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Insurance Adjusters Beware: Nevada Courts Impose Consequences for Loss of Critical Evidence

Spoliation of EvidenceThe loss of crucial physical evidence can be a game-changer in the defense or prosecution of a lawsuit that may follow.  Adjusters must guarantee that critical evidence is protected from the earliest stages of the adjusting process.  An insurance adjuster learned this lesson the hard way in the Nevada Supreme Court case of Fire Insurance Exchange v. Zenith Radio Corp. 103 Nev. 648, 747 P.2d 911 (1987).  In that case, fire destroyed an unoccupied home.  There were no witnesses to the ignition and/or spread of the fire.  The Fire Insurance Exchange property claims adjuster conducted a preliminary investigation of the home looking for evidence to support a subrogation claim against the party at fault for the fire.  The adjuster concluded the fire probably started in the area of a television set.  Based on the adjuster’s theory, Fire Insurance Exchange hired an expert.  The expert agreed with the adjuster that the fire had started in the television set.  The expert took no steps, however, to preserve the television set because he felt the “remains were insufficient to conduct tests that might determine if an electrical fault was the cause of the fire.”  A month after the expert’s inspection, Fire Insurance Exchange hired contractors to remove the debris from the home – including the television set.

Two years after the fire and disposal of the suspect television set, Fire Insurance Exchange filed a Complaint for subrogation against Zenith Radio Corporation, the manufacturer of the television set, and the retailer.  Of course, counsel for Zenith and the retailer asked to inspect the television.  Five years after the contractors cleaned out the damaged contents of the house, Zenith and the retailer moved for sanctions against Fire Insurance Exchange under NRCP 37.  The court noted that sanctions are normally imposed only in situations where there is a willful failure to comply with a court’s order.  But the court held that even where an action has yet to be commenced and there is only a potential for litigation, the litigant is under a duty to preserve evidence which it knows is relevant to the action.  From its actions, it was clear that Fire Insurance Exchange was on notice of potential litigation prior to the destruction of the television set and preservation of the television set was within Fire Insurance Exchange’s power.  130 Nev. at 651.

Feel free to contact Mike Mills (mmills@blwmlawfirm.com) at Bauman Lowe Witt & Maxwell if you have questions about whether evidence should be preserved or what consequences may be expected if key evidence has been lost.  He can also be reached at (702) 240-6060.

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