored;

(3) Identify the ESI custodian(s);

(4) Determine if the client has retention polices in place;

(5) Suspend the destruction of records, accomplished by way of a Litigation Hold Letter, and;

(6) Plan the ESI collection.

See The Sedona Principles (Second Edition) Address Electronic Production (The Sedona Conference 2007).  Given the Zubulake rulings, these steps should be taken at the beginning of an investigation, because Insurers may be responsible for the opposing party’s legal fees if it becomes necessary to conduct the same steps later during litigation.  Zubulake, 220 F.R.D at 219-222.

Once the above steps are taken, Insurers must then determine how to actually collect the preserved ESI.  Should Insurers employ less costly self-collection methods, or retain the services of an ESI vendor to professionally process the data? Retaining a vendor to process ESI can be very expensive, costing thousands of dollars at a minimum.  However, self-collection, while initially less costly, poses significant risks as it is prone to human error, bias, and relies upon the insured to make the right legal determinations as to what is relevant. Jones v. Bremen High School Dist. 228 is another employment discrimination case which demonstrates the dangers posed by self-collection. No. 08 C 3548, 2010 WL 2106640, at *3 (N.D. Ill. May 25, 2010).  In Jones, the Northern District of Illinois found that the defendant high school was grossly negligent by allowing its employees the discretion to determine which emails were relevant to the lawsuit. Id.  For sanctions, the Court ordered a damaging adverse jury instruction, and awarded all costs and fees related to the motion practice for the non-spoliating party. Id. at *10. Every ESI self-collection runs the risk of being found inadequate by a Court.  As with most litigation decisions, determining whether to use an expensive ESI vendor is a typical cost/benefit analysis.  However, Insurers must keep in mind that the expenses incurred early during an investigation to go through the proper ESI preservation steps may help avoid wasted time and unnecessary legal expenses later during litigation.

Foran Glennon’s subrogation attorneys have handled hundreds of investigations involving a large variety of industries.   Based on our experience, we know that spoliation of evidence is a favorite play in defense counsel’s playbook.  The Zubulake rulings and the explosive growth of ESI requires that Insurers and their counsel be proactive in ensuring that all potentially relevant ESI be preserved in any potential subrogation action.   As such, Insurers and their counsel need to be prepared to incur upfront ESI preservation costs in order to ensure that no recovery effort is needlessly jeopardized.