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An insurance carrier may be sued for negligent destruction of evidence that its policyholder may need to mount a legal defense, a Queens, New York, Supreme Court justice has ruled. Recognizing for the first time in a New York court an independent tort for spoliation of evidence, Justice Patricia P. Satterfield said that insurers have a duty not to impair their insureds’ defense. In other cases where spoliation of evidence has been alleged, courts have elected to impose discovery or trial sanctions against parties who have disposed of evidence. In this case, the court found such remedies inadequate. In Fada Industries v. Falchi Building Co., 12790/99, Justice Satterfield refused to dismiss a third-party claim by a business against its liability insurer. Koolwear Inc., a tenant in a Long Island City building, was sued by a fellow tenant, Fada Industries, which claimed that a leaking water heater on Koolwear’s space had caused $60,000 in damage on Fada’s premises. Koolwear, in turn, sued its liability insurance carrier, General Accident Insurance Co., for the negligent loss or destruction of the water heater, which it claimed was key evidence in the case. A General Accident agent, Koolwear said, took possession of the water heater after the leak occurred, and the appliance can no longer be found. Not only did the loss of the appliance impair Koolwear’s ability to defend itself from Fada’s property damage claim, it made it impossible to name the manufacturers of the water heater as third-party defendants on breach-of-warranty grounds. General Accident is not defending Koolwear against the damage claim filed by Fada. However, Koolwear is not challenging the coverage decision at this time, according to Justice Satterfield. The judge noted that in two previous cases in New York County Supreme Court — Pharr v. Cortese, 127 Misc2d 1078 (1990) and Weigl v. Quincy Specialties Co., 158 Misc2d 753 (1993) — trial courts had declined to recognize spoliation of evidence as an independent tort cause of action. But no appeals court has yet rejected the claim as a matter of law, she pointed out. Satterfield further observed that the spoliation claims are often relied upon in New York trial courts to gain dismissal of claims or trial sanctions. When key evidence is destroyed by a plaintiff and impairs a defendant’s ability to answer the claim, “remedial action is obligatory,” she said. In this case, she said, no remedy is available to Koolwear except for a damage claim against the party that destroyed or lost the water heater. “Here, Koolwear is stripped of its ability to defend in the main action because of the conduct of General Accident, its own insurer,” she wrote. “None of the sanctions traditionally available to a party apply in this case. Neither the striking of the answer nor a preclusion order will aid in Koolwear’s defense of the action against it based upon its water heater causing damage to plaintiff’s property.” Nationally, recognizing spoliation of evidence as an independent tort cause of action is the minority rule, Justice Satterfield said. Six states, including California, have allowed spoliation claims for damages to go forward. Meanwhile, 12 state appeals courts in the 1980s and 1990s have declined to recognize such actions. Satterfield said that New York should recognize the tort, since the state has “adopted a strong public policy” penalizing the spoliation of key evidence. More specifically, the relationship between the insurer and its insured argues in favor of the spoliation claim. “From a policy perspective, the obligation of the insurer to defend must carry with it the obligation to preserve key evidence relied upon by its insured to defend against property damage claims,” Satterfield wrote. Koolwear is represented by Norman Landres of Milner & Coburn in Manhattan. General Accident is defended by Diana McDonough and Thomas Scott of Speyer & Perlberg in Melville, L.I. Defense counsel said they are preparing to seek reargument before Justice Satterfield and to appeal the decision if necessary.

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