By: David H. Levitt

Insurers face e-discovery challenges on a regular basis. Most often, it arises in the context of claims against their insureds, being defended by insurer-retained defense counsel.

In that context, given cases such as Zubulake v. UBS Warburg LLC, 229 FRD 422 (S.D.N.Y. 2004), which require outside counsel to advise a client about the need for a litigation hold, and to discuss the steps to be taken to preserve electronically stored information (“ESI”), insurers must deal with the expense incurred on behalf of their insureds to preserve, maintain and produce ESI.

But insurers also face a more direct challenge regarding ESI — their own internal data and systems. This challenge is exemplified by the recent decision in Opperman v. Allstate New Jersey Ins. Co., 2008 WL 5071044 (D.N.J. 2008).

In Opperman, Allstate was sued in a class action which asserted that Allstate systematically underpaid fire loss claims. The class alleged that Allstate had represented that the amounts it offered to pay for the value of the property were based upon Home Depot prices. But when the plaintiffs visited a Home Depot store, they were unable to find the goods at the Allstate-listed prices.

Allstate used a customized third-party software to adjust its property losses, and this is where the e-discovery issues arose. The plaintiffs sought production of the software program.

Allstate and the third-party vendor resisted, arguing among other things that the program was a trade secret, that the license prohibited distribution of copies, and that the plaintiffs did not need access to the program itself for purposes of the litigation.

The court rejected all of these arguments. It found that appropriate safeguards had been put into place to protect the trade secrets.

It found that the license limitations could not be used to restrict the plaintiffs’ access to the software, especially where, as here, the plaintiffs had made a “compelling case why they needed access” to the software.

Further, the court required production of a copy of the software:

"in a form and manner to assure that it is accessible and useable for the purposes described in plaintiffs’ moving papers ['to determine how the system process and/or manipulates the Home Depot pricing material data ... to figure out exactly what happens to ... Home Depot material pricing from the time it’s transmitted from home depot to MS/B, the journey it takes through the system before it ends up on the estimate ...'].

"Allstate shall produce with the software all passwords, keys, activation codes, etc., that plaintiffs need to access the software and data referenced in this order so that plaintiffs can use the software in the same manner in which it was used by Allstate, except the software will be used in a stand-alone environment."

In other words, the court ordered Allstate to produce the entire software program, so that the plaintiffs could, in their discretion and in their own office, run through it as they deemed fit.

Insurers use all sorts of software programs and computer storage media in their business. Many claims departments are paperless. Software programs are used to determine the value of claims, to set reserves, to consider underwriting of particular risks, and the like.

Moreover, particularly in some claims departments, claims reports are “living” documents — that is, they are not maintained statically but instead are automatically modified whenever an entry is made.

Perhaps some of the earlier versions are archived or otherwise stored in some form of backup — where they may or may not be “reasonably accessible” within the meaning of FRCP 26(b)(2)(B) — but perhaps they are not.

If not, some data might be lost in the ordinary course of business, creating additional challenges for establishing and enforcing a litigation hold once the program itself, or the data maintained within the program (such as a claim file) is placed at issue.

It is doubtful, though, that in their selection, configuration and use of this technology, insurers have taken into consideration that the technology itself is potentially subject to discovery, especially the potential that the production might be required in its most pure format such as ordered in the Opperman case.

For the most part, the literature on e-discovery and insurers deals with the costs and procedures faced by insurers in representing their insureds. Very little has been written about how insurers handle their own internal systems.

In our experience, insurers have not yet necessarily spent the time and resources to do IT audits of their own systems, and to confirm that they have policies and procedures in place to maintain their own ESI for those occasions when their own procedures are at issue, such as bad faith claims, insurance underwriting battles arising from policy language changes over a period of time, or alleged misrepresentation of property values as presented in Opperman.

It would behoove insurers to consider this risk, as they consider risks which they underwrite for insureds, and act accordingly. Insurers should consider the wisdom of putting document retention/destruction policies in place. Steps to consider include establishing litigation hold procedures for their own files and ESI.

Wisdom suggests developing data maps identifying locations where data may be stored, how long data is stored in each such repository, and any problems that might be encountered if data from that depository many need to be produced.

And insurers should particularly consider an audit of the software programs that they use which impact how they deal with claims by and against their insureds — those processes which impact how the insurers interact with the outside world which are most likely to become the source of litigation.

Further, that audit should consider whether a “discovery” version of program might need to be available. The logistics of just how the “software program” itself, as it resides on the insurer’s servers and systems, presents its own set of challenges.

Just how is the program, without all of the underlying data which has been inputted into the system in the course of ordinary use, supposed to be produced as a stand-alone entity?

Insurers ought to take the time to consider these issues. Otherwise, it is only a matter of time until the e-discovery bug bites.

- Reprinted by permission of Law 360

This publication has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.