The Subrogation Strategist

In Cumberland Insurance Group v. Delmarva Power d/b/a Delmarva Power & Light Company, 130 A. 3d 1183 (Md. App. 2016), the Court of Special Appeals of Maryland (the Court) addressed an issue of first impression: the appropriate spoliation sanction when the physical object that was destroyed is, itself, the subject of the litigation. The Court, finding that the plaintiff was at fault and that the destruction of the house at issue irreparably prejudiced the defendant’s ability to defend the case, held that the trial court did not abuse its discretion when it dismissed the plaintiff’s case as a spoliation sanction.

In Cumberland Ins., a subrogation action, the insured, David Warwick (Warwick), suffered a loss on May 5, 2013, when a fire broke out at his house. The fire department and Delmarva Power (Delmarva) responded to the fire and Delmarva’s lineman, at the request of the fire department, disconnected the power supply to the house. After the fire, the fire marshal concluded that the fire originated in the meter box and he removed the meter and meter box from the scene. Timothy Hattwick, the fire origin and cause expert retained by Cumberland Insurance Group (Cumberland Ins.), inspected the property three days after the fire and concluded that the fire “originated in the area of the meter.”

On May 30, 2013, Cumberland Ins. issued a check to Warwick that included a sum to cover the estimated cost of demolition. On June 4, 2013, Cumberland Ins. sent a letter to Delmarva to put Delmarva on notice of a possible claim related to the fire. Cumberland Ins. sent Delmarva a second letter on July 3, 2013, asserting that, based on Delmarva’s failure to respond, it waived its right to inspect the premises and mentioning that demolition had begun. On the same date, the house and its contents were demolished.

Based on the fact that the house was demolished before Delmarva sent personnel to inspect the property, Delmarva filed a motion for summary judgment, arguing that Cumberland Ins. destroyed the fire scene and crippled Delmarva’s ability to “mount a meaningful defense.” The trial court found that demolition commenced less than sixty days after the date of the fire, the Cumberland Ins.’ letters did not put Delmarva on notice that demolition was contemplated and that Delmarva’s experts did not have the opportunity to adequately prepare a defense. Thus, the trial court granted Delmarva’s motion. Thereafter, Cumberland Ins. filed an appeal.

On appeal, the Court noted that although, in other contexts, the Court has concluded that the destruction of evidence is not an independent tort and affirmed a spoliation instruction that permits an adverse inference even without a showing of bad faith, this case represented the first time the Court considered how to apply the spoliation doctrine in a situation where “the physical object (or in this case, the building) that was destroyed [was] itself the subject of the case.” In this context, the Court stated that, to decide whether the facts warrant a spoliation sanction, “it is appropriate to balance the degree of fault (or, in some instances, intent) on the part of the spoliator . . . with the level of prejudice that inures to the defense because the evidence has been destroyed . . . .” In addition, the Court stated that, “[i]f a trial court finds that this balance favors imposing some sort of sanction, the question then becomes what remedy is appropriate and whether a remedy less drastic than dismissal can cure the prejudice to the defendant.”

Applying this standard, the Court found that Cumberland Ins.’ actions led to the destruction of discoverable evidence when suit was fairly perceived as imminent and, thus, a spoliation sanction was warranted. To determine the remedy for spoliation, the Court considered, first, whether Cumberland Ins. was at fault. The Court found that Cumberland Ins. was at fault because the notices it sent to Delmarva provided no more than notice of the loss and a potential claim, but provided no notice about destruction of the home. Although Cumberland Ins. did not, itself, destroy the evidence, it was at fault for the destruction of the fire scene because Cumberland Ins. knew that demolition of the fire scene – rather than the meter box - was imminent and issued a check for demolition to Warwick without ever notifying Delmarva about the pending demolition.

After finding Cumberland Ins. at fault, the Court considered whether Delmarva suffered any prejudice and whether dismissal was the appropriate remedy. The Court noted that, although Delmarva’s experts prepared a report stating that the fire originated in the attic and was electrical, their theory was flawed because they could not, and did not, perform a thorough investigation of the fire scene. Because the fire scene was destroyed, the Court held that Delmarva’s experts “never had the opportunity affirmatively to rule in or rule out the other parts of the house as the area of origin, which irreparably prejudiced their ability to defend, and which made dismissal altogether appropriate.”

Cumberland Ins. presents a reminder to subrogating insurers with losses in Maryland, and elsewhere, that prior to the time when a fire scene is demolished, target defendants should be given both an opportunity to inspect the fire scene and advance notice that the fire scene will be demolished. Insurers need to provide notice even if the insurer’s origin and cause expert identifies and preserves the instrumentality that he or she believes caused of the fire. If insurers do not provide target defendants with timely, advance notice that the fire scene will be destroyed, target defendants in Maryland will likely rely on Cumberland Ins. and argue that their defense is irrevocably prejudiced because their experts did not get the opportunity to rule in or rule out other parts of the house as the area of origin. If the defendants can show that their defense was severely prejudiced, a court may impose the ultimate sanction – dismissal – on the spoliating party or its insurer.