Editor's Note: Dana Ferestien is a member of the businesslitigation and insurance practice of Williams Kastner.

In a new era of document management and litigation, insurers ofall sizes will, at some point, encounter opposing counsel seekinglarge sums of money on the basis of alleged e-discoverymismanagement. Without devising and implementing proactivestrategies for electronically stored information (ESI), P&Cinsurance carriers may face protracted legal battles, which willnot only be costly but also disrupt their day-to-day businessoperations.

Of course, given the complex web of ever-changing compliance andregulatory obligations, insurers are not immune from e-discoverychallenges and missteps. Dana Ferestien, a member in Seattle,Wash. office of WilliamsKastner, recently spoke with Claims about two recentcases involving discovery of internal emails and claims proceduralinformation.

Both actions originated from U.S. District Court of Washington'sJudge Martinez, who compelled two different insurers to producediscovery. First, in Panattoni Construction, Inc. v. Travelers Prop. & Cas. Co.of America, 2012 U.S. Dist. LEXIS 178273, thecourt narrowly applied the attorney-client privilege to internalemails between Travelers claims employees and in-house counsel,finding that all of the communications were discoverable except forone email that included substantive legaladvice.

Second, in Bayley Construction v. Wausau Business Ins. Co., 2012 U.S.Dist. LEXIS 177559, the court rejected WausauBusiness Insurance Company's objections to the insured's Rule30(b)(6) notice requesting testimony from an insurer representativeon the underwriting file for the policy at issue and the names and“dollar level authority” of the claims employees whose authoritywas necessary to deny a claim like the one at issue. Judge Martinezreasoned that the underwriting file information is discoverable notonly because it is relevant to plaintiff's claims for denial ofcoverage but also because it appears reasonable that theinformation contained in the file may lead to the discovery ofother admissible evidence.

In both cases, Judge Martinez indicated awillingness to award attorney's fees in favor of the insured.Below, Ferestien explains document retention and risk-managementimplications for claims managers.

Tell us more about Panattoni Construction, Inc. v.Travelers and the judge's application of attorney-clientprivilege to internal emails.
The PanattoniConstruction case involved claims of bad faith, and JudgeMartinez's decision focused upon Travelers' refusal to produce 180pages of claims file documents based on the attorney-clientprivilege and work product doctrine. After reviewing the disputeddocuments in camera, Judge Martinez rejected Travelers' claim ofprivilege for all of the documents except for a single emailcommunication between an in-house attorney and a claims unitmanager.

Judge Martinez noted two significant limitations on theattorney-client privilege in the insurance coverage context. First,the privilege does not apply to communications with an attorney whois actually acting as an attorney rather than in someclaims-handling capacity. Second, even where the privilegewould otherwise apply, communications between an insurer and itsattorney are discoverable with respect to the insured if theinsured has sued for bad faith and the communication is relevant tothat claim.

What must claims professionals understand aboutdiscovery and how their notes and records can play a role inlitigation? Could an oversight on the part of the adjuster bedetrimental to the insurer later on?
Many peoplebelieve that the attorney-client privilege protects your writtencommunications with your attorney, regardless of what thecorrespondence says. But courts have grown increasinglyhostile to the privilege because it prevents full disclosure ofinformation. So claims professionals should understand thateverything they write may later be provided to the insured and to acourt. If an insured sues, especially for bad faith, then there isa good chance the insurer will produce most or all of its claimsfile.

It is important that claims files should document the adjuster'swork with this understanding squarely in mind. In practicalterms, this means claims professionals should strive for regularfile note updates and plain-spoken and nonjudgmental language.Claims professionals should also limit their entries to what theyactually know and avoid the temptation to jump to prematureconclusions.

What types of claims-payingguidelines/internal policies have been deemed “discoverable” bycourts? In the context of litigation, what should claims managersknow about effective risk management and creating manuals for theiremployees?
The discovery rules in both state andfederal courts are very broad. As Judge Martinez observed inBayley Construction, insureds are afforded broad andliberal discovery such that an insurer may avoid productions of itsinternal policies only if it can make a particularized showing ofprejudice or harm. So insurers should operate on the assumptionthat their internal policies will be given to the insured and acourt if there is coverage litigation. Insurers, therefore, aretypically well-served by taking a conservative approach to anymanuals they adopt.

Guidelines are typically better than firm rules; for example,manuals should not use absolute language such as “always” or never”or set firm deadlines. Instead, insurers are often well served byemploying “softer” language that allows for the exercise ofdiscretion. For example, rather than use “must,” “always,” and“never,” manuals can approach relevant issues with phrases like“where appropriate, consider.”

What are some lessons from Bayley Construction v.Wausau Business Ins.?
Both cases convey twoimportant lessons: First, as I've already noted, claimsprofessionals need to approach their work with the understandingthat everything they write might later be the subject of depositionquestioning or a trial exhibit. Second, insurers should carefullypick their battles when they resist discovery in coveragelitigation.

In deciding whether to refuse discovery, insurers should focuson only the most critical items and try to negotiate resolutionswith insureds' attorneys. Most of the time courts will rule againstan insurer resisting discovery unless the insurer can make a strongshowing of privilege, extreme burden, and/or total irrelevance. Andlosing an early discovery motion can set the tone for the entirelitigation either by emboldening the insured or angering thecourt.

What can you tell us about the evolution of guidelinesfor discovery of claims correspondence in recentyears?
Federal judges are growing increasinglyimpatient with discovery disputes and expect there to be a freeflow of potentially relevant information and documents. Unless aninsurer can show that it has “bent over backwards” to avoid motionpractice, many judges now award attorney's fees withouthesitation. Insureds and their counsel now frequently try towipe out any privilege that might normally apply to attorneycommunication documents and internal policy documents.

When a coverage dispute emerges, insurers should consider whenand how they use inside and outside attorneys to investigate and/ormanage a claim. If an attorney performs investigatory work, aninsured and their counsel may later try to characterize them as a“super-adjuster” in order to defeat a claim of privilege. They alsomay allege bad faith, even where not justified, in order to forcedisclosure of privileged communications.