Recognizing, investigating, and aggressively pursuing subrogation potential is a very important part of claims and subrogation professionals’ day-to-day responsibilities. But doing so carelessly is not without its traps, pitfalls, and consequences. Claims handlers who also wear a subrogation hat must delicately balance the exigent need for an insured to get his burned dwelling or structure demolished and rebuilt with the obligation of investigating, protecting, and pursuing any third-party liability opportunities that may exist. It is difficult to serve both masters, but it must be done—and it must be done right.
In today’s complex world of insurance, the pitfalls include subrogating in made whole jurisdictions like Washington or Montana, without properly vetting and determining whether the insured was made whole. Trial lawyers are drumming their fingers on their desks waiting for you to make that mistake. The pitfalls include failing to properly or timely investigate third-party recovery potential—failing to give proper notice to a governmental entity, overlooking contracts which contain indemnity, or angering an important insured due to the length of time it takes to get their property rebuilt and back online. Or, as Encompass Insurance Company recently learned in a Washington federal court, it could mean losing, destroying, or other spoliation of important evidence which allows a tortfeasor potentially on the hook for a seven-figure loss to escape liability. Subrogation is not for the faint of heart.
“Spoliation” of evidence occurs when someone with an obligation to preserve evidence with regard to a legal claim neglects to do so or intentionally fails to do so. Such a failure to preserve evidence can take place by destruction of the evidence, damage to the evidence, or losing the evidence. When spoliation occurs, the party responsible may be held accountable in court through a variety of different sanctions. Those sanctions vary greatly from state to state. Insurance companies often have the first crack at investigating a significant loss, be it fire, water, wind, or other disaster. As a result, they inherit a significant legal responsibility and duty to avoid spoliation of evidence. This means a legal obligation to preserve and protect any evidence that could be relevant to a potential or ongoing lawsuit, preventing its intentional or negligent destruction, alteration, or concealment, which could significantly harm one’s case in court if violated; essentially, it requires parties to take reasonable steps to maintain evidence that might be needed for litigation, even if they are not currently aware of a specific lawsuit being filed.
In 1984, California was the first state to recognize an independent tort of spoliation.[1] However, the majority of jurisdictions that have subsequently examined the issue have declined to create or recognize such a tort. Only Alabama, Alaska, Florida, Indiana, Kansas, Louisiana, Montana, New Mexico, Ohio, and West Virginia have explicitly recognized some form of an independent tort action for spoliation. This means that innocently botching a subrogation investigation could result in the subrogated carrier being sued. California overruled its precedent and declined to recognize first-party or third-party claims for spoliation.[2]
Generally, those states that have recognized or created the tort of spoliation in some form, limit such an action to third-party spoliation of evidence related to pending or actual litigation. First-party spoliation claims are those claims for destruction or alteration of evidence brought against parties to underlying litigation. Conversely, third-party spoliation claims are those destruction or alteration of evidence claims against non-parties to underlying litigation. Moreover, most of these states generally hold that third-party spoliator must have had a duty to preserve the evidence before liability can attach. The majority of states that have examined this issue have preferred to remedy spoliation of evidence and the resulting damage to a party’s case or defense, through sanctions or by giving adverse inference instructions to juries.
Federal courts also possess inherent powers to manage litigation.[3] Spoliation of evidence is the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence, in pending or future litigation.[4] To determine whether spoliation occurred, the majority of courts use some variation of a three-part test:
(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed;
(2) that the records were destroyed with a “culpable state of mind”; and
(3) that the evidence was “relevant” to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.[5]
If spoliation is found, federal courts also have discretion to impose sanctions.[6] Courts generally consider three factors to determine whether and what type of sanctions to issue:
(1) the degree of fault of the party who altered or destroyed the evidence;
(2) the degree of prejudice suffered by the opposing party; and
(3) whether there is a lesser sanction that will avoid substantial unfairness to the opposing party.
A recent reminder of the spoliation hazards encountered by subrogated insurance companies is the January 17, 2025 federal court decision in Encompass Insurance Company v. Norcold, Inc.[7] The facts of the case are like the typical fire loss insurance professionals run across daily. On January 29, 2021, Stephen and Stephanie Phillips experienced a devasting fire which damaged their home and personal property. Following good subrogation investigation policy, within a day of the fire, Encompass retained subrogation counsel and a team of experts to inspect the scene and identify any subrogation potential. There were multiple investigations during January and February of 2021. The origin of the fire appeared to be a recreational vehicle. In particular, three possible components of the RV were suspected: (1) a dehumidifier, (2) a portable electric, oil-filled radiant heater, and (3) a refrigerator/freezer manufactured by Norcold, Inc. The fire marshal also investigated, and while the fire marshal said that while the other two potential causes of the fire could not be ruled out, the parties ultimately decided that the Norcold refrigerator was the culprit. Up to then, everything was done by the book. But this is where the balancing act came into play.
On March 9, 2021, the insured provided Encompass with an estimate for the demolition of the building. Under pressure from its insured, Encompass approved the estimate and by April 6 the demolition was complete. At this time, however, Norcold had not yet been put on notice of the fire and had not been given a chance to attend one of the inspections. In fact, they were not put on notice of the fire or the inspections until June 23, 2021, nearly five months after the fire.
On January 24, 2023, Encompass filed a subrogation action against Norcold in Washington state court, alleging damages of $608,745. The suit claimed the fire occurred from the defective Norcold refrigerator and sought to recover the $608,745 if paid to its insured, Stephen Phillips. The case was removed to federal court.
Norcold promptly filed a Motion for Sanctions against Encompass for spoliation of material evidence. It complained that Norcold failed to preserve the fire scene, the RV, and the building and its contents, and instead cleared all evidence from the fire scene, despite Plaintiff knowing it had a duty to preserve this evidence and an understanding of the importance of preserving the evidence. The motion also noted that Encompass failed to give Norcold notice of any of the inspections conducted by Encompass, and didn’t even notify Norcold until nearly five months after the fire, and after Encompass had already inspected the fire scene on multiple occasions and all evidence had already been cleared. Norcold claimed that had they been given the opportunity to inspect the scene, the evidence would have pointed to the dehumidifier and/or the heater as the cause. Norcold also asked the federal judge to exclude any evidence from the investigations and from the experts Encompass hired to conduct the inspection.
Encompass attempted to defend itself by arguing that its duty to mitigate its and its insured’s damages were in tension with its subrogation investigation duties. But the court wasn’t buying it and ruled in favor of Norcold. It stated that a subrogated carrier’s duty to preserve evidence is triggered when it knows or reasonably should know that the evidence may be relevant to pending or future litigation. That duty arises as soon as a potential claim is identified. Encompass’ argument that it did preserve all “relevant” evidence also fell on deaf ears because Encompass’ own expert admitted that the other two potential causes of the fire could not be ruled out.
The federal judge ruled in favor of Norcold, noting that all three factors for spoliation—duty to preserve, relevance, and culpable state of mind—were satisfied. While the court did not dismiss the case, it might as well have; because the judge ruled that he would instruct the jury that physical evidence lost as a result of the destruction of the fire scene would have been unfavorable to the position asserted on behalf of the property owners. Game over.
The lesson for subrogated carrier’s and their subrogation counsel is that the mere knowledge or even suspicion of a potential subrogation claim is deemed sufficient to impose a duty to preserve evidence. When conducting a fire investigation for subrogation purposes, the key rules include: thorough documentation of the fire scene, proper evidence collection and preservation, detailed analysis of the fire origin and cause, careful witness interviews, and adherence to established fire investigation standards like NFPA 921, ensuring all findings can be used to support a potential legal claim against the responsible party; this requires a systematic approach to identify the ignition source, potential contributing factors, and any potential negligence that may have led to the fire.
For a chart detailing the spoliation laws in all 50 states, see HERE. For questions about whether, when, and how to conduct subrogation investigations in property losses involving fire, water, explosions, and other similar losses, contact Lee Wickert at leewickert@mwl-law.com.
[1] Smith v. Superior Ct., 151 Cal. App.3d 491, 198, Cal. Rptr. 829, 831 (Cal. 1984).
[2] Temple Cnty. Hosp. v. Superior Ct., 20 Cal.4th 464, 84 Cal. Rptr.2d 852, 976 P.2d 223, 233 (Cal. 1999); Cedars-Sinai Med. Center v. Superior Ct., 18 Cal.4th 1, 74 Cal. Rptr.2d 248, 954 P.2d 511, 521 (Cal. 1998).
[3] Chambers v. Nasco, 501 U.S. 32, 43 (1991). One such power is the discretion to levy sanctions for spoliation. Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993).
[4] Kearney v. Foley & Lardner, LLP, 590 F.3d 638, 649 (9th Cir. 2009).
[5] Ghorbanian v. Guardian Life Ins. Co. of Am., 2017 WL 1543140 (W.D. Wash. 2017) (quoting Apple Inc. v. Samsung Elecs. Co., 888 F. Supp. 2d 976, 989 (N.D. Cal. 2012) (citing cases)).
[6] Ryan v. Editions Ltd. W., Inc., 786 F.3d 754, 766 (9th Cir. 2015).
[7] Encompass Insurance Co. v. Norcold, Inc., 2025 WL 241174 (W.D. Wash. 2025)
