Businesses Must Maintain Proper Records or Risk Discovery Sanctions for Missing Documents

Once a lawsuit is filed, all parties involved have an obligation to diligently search through their records and disclose to the other parties any and all relevant documents and witnesses. If you own a business and get sued, you have an obligation to go through your records and find anything that is relevant to the suit. If you do not, you risk being sanctioned for failure to participate in meaningful discovery. But how far this duty goes varies from case to case. For instance, it does not seem reasonable to hold a company liable for maintaining 15 years’ worth of paper files, but what if the lawsuit centers around the identity of a beneficiary of a 20 year old insurance policy? Situations have arisen where companies have taken old paper files, had employees make electronic records, and then shredded the paper files. But what if there is reason to believe that the named beneficiary was electronically inputted inaccurately? Did the company have a duty to maintain the records for something as important as the naming of a beneficiary 20 years ago? The answer is: Perhaps.

A scenario that could also cause problems for disclosing relevant documents is when companies have disorganized files. What if someone’s health insurance application gets misfiled and they are later accused of not disclosing their true health conditions? If a company is accused of negligently failing to disclose the relevant documents, they may have to pay the wronged party’s attorneys’ fees and costs caused by their actions.

A discovery example from California

In the California case of Finley v. the Hartford Life and Accident Insurance Company, the Hartford failed to disclose a highly relevant surveillance tape until very late in the discovery process. ¹⁾249 F.R.D. 329 [N.D. Cal. 2008]. The Hartford claimed that they had diligently searched their files but did not initially find the tape. The Court agreed with Hartford that the failure to find the tape was an administrative oversight and not a malicious act but still sanctioned the company for not locating and turning over the tape earlier on. Although it was an accidental misplacement of the tape, the policy iterated by the court is that it is not an excuse to keep disorganized files and not promptly find relevant items and documents. The Court found that if something should show up in a routine search of the files, then it is not excusable when it does not turn up. This case is just one example of how important it is to maintain accurate and up-to-date files in the event that litigation arises. In the Finley case, if the videotape was disclosed earlier, the entire lawsuit could have been disposed of. The court did not look fondly upon an administrative error, and in turn, it cost the guilty party a lot of time, money, and stress.

If there were never the threat of sanctions, then parties would be incentivized to “misplace” documents, undermining the transparency/effectiveness of the judicial process. If you have reason to know a dispute is looming, it would be best to ensure that your files are properly preserved so anything relevant will be accessible during a routine search. Also always make sure to maintain accurate electronic records because courts expect this in the modern technology-driven world. Before you find yourself in a discovery mess, consult one of our attorneys for guidance through each and every step of the litigation process.