No matter how vigilant, an insured cannot fully insulate him/herself from a potential lawsuit. Defending a lawsuit can be costly, even in a case where an insured is ultimately not held liable. Advancements in technology, including the ubiquitous use of e-mail, can significantly increase the cost of litigation. With the unavoidable expenses associated with litigation, claim professionals should be aware of what mechanisms (if any) their insureds have implemented with respect to electronic discovery (e-discovery), especially in light of requirements mandated by the courts.

Relevant Rules

Courts have recognized the importance of technological advancements in litigation by implementing rules requiring parties to produce electronic information in discovery. Indeed, the Federal Rules of Civil Procedure (FRCP) require parties to produce their electronically stored information (ESI) during litigation.

In federal actions, parties are required to disclose, among other things, documents and other objects within their possession that may be used to support claims or defenses prior to receiving a discovery request. (FRCP 26(a)(1)(A)(ii)). As of December 1, 2006, the term “documents” has been expanded to include ESI among the type of information and documents produced in litigation. Similarly, there are state court rules that provide a party may request ESI from its adversary.

Although not formally defined in the federal rules, in practice it is understood that ESI includes information “created, manipulated, communicated, stored, and best utilized in digital form, requiring the use of computer hardware and software.” Electronically Stored Information: The December 2006 Amendments to the Federal Rules of Civil Procedure, Kenneth J. Withers, Northwestern Journal of Technology and Intellectual Property, Vol.4 (2), 171, 173. Although the most commonly requested form of ESI is electronic mail, commonly known as “e-mail,” the FRCP require production of electronic data in formats other than e-mail.

The FRCP have attempted to provide some limitations to the production requirements of electronic discovery, presumably in an effort to achieve fairness and balance. For example, in the context of a federal case, “[a] party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost.” (FRCP 26(b)(2)(B). However, even with limitations, the production of ESI can be very expensive and onerous.

Mechanisms to Reduce Costs

It is essential to identify whether an insured has developed and implemented a document retention policy. Claim professionals should not wait for the filing of a claim or lawsuit to know how their insureds maintain their electronic information. They should be aware of whether the insured is being proactive by developing and implementing a document retention policy, with the assistance of counsel, before a lawsuit is filed. This applies to all insureds, no matter how big or small.

The FRCP contain a safe harbor provision for those that maintain a lawful policy that is implemented uniformly and who take the appropriate steps to preserve ESI when litigation is pending or reasonably foreseeable. FRCP acknowledge this by providing that absent exceptional circumstances, the court “may not impose sanctions under these rules on a party for failing to provide [ESI] lost as a result of the routine, good faith operation of an electronic information system.” (FRCP 37 (e). Thus, a lawful policy may save on litigation costs, because the insured's counsel would not incur legal fees for the review of ESI for relevancy and/or privilege that was created many years prior to the lawsuit if it no longer exists pursuant to the insured's lawful policy.

With regard to the scope of a document retention policy, an insured should consult with counsel for its preparation. In general, the time frame for retention of documents, including electronic documents, depends on the situation. Even state governments have set forth document retention schedules. For instance, in New Jersey, the New Jersey Department of State, Division of Archives and Records Management sets forth various schedules on its website. If not mandated by law, an insurer should use these schedules as a guideline when creating a document retention policy. In general, it is good practice for an insurer to stay abreast of all pertinent state and federal regulations that may apply to its particular industry when creating and maintaining its retention policy.

A document retention policy should also include the method for retention of ESI, including the length of time to retain ESI and the format. This becomes particularly important when considering deleting e-mails. Often, deleted e-mails are stored in backup tapes or in remote backup facilities. Backup tapes may be discoverable. Zubulake v. USB Warburg LLC, 217 F.R.D. 309, 317-318 (S.D.N.Y. 2003). More importantly, production of backup tapes can be very expensive.

In order to take advantage of the safe harbor provision in the Federal Rules, a party should consult counsel to develop and implement a document retention policy that is tailored to the insured's needs.

Operational Responsibilities

Litigation can be chaotic and disruptive. To diminish chaos and disruption with regard to retention and production of electronic documents, it is prudent for an insured to designate an individual or a department to have the operational responsibility to maintain and retrieve this information.

Electronic information can sometimes be riddled with jargon while being technically challenging. It is wise for an insured, therefore, to designate who will be in charge of retaining the electronic documents and retrieving them if needed. Having a designated individual also makes the litigation process simpler for the claim adjuster, attorneys, and consultants assisting with the claims. It is best to deal with the individual who has the technical capability to address issues that may arise during litigation. A designee is also better suited to address issues prior to litigation, such as storing information in a location that is easily accessible, labeling information appropriately, and in the case of a business with multiple facilities, providing a uniform system and centralized location for handling electronic information and documents.

Retaining a Consultant Early

The first order of business is to retain information in a manner that makes it easily retrievable. A consultant can often be helpful in identifying formats, systems, and methods to retrieve, copy, and produce electronic information. A consultant is also necessary to ensure that during this effort, the integrity of the original data is preserved. While it is ultimately necessary to preserve information company-wide, it is also important to remember that only a small fraction of the preserved information will be relevant for any given case. If a consultant is involved in the initial collection and storage process, then he or she will be able to proactively develop a plan to search the ESI in an effective, efficient manner. By identifying the type of information that may be relevant to the claims, a consultant can develop a matrix of searches to obtain information that reduces the amount of documents that would eventually be produced. Narrowing discovery is a direct cost-saving measure when the insured is producing discovery.

During litigation, there can be an initial cost in connection with the consultant fees. However, overall the consultant would be cost-effective because he or she would already be familiar with the company's ESI storage processes can be very helpful in narrowing the scope of discovery early on in the litigation process, and ultimately helping to curtail the unavoidable costs of litigation. Claim professionals should perhaps ask their insureds to identify the consultants' fees in their initial litigation budgets early on in the litigation process.

Another benefit of having a consultant involved early on is that the consultant can help diffuse potential conflicts with the adversary. It is often less stressful and adversarial to have consultants, rather than the parties, meet and confer about electronic discovery. Courts have also recognized the benefit of added neutrality. Although there may be an initial added cost associated with retaining a consultant, is often worth the expense in cost savings during litigation.

Finally, in cases where the insured is involved in multiple suits involving the same core of relevant ESI, having a consultant familiar with the storage procedures and previous ESI searches can dramatically reduce costs associated with subsequent litigation.

Ensuring Compliance

The law imposes a duty to preserve relevant documents. This is commonly referred to as a “litigation hold.” It is important to know whether an insured is complying with this requirement to avoid claims of spoliation. Courts have defined spoliation as the “destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation.” Mosaid Technologies Inc., 348 F.Supp.2d 332, 336 (D.N.J. 2004) citing Zubulake, 2004 WL 1620866 (S.D.N.Y. July 20, 2004) (quoting West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999). A claim of spoliation carries the risk of serious sanctions, the possible imposition of attorneys' fees and costs, and even an adverse inference instruction by the court at trial to a jury. However, by preserving documents and retaining its documents in the first place pursuant to its lawful retention policy, an insured could prevent an adversary from succeeding on any claims of spoliation.

In summation, e-discovery is like a puzzle and must be taken seriously to mitigate risk.

A version of this article was originally published in the May 17, 2010, issue of the New Jersey Law Journal. C. 2010 ALM Properties LLC.

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