A Hidden Risk When Obtaining D&O Insurance (Part 1 of 2)

E-Discovery: A Hidden Risk When Obtaining D&O Insurance
Part 1 of 2

Electronically Stored Information (“ESI”), as defined by the Federal Rules of Civil Procedure (“FRCP”) refers to electronically stored information, which constitutes evidence to be produced during pretrial discovery.  This discovery process is known as electronic discovery (“e-discovery”).  E-discovery can be especially expensive for corporate litigants, yet corporations do not pass these costs onto the officers, directors and employees who are custodians of their ESI.  Instead, corporations manage their litigation risks by obtaining Director’s & Officer’s Insurance (“D&O Insurance”).  However, the amount of D&O Insurance coverage available to resolve litigation or protect against judgments is limited by the given policy available to the party seeking coverage.  In addition, the amount of coverage provided by the policy is reduced by litigation fees and expenses applied against the coverage.

In order to obtain the maximum coverage under the given circumstances of each individual case, it is necessary for corporate counsel, their insurance agents and insurers to understand not only the potential exposure to the company based on its business activities, but also to assess the risk of incurring e-discovery costs which may waste D&O Insurance coverage.  Therefore, familiarity with the volume of ESI a given company typically generates, where the ESI is stored, the various formats of the ESI and the process for retrieving the ESI are key factors to be considered.

There are given requirements involved for almost any party involved in litigation.  These litigation requirements include but are not necessarily limited to preservation of ESI, analysis and management of various formats of electronic evidence and its attendant meta data, chain of custody reporting, and protection of legal and statutory privilege are all of paramount concern.   Unlike hard copy documents, ESI is volatile, contains embedded information (e.g. metadata).   Unfortunately, particularly in a struggling economy, litigants are now being forced to confront the ultimate dilemma concerning e-discovery:  foregoing meritorious claims and/or defenses due to diminishing return on unpredictable legal fees.

Moreover, certain federal (and some state) statutory provisions make e-discovery a mandatory concern for corporations, and the cost of preserving ESI is a regulatory concern under (e.g., Sarbanes-Oxley, Gramm-Leach Bliley, HIPPA, etc.) which is equal to the concerns of litigation.

* This is an abridged version of the article written by Daniel Garrie and published in the Los Angeles Daily Journal.