United States: Can An Insured "Losing" His Cellphone Constitute Spoliation Of The Evidence?

Insurance companies investigating fraudulent claims often seek an insured's cell phone on the grounds that the data contained therein is material to its coverage investigation. The GPS data on the insured's phone may provide evidence regarding the insured's location at the time of the loss. The text and call history could also provide information helpful to the fraud investigation. Realizing the potential incriminating evidence that could be obtained through his cell phone, an insured might "lose" his cell phone. What consequences might a court assess because of an insured losing his cellphone or otherwise failing to preserve the cellular data? A federal court has answered that question, holding the insured can be sanction for spoliation of the evidence.

The fraud being investigated by the insurers in Corey Brown v. Certain Underwriters at Lloyds, London, et al., Case No. 16-CV-02737 (ED Penn. June 9, 2017) was an incendiary fire. The two insurers Certain Underwriters at Lloyds, London and Underwriters of Lloyds (collectively "Lloyds") suspected that the insured Corey Brown started the fire. When Lloyds denied Mr. Brown's claim, he filed suit. During discovery, Lloyds requested the insured produce his cell phone. Just before his production, Mr. Brown filed an objection claiming that he lost his cell phone "months ago." Lloyds then filed a motion seeking sanctions against Mr. Brown for spoliation of the evidence.

To demonstrate the grounds for spoliation sanctions, Lloyds argued it was prejudiced by the loss of location information contained in the phone as well as the substance of text messages and calls received or made at the time of the loss. The court concluded that the insured had control over his cell phone, and the information lost would have been "highly relevant to determine the merits" of the claim for insurance proceeds as well as Lloyds' counterclaim for fraud. Mr. Brown argued that there was no prejudice, because Lloyds had "ample opportunity" to examine the phone but declined to do so. The court rejected that argument finding Lloyds was "no less prejudiced by the loss of relevant evidence because they could have chosen to request" the cell phone at an earlier date. The court noted that Mr. Brown should not have been surprised by the request for his cell phone. At his examination under oath taken two years before, Lloyds specifically requested that Mr. Brown preserve any evidence that was on his cell phone for possible discovery. In addition, Lloyds requested the cell phone information within the time permitted for discovery.

Having found that the loss information was relevant, the court then considered whether Mr. Brown intentionally suppressed or withheld the evidence. Mr. Brown produced an affidavit in which he swore that he lost the phone, and "did not intentionally dispose of it." The court rejected that self-serving affidavit finding:

...that Mr. Brown's undetailed account of losing his phone is not credible and that, rather than innocently losing his phone, Mr. Brown made a deliberate choice to withhold it from production. In making that finding we note that Mr. Brown and his attorney did not notify Lloyds of the loss of relevant evidence that he had a known duty to preserve until hours before the requested time of production, even though its loss had supposedly been known for at least four months.

Mr. Brown has offered zero explanation as to how he came to lose his phone. He has also offered no indication that he took even rudimentary steps to preserve the evidence that existed on his phone, as was his obligation, or to take any measures to find the phone after it was somehow lost.

Because of the insured's action, the Court found that Lloyds was prejudiced, and such prejudice was significant "enough to weigh in favor of sanctions." While Lloyds wanted the court to issue the ultimate sanction - the dismissal of Mr. Brown's claim - the court elected to issue an adverse jury instruction as it would "likely be sufficient to cure the prejudice" to Lloyds. The court thus would instruct members of the jury that "they may infer that if [Lloyds] were permitted to inspect Mr. Brown's cell phone, any evidence would have been unfavorable to Plaintiff."

Insurance companies should consider two possibilities following the federal court's decision. First, an insurer should acknowledge that it also could be found on the receiving end of spoliation sanctions if it fails to preserve material and relevant information. Insurers thus should ensure that procedures are implemented to preserve such information. Second, because a cell phone can contain material and relevant information, early in the claim an insurer should make a demand that the insured preserve cell phones as well as any other electronic evidence. These demands can be made in reservation of rights letters or in the written request for an insured's examination under oath. If the insured fails to preserve the evidence, and suit is filed, the insurer may be able to obtain sanctions because of the insured's spoliation of evidence.

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