Adverse Inference Instruction Warranted For Insurer’s Breach of Retention Policy

It should come as no surprise that litigants continue to ignore such basic discovery obligations as the duty to preserve potentially relevant documents once litigation is reasonably anticipated. A recent case out of the Northern District of New York exemplifies the importance of patience in establishing a record of discovery abuses, including data deletion, before seeking sanctions to address such situations.

In Dataflow, Inc. v. Peerless Ins. Co., 3:11-cv-1127, NYLJ 120263980764 (N.D.N.Y., Jan. 13, 2014), Dataflow sought insurance coverage under a policy covering employee dishonesty where a Dataflow employee misappropriated over $1M and later pled guilty to felony grand larceny and forgery. Peerless denied coverage and Dataflow filed suit. In discovery, Dataflow sought Peerless’ internal communications and investigations related to its claim. Notwithstanding two requests for production, Peerless failed to produce internal communications regarding its analysis of Dataflow’s claim. During the deposition of the Peerless representative who handled the Dataflow claim, Dataflow learned that Peerless regularly used email to discuss the claim. Following the deposition, Dataflow repeated its demand for production of emails, but Peerless claimed the emails were unavailable because of a system change and that emails not actively marked for preservation were deleted, notwithstanding Peerless’ internal policy requiring preservation of all business records related to a potential claim.

The Magistrate Judge granted Dataflow’s motion for sanctions, including a request for an adverse inference and attorney’s fees and costs associated with the motion. In its objections to the Magistrate Judge’s Report-Recommendation, Peerless argued it was not grossly negligent and that Dataflow failed to demonstrate prejudice and/or that the destroyed emails were not relevant. The Court rejected Peerless’ contentions, observing that Dataflow had identified several deleted and not-produced emails regarding the insurance claims. The Court further explained that Dataflow demonstrated that the emails “may have been more generally harmful to [Peerless]” in light of the fact that Peerless admitted destroying emails in a system change after having notice of a potential claim. Furthermore, the Court noted that Peerless appeared “purposefully sluggish” in admitting that any relevant emails existed. Accordingly, the Court found an adverse inference instruction to be warranted.

The Dataflow decision emphasizes the importance of developing a discovery record before seeking sanctions. While many litigants have sought sanctions based on the mere absence or small volume of emails in a party’s production, in this case, Dataflow was able to elicit testimony during depositions regarding the regular use of email in communications regarding Dataflow’s claim and was able to identify specific deleted non-produced emails. Moreover, Dataflow forced Peerless to admit that it failed to preserve documents following insufficient responses to two separate production requests and incriminating deposition testimony, providing Dataflow with the ammunition needed to seek appropriate relief from the Court. Parties would be well-served by following Dataflow’s excellent example — carefully establish a record of non-compliance before moving for sanctions or resist such applications by insisting that such a record be established, in order to insure the ultimate success or failure of such an application.

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