$1.25 Million Dollar E-Discovery Sanction for Zurich American Insurance and Counsel
After following resolution of issues concerning covered insureds in insurance coverage litigation involving September 11, 2001 attacks on the World Trade Center (“WTC”), insured parties moved for sanctions against liability insurer. In re Sept. 11th Liab. Ins. Coverage Cases, 2007 WL 1739666 (S.D.N.Y. June 18, 2007)
On June 18, 2007, United States District Judge Alvin K. Hellerstein, for the Southern District of New York, slapped Zurich American Insurance Company (“Zurich”) and its counsel, the law firms of Wiley Rein LLP and Coughlin Duffy LLP, with a $1.25 million sanction for making statements without evidence to back them up and discovery violations including deleted electronic evidence, and delayed production of relevant documents.
This insurance coverage suit revolved around whether Zurich covered Westfield Corporation, Inc. which leased retail space in the WTC, and the Port Authority of New York and New Jersey (“Port Authority”) which owned the WTC. Zurich alleged that it did not. Zurich ultimately changed its position, however, when Zurich’s chief underwriter revealed in a deposition that she believed the Port Authority was covered. During discovery, opposing counsel, Latham & Watkins became suspicious that among other documents, a 62-page policy that would prove Zurich’ policy applied had been deleted from Zurich’s computer system and that defense counsel had a copy that had not been produced. Critical documents were in Zurich’s counsel’s possession for almost three years before they were produced.
Federal Rule of Civil Procedure 37 authorizes sanctions for an attorney’s failure to comply with Rule 26 disclosure requirements, even without a discovery request, including:
1) failure to produce a copy of all relevant documents in the party’s control; and
2) failure to amend any prior discovery responses if the party learns that the response is incomplete or incorrect and the additional or corrective information has not been made known to the other parties during the discovery process.
The Court dismissed counsel’s explanation at the sanctions hearing that Zurich’s failure to produce was due to inadvertence. The court found the actions to be negligent or worse. The Court was particularly troubled by Zurich’s deletion of the electronic version of the 62-page policy which occurred even after counsel had instructed that all underwriting communications were to be preserved. The Court also took umbrage at Zurich’s “slow and inadequate responses” to repeated document requests and related court orders. and found that “Counsel’s failure to recognize the importance of the document, and to produce it timely, especially when alerted to its possible existence by opposing counsel,” was sanctionable.
