Insurance Company Owed Duty to Defend Claim for Negligent Spoliation of Evidence Because the Vehicle Loss Was Tangible Property – Universal v. LKQ

The Illinois Appellate Court recently ruled on a spoliation claim in a product liability lawsuit arising out of a 2004 car accident. The trial court had ruled that the insurer for the defendant vehicle salvage company did not have to contribute to any settlement that might arise out the salvage company’s inappropriate destruction of the relevant vehicle. However, the appellate court reversed this ruling and found that the salvage company’s insurance policy did in fact cover any claims arising out of spoliation of evidence. As a result of the appellate court’s decision, the defendant’s insurance company will now have to pay any reasonable damages arising out of the spoliation claim. Universal Underwriters Insurance Company v. LKQ Smart Parts, Inc., et al., No. 1-10-1723 (December 16, 2011).

The product liability lawsuit was based on a 2004 SUV rollover accident. Michael Widawski’s Nissan Pathfinder SUV rolled over, ejecting Monika Gramacki, its only passenger, from the vehicle as it rolled over. Gramacki died and her family brought a product liability lawsuit against Nissan for an alleged defect in the Pathfinder’s rear door.

The main piece of evidence in a product defect claim is the alleged damaged product, which in this case would Widawski’s Nissan Pathfinder. It is not enough for a party to simply allege that a product is defective; it must also be examined by experts to determine the source of the defect and whether that defect caused harm to the party. However, in the present case, no experts were able to examine Widawski’s vehicle because it was destroyed before they could do so.

Following the rollover accident, Widawski’s insurer, Farmers Insurance, handled the preservation of the Pathfinder. Farmers hired LKQ Smart Parts, Inc., a vehicle salvage and storage firm, to store the damaged Nissan and keep it in its current condition. However, LKQ failed to follow these instructions and somehow ended up destroying the Nissan Pathfinder shortly after it arrived. And with its destruction went Gramacki’s family’s hope of a fair and successful product defect claim against Nissan.

In order to rectify this dilemma, Gramacki’s father filed two lawsuits: the first was a product liability lawsuit against Nissan for the allegedly faulty door latch, the second was a spoliation of evidence claim against Farmers for the destroyed Pathfinder. In its claim against Farmers, Gramacki alleged that the “destruction of the subject Nissan Pathfinder deprived Plaintiff of the key piece of evidence necessary to prove an otherwise valid product liability/negligence lawsuit” against Nissan. Farmers then filed a third party lawsuit against LKQ for its role in destroying the Pathfinder.

LKQ turned to its own insurance company, Universal Underwriters Insurance, for help in paying the costs of Farmer’s third party lawsuit. However, Universal denied that LKQ’s insurance policy covered spoliation claims and therefore that it was not responsible for paying any of those costs. The trial court agreed and released Universal from any responsibility in the settlement of the spoliation lawsuit.

However, LKQ appealed this decision and argued that its insurance company was responsible for paying these costs and that the spoliation claim was covered under LKQ’s policy, specifically the clause entitled “Auto Inventory Physical Damages:”

WE will pay for LOSS of or to a COVERED AUTO from any cause, including sums an INSURED legally must pay as damages as a result of LOSS to a CUSTOMER’S AUTO, except as stated otherwise in the declarations or excluded. WE have the right and duty to defend any suit for damages for LOSS to a CUSTOMER’S AUTO. However, WE have no such duty for LOSS not covered by this Coverage Part.

* * *
LOSS means direct and accidental physical loss or damage, occurring during the Coverage Part period. LOSS, with respect to a CUSTOMER’S AUTO, includes resulting loss of use.

The main issue was that Universal failed to consider the spoliation of evidence as a “loss” according to its policy. Rather, Universal defined a loss as “physical loss or damage” that results in “loss of use.” Likewise, Universal classified the lost “property” in Gramacki’s spoliation claim as the potential lost money from the product liability lawsuit and contended that its policy did not cover such intangible property.

In contrast, the appellate court cited Travelers Insurance Co. v. Eljer Manufacturing, Inc., 197 Ill. 2d 278, 301-02 (2001) to define tangible property as “a ‘physical’ injury when the property is altered in appearance, shape, color or in other material dimension.” Under this definition, the Pathfinder’s destruction can be clearly classified as a tangible loss. Similarly, Gramacki’s complaint alleges that the physical loss of the Pathfinder in turn resulted in Gramacki’s inability to use the Pathfinder in its product defect lawsuit. Because the damages under the Gramacki claim were based on the destruction of the Pathfinder and its loss of use, Universal was responsible for paying those damages.

Finally the court said that the damages that Gramacki sought in this case, even if measured by the diminution and value of the product liability claim, were damages as a result of the destruction of the vehicle and the loss of use of that vehicle. And while the appellate court remanded Universal back to the trial court to work out the details, it noted that “Universal may also have to reimburse LKQ for the amounts paid to settle the Gramacki claim, as the policy imposes a duty on Universal to indemnify LKQ for damages resulting from the loss of the Nissan Pathfinder.”

Kreisman Law Offices has been handling Illinois product liability cases for individuals and families for more than 35 years, in and around Chicago, Cook County, and surrounding areas, including Tinley Park, Prospect Heights, Round Lake, and Chicago’s Lincoln Village.

Similar blog post:
168,000 Volkswagen and Audi Diesel Vehicles Recalled for Fuel Leaks

$3 Million Verdict for Leg Amputation in Forklift Mishap – Price v. Nacco Materials Handling Group, Inc.

Federal Court of Appeals Rules That Expert Needed in SUV Rollover Case – Show v. Ford Motor Co.