From the February 2012 issue of American Agent & Broker • Subscribe!

Record Retention

When litigation is pending or foreseeable, create a litigation hold memorandum

Insurance brokers cannot always "avoid E&O," and often are faced with the separate but related decision of how best to "defend E&O." This process typically begins as soon as the broker reasonably believes an E&O claim might be asserted. This month we address the importance of litigation hold memoranda and retaining records, both electronic and paper, when litigation is pending or foreseeable.

Parties to a lawsuit are under a duty to preserve what they anticipate to be requested in a litigation. Failure to do so could lead to severe penalties against the offending party. The duty to preserve begins when the party in possession of the evidence knows litigation by the party seeking the evidence is pending or probable, and the party in possession of the evidence can foresee the harm or prejudice that would be caused to the party seeking the evidence if the evidence were to be discarded.

Failure to preserve the evidence can lead to sanctions of varying degrees, from a finding in favor of the harmed party, suppression of evidence, an adverse inference (an instruction to the jury that the evidence was destroyed by the offending party) and fines. Three factors are used to determine which sanction is to be imposed :

  1. The degree of fault of the offending party
  2. The degree of harm to the other party
  3. Whether there is a lesser sanction that would avoid substantial unfairness to the aggrieved party.

Ultimately, the severity of the sanctions depend upon the efforts taken to preserve relevant information. The court reviews what steps a company took to implement a litigation hold and then monitor employees’ compliance. Thus, it is advisable for an insurance agency, once litigation appears imminent, to develop, implement and monitor a litigation hold process that is reasonable and defensible under the circumstances. The nature and scope of a particular litigation hold process varies widely depending on the company and the litigation matter.

Related: Read another article by Matthew Marrone "Required Reading."

A "litigation hold memorandum" is a document created and implemented to preserve all data that could be relevant to the litigation. This includes information reasonably calculated to lead to the discovery of admissible evidence, and information reasonably likely to be requested during discovery. The goal of the litigation hold memorandum is to educate a party’s employees about the process and to monitor their compliance, accomplished by identifying relevant documents and data to be preserved, who may possess the relevant data, and where the relevant data is stored. The litigation hold memorandum should include all types of data, including emails, electronic files and paper documents. Once counsel is retained, she can assist in drafting or updating the litigation hold memorandum for distribution to all appropriate employees. During the course of the litigation, the litigation hold memorandum should be updated and reissued, if appropriate.

To help put this in context, let’s consider the following scenario. In March 2007, Ida Insured uses Diligent Insurance Agency to place property coverage. In September 2007, Ida Insured submits an insurance claim, but the applicable policy limits are insufficient to cover the loss. Diligent maintains records relating to Ida Insured’s insurance in four places:

  1. In a paper file
  2. Electronically on a server
  3. On Pete Producer’s email program
  4. On Pete Producer’s computer.

When Pete quoted the insurance in early 2007, he exchanged several emails with Ida regarding the coverage limits. Pete believes that in one of the emails, he advised Ida that she should consider higher coverage limits. Ida disputes this. The email was not saved on Diligent’s server, and was not printed and placed in the paper file.

Related: Read a previous column "Reasonable Care or Fiduciary?" also by Matthew Marrone.

In September 2008, Ida retains an attorney who writes to Diligent, advising Diligent to place its E&O carrier on notice of a claim. In January 2009, Ida Insured sues Diligent for malpractice, claiming Diligent should have procured an insurance policy with higher coverage limits. In February 2009, Pete’s computer crashes and all information is lost. During the course of the litigation discovery process, Ida Insured’s lawyer requests copies of all emails exchanged between Diligent and Ida, and Diligent discloses that emails between Pete and Ida have been lost.

Ida Insured’s lawyer files a motion for sanctions against Diligent for failing to preserve the emails. One of the sanctions sought is preclusion of any testimony by Diligent about recommendations to Ida to increase coverage limits, because the alleged recommendations were contained in an email that had been lost due to Diligent’s alleged failure to preserve relevant information. In response to the motion, Diligent cannot articulate what steps it had taken to preserve, search and produce the requested discovery once litigation became apparent.

Related: Read another column coauthored by Matthew Marrone and Daniel Strick "Rescission Blues."

It is difficult to say what sanctions a court might enter under these circumstances, but the threat alone could have been avoided had a litigation hold memorandum been circulated shortly after Diligent received the September 2008 letter from Ida’s lawyer, as it would have alerted the appropriate employees of the need to preserve the data, and likely would have resulted in its actual preservation. Obviously, even if sanctions are not entered by the court under these circumstances, Diligent has still been harmed by the loss of information helpful to its defense.

It also is worth noting that the duty to preserve documents after a company is in litigation, or if litigation is foreseeable, trumps data retention policies. Thus, if the policy at issue had been placed earlier, for instance, and if Diligent’s emails had been "purged" in accordance with Diligent’s data retention policy, Diligent might still face the threat of sanctions.

To be most useful, litigation hold memoranda should contain a description of all material that should be preserved. Therefore, if suit is filed or is foreseeable, data cannot be destroyed and an agency’s defenses can be preserved along with the data.

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