The Subrogation Strategist

The extent to which a loss scene can be altered before adversaries can legitimately cry spoliation has long been a mysterious battleground in the world of subrogation. In the case of In re Xterra Constr., LLC, No. 10-16-00420-CV, 2019 Tex. App. LEXIS 3927 (Tex. App. – Waco, May 15, 2019), the Court of Appeals of Texas, Tenth District, addressed the question of when a party has a duty to preserve evidence. The court found that the trial court abused its discretion in imposing sanctions on the defendants for the spoliation of evidence as the evidence at issue was already gone by the time the defendants knew or reasonably should have known there was a substantial chance a claim would be filed against them.

In this matter, Xterra Construction, LLC, Venturi Capital, Inc. d/b/a Artisan Cabinets and Keith D. Richbourg (collectively, Xterra) leased a commercial space from building owners Daniel Hull and William H. Beazley, Jr. (collectively, Hull) to be used as a woodworking and cabinet making warehouse. On October 18, 2014, there was a fire at the warehouse. By October 20, 2014, Xterra informed its insurance carrier, Cincinnati Insurances Companies (“Cincinnati”) of the loss and Cincinnati’s adjuster, Leann Williams (Williams), met with Keith D. Richbourg (Richbourg) at the site. Williams also hired expert Jim Reil (Reil) to inspect the fire scene to perform a cause and origin investigation. The next day, Williams informed Hull’s attorney that Reil would inspect the scene on October 23, 2014. Hulls attorney, however, did not send anyone to the scene to participate in the inspection.

When on site, Reil identified one of two fans manufactured by Emerson Electric Co. d/b/a Emerson Tool Company a/k/a Emerson Commercial & Residential Solutions (Emerson) that were located in the “paint room” of the warehouse as the most likely cause of the fire. After making his identification and realizing there was future evidentiary value in the room, Reil stopped his inspection, secured the evidence and instructed both Williams and Richbourg not to disturb the paint room.

Hull visited the site on October 29, 2014. Thereafter, on November 5, 2014, he hired a new attorney, Ryan Johnson (Johnson), to represent the building owner’s interests. Johnson spoke with Williams on the morning of November 6, 2014, informing her that he expected there would be a claim on behalf of the building owners. Williams told him that Cincinnati believed that the fan had caused the fire. After the call, Johnson met Hull onsite and saw that the scene had been swept and the fan at issue was missing. Richbourg eventually admitted that there was a miscommunication amongst his workers that led to the cleaning.

At 6:18 p.m. on the evening of November 6, 2014, Johnson sent a spoliation letter to Williams, expressly providing notice of a potential claim against her insureds, the Xterra defendants. Richbourg did not receive the letter until November 10, 2014, when Williams returned to the office from being out sick and forwarded it to him.

Hull eventually filed suit against Xterra, alleging negligence and breach of contract causes of action. Xterra filed a motion for leave to designate Emerson as a responsible third party and Hull added Emerson as a defendant. Thereafter, Hull amended its complaint to assert direct claims against Emerson. Hull then filed a motion for sanctions against Xterra for spoliation of evidence and the trial court granted the motion. The trial court found that Xterra had a duty to preserve evidence since it knew or reasonable should have known that there was a substantial chance that a claim would be filed and that evidence in its possession would be material to the case. As a sanction for Xterra’s purported spoliation, the court struck Xterra’s denials of causation in its answer and designation of Emerson as a responsible third party, ordered that a spoliation instruction be given to the jury at trial and awarded attorney’s fees. Xterra subsequently filed for mandamus relief with the appellate court.

The appellate court vacated the lower court’s ruling on the motion for sanctions, finding that it had clearly abused its discretion. In doing so, the appellate court found that Xterra did not know, nor should it have reasonably known, that there was a substantial chance a claim would be field against Xterra by Hull until Richbourg received the spoliation letter on November 10, 2014. By that time, the evidence at issue was already missing. Similarly, relying on the same timeline of events, the court found that Xterra did not owe a duty to Emerson with respect to the claims Hull filed against Emerson. Thus, the appellate court held that Xterra did not owe a duty to either Hull or Emerson to preserve the evidence and that the trial court abused its discretion when it granted Hull’s request for a spoliation sanction. Thus, since there was no adequate remedy on appeal for the “death penalty” spoliation sanctions granted by the trial court, the appellate court granted Xterra’s request for mandamus relief.

Discussing the issue of when the duty to preserve evidence arises, the court said that, contrary to Hull’s contentions, Xterra did not automatically owe a duty to Hull to preserve the scene because a fire occurred or because Xterra made a claim for personal property damage with its own carrier. Rather, the court found that Xterra did not have a duty to preserve evidence until November 10, 2014, when Hull first put it on notice of a potential claim.

This case is important to subrogation professionals for several reasons. First, it highlights the importance of informing all parties that may be on site to properly secure loss scenes. This means that subrogation professionals should clearly instruct insureds on preservation protocols and tell them to relay information to all employees. In addition, they should brief all involved remediation companies and ensure that experts placard the area of origin. Second, the case highlights the importance of promptly and properly placing third parties on notice that may have control over a scene. Third, the case shows that when asserting or defending a spoliation claim, it is important to analyze when the accused party first had a duty to preserve the evidence at issue. As displayed in Xterra, absent a duty to preserve the evidence at issue, a reviewing court will not grant a request for spoliation sanctions.