Insurance company profitability has always depended as much onmanaging legal risk as it does on successful sales and marketing,but as of Dec. 1, 2006, the challenge of minimizing legal costs hasbecome more difficult.

The reason is changes to the Federal Rules of CivilProcedure--or FRCP, the government-mandated rules of engagement forall legal proceedings--which now impose greater risk and expense oncarriers to ensure they are complying with a sweeping update ofrules that govern the process of electronic discovery.

While the changes are long overdue, the new rules createburdensome obligations on both property-casualty and life andhealth carriers that demand more skillful application of technologyto legal matters as well as an unprecedented level of coordinationbetween the general counsel and chief information officer.

The revised rules require carriers to be much better atidentifying, finding and producing potentially millions ofelectronic documents scattered across the country that can be usedby plaintiffs or defendants in a legal proceeding.

At the same time, the new rules make it far more difficult tohide behind the defense that finding documents is too hard orexpensive.

In this new environment, insurers need to have a clearly definedprocess of extracting electronic documents from mainframes,desktops, laptops, PDAs and specialized information technologyapplications--as well as turning them into admissible evidence forlegal proceedings.

They also need to be prepared to address the challenge oforganizing and preserving unstructured data that resides ontechnology platforms that were not designed to be documentretention systems.

To be FRCP-compliant and make the most of the rules, insurancecompanies need to do the following:

o Establish a definable and defensible IT process.

The new rules require all companies to clearly spell out theirinformation technology processes to opposing counsel and articulatethe process far earlier in a legal action at the firstmeet-and-confer meeting.

To achieve this objective, companies need to implement a fixedbusiness process for managing all electronic discoveryrequests.

The process should establish permanent rules--including rulesthat minimize the duplication of data and prevent the inadvertentdisclosure of privileged documents.

At the same time, in satisfying this obligation under the newrules, carriers should not provide opposing parties with so muchaccess to information systems that they might compromise securityor divulge trade secrets.

o Centralize corporatewide data collections for all legalactions into a single, enterprisewide repository.

The new rules impose a greater responsibility on companies toensure the integrity of data and avoid the inadvertent spoliationof electronic information.

To minimize risk, carriers need systematic storage protocols tocreate a single, complete copy of all data to eliminate theduplication of records and demonstrate that corporate data isreasonably accessible.

The best way to achieve that objective is to establish anindependent, online data repository that can be used by hundreds oflegal teams and create a discovery lifecycle managementprotocol.

o Standardize the form of production for allelectronically-stored information.

The new rules reward companies that have a single productionformat for all electronic discovery requests.

The production format is central to the electronic discoveryprocess because it defines whether the documents are to be preparedin Microsoft Word, as an image file or some other format.

The format decision is very important, because it has a directbearing on the cost and speed with which the documents can beproduced.

Under the new rules, companies now have a real incentive toestablish a consistent, corporatewide production format. This willenable insurers to reasonably reject requests from opposing counselfor alternative production formats that increase cost and risk.

o Establish corporate control over data.

Insurance companies typically engage a large number of law firmsto represent them in legal matters, and today those firmsfrequently control the electronic documents.

Because of the greater process imposed by the new rules,insurance companies have a unique opportunity to more closelymanage their repository of electronic documents.

Better control of sensitive corporate documents reduces the riskof losing documents or of inadvertent disclosure to opposingcounsel. It will also eliminate the risk in having vital corporateinformation disbursed among the information management systems ofdozens or even hundreds of outside law firms.

o Focus on cost control.

The new rules add to the already high cost of managing andstoring millions of electronic documents over potentially manyyears. An effective way to reduce the overall costs is to eliminateunnecessary duplication of privilege reviews.

Once a document has been reviewed for privilege, the results ofthat review can be captured and reused in subsequent proceedings inwhich such documents might be relevant. Streamlining the processcan result in substantial cost savings.

The highest single cost of discovery is the attorney timerequired to review data prior to its production.