Illinois Federal Court Sanctions Insurer for Failing to Preserve Documents in Coverage Dispute

In long-running insurance litigation addressing the availability of coverage for opioid-related lawsuits, an Illinois federal court recently imposed spoliation sanctions against an insurer for its failure to preserve documents. The court concluded that the insurer intentionally failed to preserve relevant electronically stored information (including custodial emails and underwriting records) in violation of Federal Rule of Civil Procedure 37.

Although the court declined to dismiss the insurer's knowledge-based affirmative defenses, it ordered an adverse inference instruction and awarded the policyholder its reasonable attorney fees and costs associated with bringing the sanctions motion.

The decision serves as a reminder that when insurance coverage litigation involves multiple underlying lawsuits, an insurer’s preservation obligation begins when the first claim for coverage is made and continues as additional underlying lawsuits are filed against the insured. The preservation obligation is not extinguished upon the resolution of the first claim.

The obligation includes that an insurer must ensure that all routine document destruction or deletion policies are suspended throughout the life of the underlying lawsuits and coverage litigation. Insurers who fail to fulfill this obligation risk potentially significant consequences in the form of spoliation sanctions, for example, if they take the position that they cannot produce documents to their insureds in discovery because documents were not preserved from the time the first insurance coverage claim was filed.

OVER A DECADE OF COVERAGE LITIGATION

The decision arises from ongoing insurance coverage litigation between H.D. Smith Wholesale Drug Company (H.D. Smith) and Cincinnati Insurance Company (Cincinnati) concerning coverage for opioid-related lawsuits.

Litigation over Cincinnati’s obligations to defend and indemnify HD Smith against opioid-related lawsuits began in 2012.  In an earlier coverage action, Cincinnati filed suit against H.D. Smith seeking a declaration that it owed no duty to defend or indemnify H.D. Smith against a single  lawsuit brought by the West Virginia attorney general—the first-in-the-nation opioid liability lawsuit. Although the district court initially found no duty to defend, the US Court of Appeals for the Seventh Circuit reversed, holding that Cincinnati owed a duty to defend. In a later decision, the district court held that Cincinnati was further required to indemnify H.D. Smith for its settlement with West Virginia.

While this first coverage case was pending, H.D. Smith, like other distributors and dispensers of opioids, became the target of additional opioid-related lawsuits. In 2022, H.D. Smith initiated a second coverage action seeking reimbursement for defense and settlement costs. Throughout the litigation, H.D. Smith and Cincinnati disputed the temporal scope of discovery and the adequacy of Cincinnati’s production of documents from certain document custodians and of underwriting files. In 2025, H.D. Smith moved to compel Cincinnati to produce custodial documents and the court directed Cincinnati to (1) produce  “custodial files from all Cincinnati employees that were involved materially in handling Plaintiff’s claims and underwriting Plaintiff’s policies” and (2) search for and produce “custodial files from all relevant custodian inboxes,” not only from the insurer’s claims management system. Cincinnati subsequently reported to the court that certain custodial files were no longer available. H.D. Smith moved for sanctions against Cincinnati, arguing that it intentionally failed to preserve relevant evidence by failing to suspend policies related to the automatic deletion of custodial and underwriting files.

In its July 22, 2026 opinion, the US District Court for the Central District of Illinois agreed in substantial part.

COURT FINDS INTENTIONAL SPOLIATION AND IMPOSES RULE 37(E) SANCTIONS

Under Rule 37(e) of the Federal Rules of Civil Procedure, a court may sanction a party that fails to take reasonable steps to preserve electronically stored information (ESI) that should have been preserved and cannot be restored or replaced. The court first evaluates five threshold requirements:

• Whether the information is ESI
• Whether there is anticipated or actual litigation that triggers the duty to preserve ESI
• Whether the relevant ESI was preserved at the time the litigation was anticipated or ongoing
• Whether the ESI was lost because a party failed to take reasonable steps to preserve it
• Whether the lost ESI cannot be restored or replaced through additional discovery

If the requirements are met, the court then determines if the movant was prejudiced and if the harm was intended. If there is prejudice but no intent, then the court can impose “curative measures.” If there is intent to harm, prejudice is assumed and the court can impose sanctions.

In this case, the key determination was when Cincinnati’s duty to preserve arose. The court held that Cincinnati had a duty to preserve relevant evidence when the first coverage action was filed in 2012, because the first and second coverage cases were “strikingly similar.”  The first coverage lawsuit concerned coverage under Cincinnati policies for the West Virginia enforcement action. The second coverage lawsuit concerned coverage under Cincinnati policies for underlying lawsuits brought by governmental entities, tribal entities, and third-party payors.  Both cases, the court explained “center around the same parties, similar subject matter, and similar issues.” Because future litigation was reasonably foreseeable, the duty to preserve was triggered.

The court held that Cincinnati failed to take reasonable steps to preserve documents once its duty was triggered. Cincinnati implemented only a single litigation hold during the first coverage case that failed to adequately preserve documents, including because it did not suspend Cincinnati’s automatic deletion of emails and underwriting records. The court rejected Cincinnati’s argument that its practice of saving purportedly relevant emails to its claims management system was sufficient to preserve relevant evidence. The court explained that “[t]he issue is not whether Cincinnati produced some documents or whether Cincinnati produced all documents that it claims are relevant. The issue is whether Cincinnati searched for and produced custodial files from all relevant custodian inboxes. Cincinnati has not done so because it cannot do so. These custodian inboxes were destroyed.” 

The court further held that Cincinnati destroyed ESI with intent to deprive H.D. Smith of the information. From the time coverage litigation was first filed in 2012, Cincinnati never issued a litigation hold that suspended auto-deletions for most policies at issue in the coverage case—not after it was found to have a duty to defend in the first coverage case, not after it began preparing a defense for the opioid lawsuits in 2019, not when the second coverage case was filed, and not when the court issued discovery orders in that litigation.

According to the court, “This pattern of failure does not merely show negligence or even gross negligence. Cincinnati knew it needed to preserve relevant evidence. It chose not to do so by repeatedly failing to suspend auto-deletion procedures despite having every opportunity to do so for over 10 years.” 

As a result, the court ordered an adverse inference instruction requiring the jury to presume the destroyed evidence was unfavorable to Cincinnati and awarded H.D. Smith its reasonable attorney fees and costs incurred in bringing the sanctions motion. The court declined to strike Cincinnati's knowledge-based affirmative defenses, however, concluding that an adverse inference instruction more appropriately addressed the prejudice because sufficient evidence remained for H.D. Smith to litigate its claims.

BROADER LESSONS FOR INSURERS AND POLICYHOLDERS

Although the decision arises in the context of opioid coverage litigation, its implications extend well beyond that setting. The ruling provides practical guidance for parties involved in long-running and long-tail coverage disputes, particularly regarding document preservation, litigation holds, and the potentially significant consequences of failing to preserve relevant evidence.

• Preservation obligations may extend beyond a single lawsuit: The court's decision makes clear that preservation obligations do not always end when one coverage action concludes. Where related claims involving the same parties and similar coverage issues are reasonably foreseeable, insurers must periodically reassess litigation holds and document retention protocols to ensure they remain effective. Policyholders may point to this decision when challenging preservation failures in coverage disputes involving multiple underlying claims and lawsuits.
• Litigation holds must be actively implemented and maintained: The decision underscores that issuing a litigation hold is only part of the equation. Organizations should confirm that routine document destruction, automatic email deletion, and other retention practices are suspended as necessary and periodically reviewed throughout the life of complex litigation, particularly where disputes span many years.
• Intentional spoliation can significantly alter the course of coverage litigation: An adverse inference instruction can materially affect trial strategy, settlement dynamics, and the ultimate resolution of a coverage dispute. Although the court declined to strike the insurer's affirmative defenses, the decision demonstrates that courts are prepared to impose meaningful Rule 37(e) sanctions where the evidence supports a finding that a party intentionally deprived its opponent of relevant information.

HOW WE CAN HELP

Insurance coverage disputes frequently involve years of underlying litigation, multiple related claims and lawsuits, and extensive discovery obligations.

Our insurance recovery lawyers advise policyholders throughout the lifecycle of complex, high-value coverage disputes, including presenting and negotiating coverage claims, developing litigation and discovery strategies, evaluating the scope of relevant information and implementing litigation holds, and pursuing coverage through litigation or alternative dispute resolution.

We also counsel clients on preserving insurance assets before disputes arise and on responding strategically when insurers raise coverage defenses.