Uncovering the best way to manage documents and electronically stored information (ESI) is of the utmost importance to insurers. Document management affords a company many benefits but lately, separating itself from the chaff is its role in electronic discovery (e-discovery), which involves the access and use of information and data created or maintained in electronic form for the purpose of lawsuits.

Released late last year, international law firm Fulbright & Jaworski LLP’s annual U.S. Litigation Trends survey found that 93% of insurance companies faced at least one new lawsuit in the past year, with 33% facing more than 20 new actions and 54% of American insurers reported facing at least one $20 million suit. In addition to this, the report states that 79% of insurance companies filed at least one suit themselves in the past year acting as plaintiff, with 28% of the suits seeking in excess of $20 million.

The key to insurers dealing with such legal action is the discovery process—the period of time when the company is asked to produce all relevant documentation and turn it over to counsel. This stage is critical, as the proper document management system will enable faster search, recovery and transference of ESI, but without the proper solution, or if done incorrectly, can lead to serious consequences. Take, for example, the story of Bahamas-based Phoenix Four Inc. According to Atlanta-based attorney Jon Neiditz, the investment company was asked to produce documentation for a lawsuit it filed against Strategic Resources Corp. (SRC), an investment adviser and Phoenix’s client. SRC told its insurer in 2004 it had a dispute with Phoenix, at which point Phoenix stopped all payments to SRC, resulting in the cessation of SRC’s operations. Shortly thereafter, SRC delivered all paper records and electronic documents to Phoenix, leaving behind marketing documents, old prospectuses, trade publications and numerous computers, which the landlord sold.

Phoenix filed suit against SRC in May 2005, and counsel asked Phoenix to produce all relevant electronic and paper documentation. Phoenix said it found no electronic documents and advised its counsel none existed. On the eve of the trial a year later, after close of the discovery period, electronic documents were found behind a hidden partition on SRC’s old server, which the landlord had kept. Phoenix notified its counsel, which, in turn, notified the opposing counsel. In the end, the judge found Phoenix guilty of gross negligence in the discovery process — saying they needed to push harder and scour for all electronic documentation — and leveled monetary sanctions against both Phoenix and its counsel.

“What it came down to was Phoenix represented that there were no computers or electronic collections to search because SRC was out of business,” Neiditz explains. “But later, when this information came out, the court said that counsel had a duty to ask what happened to the computers and to investigate further. Because they didn’t, both the company and the lawyers were seriously sanctioned.” 

While this is a worst-case example of what can happen to companies facing the prospect of e-discovery, it’s something insurers should keep in the back of their minds, especially when it comes to facilitating discovery and choosing the right system to manage its documents.


A report from Forrester Research Inc., Cambridge, Mass., in late 2006 projected that spending on e-discovery technology will grow from $1.4 billion in 2006 to more than $4.8 billion in 2011 as enterprises realize that they have no choice but to prepare for e-discovery. This makes the task of finding a document management system that addresses e-discovery extremely important for every carrier.

Document management solution provider Cabinet NG Inc., Madison, Ala., is one of many in the field, and specializes in helping companies manage large volumes of documents, optimize workflow and improve efficiency while preserving established processes.

“Insurers want to implement systems that will help them get better control of their documents, and part of this process is how to address e-discovery,” says James True, VP of business development, Cabinet NG. “Usually clients approach us at a broader level, but discovery is definitely one of the requirements.”

Cabinet NG has a number of insurance company clients, with the majority being offices of 30 to 50 people. One such client, Corona, Calif.-based Rick Nay Insurance Services, an eight-person retail brokerage specializing in commercial truck insurance, used to keep all of its files in boxes before switching to Cabinet NG’s paperless solution.

“We used to have boxes and boxes of paper documents and were to the point where we needed to rent a storage unit,” says company president Rick Nay. “We didn’t have any more room to store files. Now, because of our document management system, we aren’t forced to store our boxes or rent a service to keep our files, as the law requires us.”

Nay says the California Department of Insurance requires companies to keep their files for seven years and, because all of his files are digital and he has everything backed up, he doesn’t worry about the loss files if there was a disaster.

In terms of what he saves, Nay says, “We’re storing the actual insurance policies, the applications and disclaimers signed by the customer, and everything that would go in the file. Everything that’s in writing is scanned in—motor vehicle reports, e-mail, communications between us and the insurance company. The only thing that’s not included are digital phone records, which is something we’d like to add in the future.”

Another Cabinet NG client, 29-person Liability Insurance Administrators (LIA), is a Santa Barbara, Calif., company that sells E&O insurance to real estate appraisers. The company uses Cabinet NG’s CNG-SAFE system to manage electronic storage of documents from the application through underwriting and issuance of quotes and policies. Given the nature of its business, LIA uses the system for workflow and management reasons, but given its familiarity with the discovery process (suits are filed almost daily against its customers), the company is required to provide its clients with all policy information, as well as all other necessary documentation, making the e-discovery aspect of great value.

“We collect all the information from our insureds, which is the beginning of discovery,” says Robert Wiley, assistant VP, LIA. “We collect the written threat, the appraisal report and, in this situation, any supporting information, such as the policy information, which we send to our claims counsel. We have two attorneys on staff, so once physical documents arrive in the mail, we can scan it immediately, send it to them electronically and they process it as needed.”


The major obstacle to shifting to a paperless document management system, in addition to acquiring additional drive storage space, according to both Nay and Wiley, is the never-ending scanning of documents. All employees of Rick Nay have scanners on their desks, and scan documents into the system as needed, whereas at LIA, scanning evolved into a much bigger issue.

“With lawsuits and further discovery, it’s conceivable you have a stack of paperwork standing two feet off your desk—that’s a lot of paperwork to be scanned,” Wiley says. “We just didn’t understand, prior to implementing the system, how long it would take to scan those documents.”

Wiley says the company purchased three large scanners, and has two people working on bulk scanning full-time. “In most cases, two of the scanners are being utilized throughout the day; the third may be utilized most specifically by one of our people who handles our lawsuits,” he explains. “Most of our underwriters and staff have a smaller, individual scanner on their desk where they can scan documents throughout the day, but if they have anything in bulk, it goes down to one of the scanning stations.”


While carriers and agents need to keep tabs on e-discovery, ultimately, they’re not the ones who have to do the actual discovery.

“In the event of a lawsuit, discovery is really done by the attorneys,” Wiley says. “On our side, even though we’re in a professional liability field, it’s a big issue for us. Our document management software isn’t so much the meat of e-discovery as it is briefing our claims counsel by using it to get them information from our files and our client’s files. In the event of a lawsuit, it’s easy for us to send claims counsel documents because we have all their policy information that we can immediately send electronically.”

Columbia, S.C.-based Nelson Mullins Riley & Scarborough’s Neiditz believes that “litigation holds”—notices to people within a company to stop the routine records retention destruction procedures for documents that are anticipated to be required in a pending lawsuit—are the most important thing for insurance companies to keep in mind about the discovery process.

Holds commonly apply to all existing records, documents, files and e-mail—both electronic and hard copies.

What’s required in terms of documentation to produce in the discovery phase will vary depending on the case. Therefore, in addition to all physical documentation, the law may go after a company’s voice mails, instant messages, metadata, legacy data, backup tapes and even ephemeral data. A recent case permitted the requesting party to go after a computer’s RAM.

“The key is to have a plan that includes a preservation process,” Neiditz says. “Many small- and medium-size insurers outsource their document management. If they outsource it, they must ensure the outsourced documents are adequately controlled, both from an e-discovery perspective and a security perspective. Insurers also must ensure that certain things are in their contracts so the vendors working for them are preserving things when they say to preserve. If the vendors don’t preserve, then it’s the insurer that will be hit with spoliation sanctions.”

Neiditz stresses that insurers must be able to stop destruction of documents immediately when faced with a hold. Regardless of whether the company has document coordinators managing destruction in different business units, or whether the IT department does it automatically, insurance companies must know they’re able to stop document and ESI destruction when necessary. This, he says, is of paramount importance in avoiding spoliation sanctions.


Neiditz offers what some in the insurance industry would consider a controversial piece of advice to insurers regarding document management and document retention: Keep things when needed, but don’t keep everything forever—especially e-mail.

“You don’t want to keep all your e-mail forever,” he says. “There’s no reason. It’s expensive and will result in massive search costs if you get sued. There’s the additional problem of people writing things that can be taken out of context, which can be presented later as a smoking gun. The idea is to keep what you need to keep and to get rid of the rest. That’s the bottom line.”

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