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Without a doubt, virtually every aspect of electronic discovery is expensive, and with the recent amendments to the Federal Rules of Civil Procedure, litigants are being required to incur the costs associated with electronic discovery more frequently and earlier in the litigation process. Liability insurers are increasingly aware of the mounting electronic discovery costs incurred by business litigants and are beginning to address the costs of electronic discovery in their insurance products. Either through training programs, price adjustments, policy exclusions or even new insurance products such as “electronic discovery insurance,” insurers are seeking to find new ways to recover and control the costs of electronic discovery for which they may be asked to pay. This heightened focus by insurers on electronic discovery costs should put the typical business litigant on notice that it is likely that its document-retention policies and the electronic discovery preparedness plans may become a part of its insurance carriers’ underwriting decision. If those policies or plans are not adequate, that may affect the cost of or the ability to obtain insurance. Fortunately, there are steps litigants can take to prepare themselves for a litigation involving electronic discovery � steps that also can minimize the related insurance coverage issues. No surprise It is unsurprising that insurers are beginning to address electronic discovery costs in their underwriting decisions. Insurers are vulnerable to electronic discovery costs both as litigants and as insurers covering the litigation costs of an insured. Thus, insurance companies are keenly aware of the pitfalls that electronic discovery can present. Certain types of insurance policies, such as directors and officers liability policies (D&O), errors and omissions policies (E&O) and general liability policies, require the insurer, to the extent set forth in the policy, to underwrite the insured’s preservation and production of electronically stored information (ESI). Decisions such as what to preserve and how and when to produce responsive documents and data are typically left to the insured and its outside lawyers. For that reason, a huge area of litigation cost incurred by the insured is essentially out of the insurers’ control. For example, costs associated with the collection and production of ESI in litigation can be significantly affected by the steps taken by the litigant company in issuing and complying with a litigation hold issued at the outset of the case. Moreover, insurers typically are not involved in the selection of a third-party electronic discovery vendor for purposes of collecting, producing and reviewing the relevant ESI. Generally, insurers rely on the litigant or outside counsel to make the decision regarding the selection of a third- party electronic discovery vendor, which potentially could have significant cost implications for the insurer. To the extent that a litigant or its third-party electronic discovery vendor does a substandard job in complying with an opposing party’s electronic discovery requests, the liability insurer could be left paying the costs for additional production of ESI, forensic analysis of computer systems or, potentially, sanctions. During the past several years, insurers have sought to minimize the cost of electronic discovery through affirmative initiatives designed to assist their clients with document and e-mail management and to prepare for electronic discovery. Some insurers have developed risk-assessment programs for their clients that focus on electronic evidence. Others have issued publications instructing clients on policies and steps to take to avoid liability, including advice on records management and issues relating to ESI. Insurance brokers and risk management firms have followed the lead of insurance carriers. Many have added electronic discovery services to complement their consulting and risk management functions. For example, Aon Consulting, on May 22, 2006, launched an electronic discovery unit of its information technology consulting group. This unit, according to Aon, is employed to provide electronic data collection, preservation, conversion, processing and hosting services for business litigants. Further, Marsh & McLennan Cos. acquired Kroll Inc. in 2004, a unit of which, Kroll Ontrack, provides a full range of electronic discovery-related services, including forensic analysis, consulting services, electronic data collection and data processing and review. Douglas McLeod, “Marsh & McLennan Cos. Inc.,” Bus. Ins., July 19, 2004. Nevertheless, even with the availability of such resources and advice, cases such as Zubulake v. UBS Warburg, 220 F.R.D. 212 (S.D.N.Y. 2003); Coleman Parent Holdings Inc. v. Morgan Stanley & Co., No. 502003CA005045XXOCAI, 2005 WL 4947328 (Palm Beach Co., Fla., Cir. Ct. 2005, rev’d on other grounds, 955 So. 2d 1124 Fla. Dist. Ct. App. 2007); and, most recently, In re Sept. 11 Liab. Ins. Coverage Cases, No. 03 Civ. 332, 2007 WL 1739666 (S.D.N.Y. June 18, 2007) (insurer sanctioned for failure to produce in a timely manner an early draft of policy endorsement that had been deleted from computer system), demonstrate that even sophisticated litigants (including an insurance carrier) with established document-retention and e-mail-retention policies are running into significant issues with respect to the preservation and production of ESI. Insurers asking questions Insurance carriers are undoubtedly going to turn to policy-based tools to help avoid the costs associated with electronic discovery failures. Insurers are likely to begin to attempt to evaluate the costs associated with an insured company’s inability to preserve or properly produce ESI and then begin to formulate ways in which such additional costs can be built into their underwriting scheme. This means that businesses seeking liability insurance will face questions from their insurers regarding the robustness of the company’s document-retention and e-mail-retention policies and procedures; the existence, or lack, of an electronic discovery readiness plan; the company’s record in previous cases involving electronic discovery; the size of the company’s business operations and the amount of ESI generated; and the sophistication of the company’s information technology (IT) personnel and its in-house and outside legal counsel with respect to electronic discovery issues. The business litigant’s responses to these questions will affect the cost and/or scope of the liability coverage it is able to obtain. Moreover, businesses seeking liability insurance should expect to see deductibles or retention requirements specifically directed at electronic discovery-related issues. Insurers may ask the companies they insure to pay a certain portion of their electronic discovery costs before the insurance carrier’s obligation to pay such costs takes effect. Conversely, insurance carriers may begin to set limits on the amount of electronic discovery services included under the coverage they provide with any particular policy. Exclusions for sanctions As significant sanctions for violations of the electronic discovery provisions of the Federal Rules of Civil Procedure become more common, businesses should expect that insurers will start including exclusions of coverage specifically relating to electronic discovery sanctions into their policies to ensure that they are not required to cover an insured company’s electronic discovery failures. See, e.g., United Med. Supply Co. Inc. v. U.S., No. 03-289C, 2007 WL 1952680 (Fed. Cl. June 27, 2007) (discovery sanctions issues for “reckless disregard” of duty to preserve evidence); Sept. 11 Liab. Ins. Cases, 2007 WL 1739666 (insurer sanctioned for failure to produce in a timely manner an early draft of policy endorsement that had been deleted from computer system); In Re NTL Inc. Sec. Litig., nos. 02 Civ. 3013, 7377, 2007 U.S. Dist. Lexis 6198 (S.D.N.Y. Jan. 30, 2007) (adverse inference sanction imposed for spoliation of electronic evidence in possession of third party). Although none of these measures is in widespread use yet, recent articles suggest that the issues associated with electronic discovery are receiving increased focus within the insurance industry. See Aimee Siliato and Jon Neiditz, “Federal E-Discovery Rules Challenge Underwriters,” National Underwriter, May 21, 2007; Meg Fletcher, “E-discovery Falls Hardest on Insurance Industry,” Bus. Ins. Industry Focus, May 1, 2007. Potential business litigants should expect that at least part of the insurance underwriting decision and pricing scheme will be based on the underwriter’s review of their document-retention policies and electronic discovery response plan. Therefore, from a business standpoint as well as a legal standpoint, it makes sense to prepare for litigation involving electronic discovery before getting involved in a lawsuit. Doing so will allow businesses to spare themselves increased insurance premiums or reductions in the scope of insurance coverage. A business should begin to prepare to meet its potential electronic discovery obligations by assessing the currency of its records-retention and e-mail-retention policies. With the implementation of the electronic discovery amendments to the federal rules, the standards of what is appropriate with respect to the retention and production of ESI have materially changed. It is likely that even those companies that already had in place document-retention policies, e-mail use-and- retention policies and litigation-hold procedures will have to examine and update those policies in light of the amendments. To the extent that a company lacked such policies before the amendments to the federal rules took effect, they should work with outside counsel to establish them as quickly as possible. Corporations also should work with outside counsel to develop procedures setting forth the steps that should be taken once the company learns that litigation is reasonably anticipated. So-called “electronic discovery readiness” plans should advise those responsible for preservation how, when and to whom litigation hold notices should be issued and what steps should be taken to ensure that relevant documents and data are preserved. Having a document-retention policy, an e-mail use-and-preservation policy and an electronic discovery readiness plan in place will earn a business favor regarding an insurance underwriter’s pricing and coverage decision. Further, insurance underwriters will want to be sure one or more individuals within the company are responsible for addressing electronic discovery issues such as identifying key individuals, issuing and monitoring litigation-hold notices and working with outside counsel to ensure that relevant documents are preserved, collected and produced. Typically, the “electronic discovery response team” is an interdisciplinary group consisting of members of the in-house and outside legal team, members of the IT group and, likely, key business personnel. Ideally, the electronic discovery response team would combine the technical expertise of IT with the legal experience of attorneys and the enterprise knowledge of the business people to give the company the broadest possible coverage in dealing with electronic discovery issues. The advantages of preparation Insurers will be looking for those corporations that have taken steps on an enterprisewide basis to reduce the costs associated with electronic discovery and to prepare themselves for anticipated litigation involving electronic discovery. Under newly amended Federal Rules of Civil Procedure 16 and 26(f), litigants are required to make an initial disclosure regarding potential sources of ESI and to meet and confer with their adversaries regarding sources of ESI that are “reasonably accessible” or “not reasonably accessible.” One method through which a business can demonstrate to an insurer that it has prepared for potential litigation is by, before being involved in a lawsuit, working with its electronic discovery response team, its outside counsel and possibly a third-party discovery vendor to locate potential sources of relevant data, identify technical and business staff who will be responsible for such data and categorize whether those data are accessible or not. Doing so will reduce litigation costs in several ways. First, it reduces the amount of time required for outside counsel to become reasonably familiar with the sources of company’s ESI, which counsel will need to do to participate in the initial meet-and-confer session under Rule 26(f). Second, once completed, such a “data map,” if properly updated, can be used in multiple litigation. Insurers will want to know whether a company that has created a data map has procedures in place to ensure that it is regularly updated. Third, by analyzing the potential sources of data ahead of time, a company will be in a better position to limit the scope of its preservation and production efforts to only those sources likely to contain data relevant to the litigation. Such efforts by businesses in attempting to reduce litigation costs are likely to be met with favorable policy premiums, more favorable insurance coverage terms and an increased scope of liability coverage by insurers. Finally, the extraction and production of relevant ESI is one area in which third-party electronic discovery vendors will most likely come into play before and during the litigation process, and is a significant source of cost for an insurance carrier. If they have not already done so, it is likely that liability insurers soon will be creating lists of preferred third-party electronic discovery vendors with which they will work. Members of a company’s electronic discovery response team should be given the task of interviewing third-party electronic discovery vendors and coming up with a short list of vendors with which the company will work. By doing so, the company can present an insurer its list of third-party vendors at the underwriting stage and avoid any issues with the selection of vendors once litigation has commenced. Moreover, several vendors and document review managers have created artificial intelligence software to make the reviewing of responsive documents more efficient and inexpensive. In appropriate cases, such services streamline the production process and reduce the costs of having legal personnel sift through the data themselves. If a corporation is considering using such document-review technology, it should discuss the costs involved with the underwriter before engaging such a vendor and, ideally, prior to an underwriting decision. Precautions will be rewarded The potential business litigant can avoid future costs of high insurance premiums and adverse sanctions if it is willing to spend money and resources before it becomes a party to a lawsuit. Insurance underwriters will take note of the precautions that these potential litigants have taken and will factor these precautions into the pricing of their premiums. These litigants, as opposed to those litigants that do not take the preventative measures of installing a discovery response team, will be looked upon favorably when they apply for insurance policies covering their litigation losses. Additionally, they will avoid becoming another in a growing number of litigants whose prospects of winning at trial on the merits of the suit have been severely dampened by the imposition of sanctions. Planning for electronic discovery is not an easy task. It requires a combination of technological savvy and legal experience in the electronic discovery field. But with the proper mindset of preparing for litigation and discovery requests before litigation commences, the potential business litigant can receive favorable treatment from insurance carriers and avoid crippling monetary and evidentiary sanctions imposed as a result of spoliated evidence. Edwin M. Larkin is a partner in the New York office of Chicago-based Winston & Strawn. He is East Coast chairman of the firm’s e-discovery practice group. Associates Paul Siciliano and Brandon S. Clar assisted in the preparation of this article.

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