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Risky Business A U.S. and Bermuda Under 40s (Re)Insurance Collaboration Inaugural Edition |
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The Effects of eDiscovery Rules on the Insurance and Reinsurance Industry By Matthew Musgnung, CPA, CFE, CFF
Recently, a curious change has been occurring to many of the words that we use all the time: a little “e” has begun to appear in front of them. You can now be e-vited to a party, send e-cards, and of course receive email. And then there is e-business, where you can perform e-banking, e-file your taxes and spend your e-money on eBay. You can read an e-book checked out from an e-library, investigate health problems at an e-clinic, and even get e-dumped by your significant other. But don’t worry; you can always be consoled by your e-friends via a social networking site. With the Information Age virtually changing our language around us, it should be no surprise that the sneaky little “e” has found its way to the front of another word that many of us see and use all the time: discovery. The concept of eDiscovery has had an incredible effect on how disputes are handled; whether in litigation, arbitration or some other type of alternate dispute resolution. It has also changed the way insurance companies and law firms view the importance of access to data, storage of information and record retention policies. This article will provide a background of the development of eDiscovery issues and how, in particular, they are playing a role in the ways insurance and reinsurance companies do business. The Need for eDiscovery Rules I would first like to start by setting the proper background for a discussion on eDiscovery. For those who have been faced with the daunting task of gathering and providing information related to a discovery request (or the sometimes even more daunting task of wading through mountains of unorganized, unidentified documents provided by the opposition), this may be a walk down memory lane. But for those of you lucky enough not to have gone through this process, please let the following example provide just a taste of what you can expect during a typical discovery information request. Imagine that someone walks into your office today and asks what you did at work yesterday? After you answer, he then asks you to produce every piece of information that you created. Every email, every text message, every IM, every voicemail, every note you took, and every document you created or edited. Every accounting entry you made, every calculation you performed, and every change to an underwriting or claim file that you made. Needless to say, it would not be an easy task to complete. Further, you would most likely require the help of outside sources, such as someone in your IT or records management department, to gather this data. Now imagine that same person asks you to produce all of that data for a six month period that occurred five years ago. This is exactly what occurs every day by way of subpoenas and requests for information related to the discovery portion of litigations, arbitrations and mediations. As the types of formats, methods of transmittal and storage and sheer volume of data has increased, an extreme strain has been placed on all parties involved in litigation in having to wade through the many issues related to producing electronic information. Added to this strain is the cost and disruption of ongoing operations often required to gather the data necessary to comply with a discovery request. Due to the sheer volume of disputes and litigation in the insurance and reinsurance industry, managing electronic data has become a very important part of how these companies do business. If your company or the attorneys and consultants that represent you are knowledgeable in eDiscovery issues, trends and tools, it can put you at a distinct advantage over your opposition to a dispute, as well as your competitors in the marketplace. The Basis for eDiscovery Rules and Guidance The December 1, 2006 amendments to the Federal Rules of Civil Procedure set forth the new rules related to how eDiscovery should be handled. However, companies and parties to disputes had been struggling with requesting and providing electronic data long before that time. The promulgation of new types of data medium for creation, storage, transmittal, and destruction caused many headaches during the discovery process. Three years prior to the issuance of the new Federal Rules, a group called the Sedona Conference – a group of attorneys and practitioners dedicated to the advancement of law and policy - formed a workgroup and issued The Sedona Principals, which addressed electronic document production. The fourteen Sedona Principals were “…intended to complement the Federal Rules of Civil Procedure, which provide[d] only broad standards, by establishing guidelines specifically tailored to address the unique challenges posed by electronic document production.”1 The principles were broad in nature and provided an outline for future discussions and developments in eDiscovery procedures. However, they provided a foundation and framework on the most important eDiscovery topics, including: · Establishing that electronically stored information is potentially discoverable and that organizations have a duty to preserve this information · Discussing the importance that a cost/benefit analysis has in determining what lengths a party should go through to preserve, retrieve, review, and produce electronically stored information · Detailing the importance of cooperation and planning between all parties to a dispute to reduce the cost, stress and hostility that can occur during the discovery process which is often compounded by eDiscovery issues. The Principles stress early discussions and agreements regarding production of electronic data, the importance of clear discovery requests and responses and the obligations on both sides to make the process as efficient and cost effective as possible · Finally, the principals establish the need for sanctions to be considered by the court in instances where improper actions by a party had a reasonable probability of causing a loss of evidence, and that the loss of evidence has materially prejudiced the adverse party Shortly after the original Principles were published, they were cited by the Federal Judicial Center's Civil Rules Advisory Committee Discovery Subcommittee as one of the reasons to focus on possible amendments to the Federal Rules of Civil Procedure in this area. Once the amendments to the Federal Rules were enacted, they became a major step forward in helping the parties to a dispute form guidelines around the eDiscovery process. For one, they provided a universal term for all data types that would be considered: Electronically Stored Information (“ESI”). As with any change in procedure related to the court system, these amendments were widely dispersed, read, discussed, written about, and debated. What is taking considerably longer is for them to be tested in the courts and the real world to determine their enforceability and practicality. One of the main implications of these procedures is the requirement that parties and their attorneys pay specific attention to electronic data and incorporate discussions on this topic in their “meet and confer” sessions. In these sessions, the parties should discuss the important questions related to this data, specifically: · Is ESI going to be a relevant part of the dispute? · In what format is the ESI stored and will it need to be changed prior to the document production? · Have any document retention policies affected the preservation ESI? · Can/should metadata2 be provided? · What effort should be undertaken by the respondent to produce the requested information? How much cost should be expended and who should pay for it? Also, the Rules provide some protections to respondents by potentially not requiring them to provide electronic information that is “not reasonably accessible because of undue burden or cost”3, and also allows for situations where electronic data may not be available due to data destruction based on normal, good faith record retention programs. eDiscovery Issues Specific to the Insurance and Reinsurance Industry Insurance companies must consider both sides of the eDiscovery sword: they must evaluate their own operations and data management procedures to ensure that they are ready in the event of a discovery request as a party to a lawsuit; and they must also consider the effects that eDiscovery will have on their coverage of insureds’ litigation costs. D&O, E&O and general liability policies often require the insurer to underwrite the insured’s costs to preserve and produce electronic information as part their covered litigation expenses, per policy terms. Underwriting policies and premiums charged should be continually evaluated to ensure that they are incorporating the eDiscovery aspects of litigation in the policy coverage. Further, liability insurers must work to find ways to control and reduce the costs of eDiscovery that they cover, either through policy exclusions, new products such as eDiscovery insurance, or loss control practices such as training programs. To be sure, many wise insurers have begun to seek to control these costs through affirmative initiatives designed to help their customers manage their electronic data management. Another aspect of eDiscovery that is particularly troubling to insurers and reinsurers is how to handle information that has been transferred or is being stored in foreign countries. Globalization of the insurance market has made the cross-border creation and transfer of electronic information commonplace. This means that foreign customs and laws must be taken into consideration in the eDiscovery process. What often complicates matters is that the views of the rest of the world on privacy matters differ greatly than the United States. Generally speaking, privacy laws are much more protective of individuals in places like the European Union and Asia. This makes it much more difficult to receive this data in a discovery request. Organizations and their attorneys involved in cross-border litigation must be sure to be aware of the potential pitfalls and added costs, effort and time required in data production that may arise when foreign regulations must be taken into consideration. The Future of eDiscovery As is the case with almost all business processes, the current economic environment will play a role in eDiscovery issues. The continual balancing act between managing tight budgets and process improvement will also play out in this arena. Companies will strive to continue to reign in litigation costs by concentrating on the most costly portion: discovery. Companies are quickly learning that there are steps that can be taken to control eDiscovery costs. Attorneys who are savvy and truly understand this area will take the necessary steps and expend the efforts to successfully argue the limitation of the amount of ESI that will need to be produced. Companies may decide that long standing relationships with attorneys may need to change in order to bring in up-to-date knowledge in this area. Other companies may go with the idea of hiring a national eDiscovery law firm to handle this specific aspect of their cases. There will also be a continual increase in the use of eDiscovery experts who have the IT capabilities to extract required ESI with less time and expense than doing it internally. While these things are not necessarily bad, where problems may arise are when budget constraints put a damper on proactive steps companies can take to initiate systems, procedures and functions to provide systematic storage and retrieval of ESI. It is these systems that will be required in order for companies to truly adapt to the new Federal Rules in a cost-effective manner. Further, companies who do not have these systems in place will run a much higher risk of either not providing all of the data requested, providing incorrect data, or even worse, providing data that should not have been produced (i.e. due to confidentially reasons) that could damage your case. Companies who have experienced these issues usually realize that that the absolute worst time to begin the evaluation of ESI data storage and retrieval capabilities is in the middle of an ongoing litigation. As the volume of case law increases regarding eDiscovery issues, the landscape surrounding this aspect of litigation will continually change. It is important for companies to concentrate on the core strengths needed to prepare for eDiscovery requests while keeping a close eye on developments in case law and the legal environment in order to institute changes in data management and litigation tactics as needed. You are Not Alone With the continual evolution of the eDiscovery process causing increased costs and interruption of ongoing operations, many companies are realizing that they cannot handle this on their own. The industry has recognized this and has begun to develop a strong network of service providers and tools to help with eDiscovery issues. Some of the areas that these firms may be able to provide much needed assistance are as follows: · Create a document retention policy that specifically discusses the unique issues related to the storage, transmittal and destruction of electronic data. As part of this process, a detailed inventory can be prepared to identify all electronic data systems and sources, as well as develop related information for each regarding: · the content of the system · the owner of the system or system administrator · the normal format of information outputs, as well as format options · an assessment of the cost and burden to access the information stored · whether any privileged or confidential information is stored · Assist in putting in place procedures to help with implementing “litigation holds”: the process of identifying and safeguarding information from destruction if it relates to a known or reasonably anticipated litigation. · Identify the types of information produced by your company that might be requested during the discovery process. Many times in the insurance industry, the type of information that needs to be produced relies heavily on the type of dispute being handled. If the dispute is over coverage issues, underwriting or placement files will need to be produced. If the dispute is between a cedant and a reinsurer over loss reporting, claim files or loss run data will need to be accessed. Knowing what data will be required for a particular dispute may save costs in the long run. · Assist with the actual collection process of the information required to be produced. Whether it is accessing storage tapes, hard drives or portable data assistants, they can assist in accessing the data and producing it in a format that is acceptable to the opposition and the court. · Review the data prior to production to make sure that all of the requests have been fulfilled to the best of your ability. Specific areas that can be troublesome are in ensuring that the most recent version of a document is produced and eliminating duplicate copies, that the presentation and format is acceptable based on any court orders, and sometimes most importantly, that no information is provided that may be protected under confidentially agreements or may otherwise be damaging to the case. Conclusion Although consideration of electronically stored data in the discovery process has required a major shift in how this process is performed, there also has been an upside for those who whish to explore it. It is on this positive note that I wish to conclude. Successful insurance and reinsurance companies often look at changes in the regulations, marketplace or economy as potential opportunities to improve their business processes and infrastructure in a way that separates them from their peers and provides them with a competitive advantage. Focusing on the issues related to electronic data storage, access, safeguarding, and production during the eDiscovery process can greatly improve your organization…even if you never face a litigation or arbitration proceeding.
About the author: Matthew D. Musgnung, CPA, CFE, CFF is a Senior Manager with SMART Business Advisory and Consulting, LLC. In his capacity within the Dispute, Valuations and Investigations Practice Group at SMART, Matt leads engagements and provides services in a number of industries, including insurance & reinsurance and healthcare. Matt specializes in complex commercial transactions while supporting his clients in the normal course of business and cases of dispute. Matt may be contacted at mmusgnung@smartgrp.com.
1Sedona Conference Working Group on Electronic Document Retention and Prot., The Sedona Principles (July 2005), available at: http://sedonaconference.org 2Metadata is described as “Data that provides information about other data” by the Merriam Webster dictionary. Generally, it is the data stored on a system that describes other electronic data, such as its attributes, (name, size, data type, etc) and data about records or data structures (length, fields, columns, etc) and accessibility (where it is located, how it is associated, ownership, etc.). 3Federal Rules of Civil Procedure 26(b)(2)(b) |
