Document Destruction Could Prove Painful

There have been other cases where, even in the absence of clear wrongdoing, companies have faced stiff penalties for failing to preserve documents and electronically stored data in the face of an investigation.

Not only does the failure to preserve evidence bring with it the potential for criminal penalties, but it often results in adverse inferences that harm a company’s position relating to the subject matter of the litigation or investigation.

In the context of litigation, it should be noted that proposed revisions to Rules 26 and 34 of the Federal Rules of Civil Procedure would specifically incorporate electronically stored data into the definition of discoverable evidence and potentially ease the discovery of such evidence.

The proposed rules also allow for broad protective orders relating to the preservation of evidence, and records retention polices need to be flexible enough to comply with such potential directives.

Implementing A Policy

Existing records retention policies generally break down documents by type or subject matter, and provide tables showing the retention periods for each type of document or file.

Determining the appropriate retention period for a given class of documents may be complicated by the number of potentially applicable laws, regulations and business considerations. Moreover, the policy must strike the appropriate balance between which specific types of documents should be kept and which discarded.

The cost of implementing a document retention policy is large enough–the cost of paying lawyers to sift through unnecessary piles of documents once litigation commences should be cut down to the extent possible by clear guidelines regarding document destruction.

The major challenge for most insurers is in creating the plan to implement the policy, which is also where the real costs begin. It is no longer sufficient merely to compare the costs associated with onsite storage of paper documents to the costs of archiving them elsewhere.

The management of electronic data is an immense challenge, particularly in the face of changing media and technologies. An inventory of all potential sources of electronically stored data should be undertaken as a starting point. From there, it is often a matter of what the latest technology can provide.

For example, the market offers competing e-mail and instant messaging storage and archiving systems, some of which are specifically geared to track and implement compliance objectives automatically under various laws and regulations. This is in addition to the usual safeguards against the theft, corruption or loss of electronic data, such as virus-protection software, firewalls, encryption technology and backup systems in the event of system failure.

Despite the best information technology has to offer, it is likely that employees will be left with making decisions respecting which records to maintain and which to discard. Insurers should delegate document retention authority among different departments and maintain reporting and auditing structures.

Ultimately, to be effective, appropriate document retention and destruction practices should be incorporated into the daily routine of the company.

Dan H. Wright is an associate in the Insurance and Reinsurance Department of Edwards & Angell in Providence, R.I., a national law firm focusing on private equity and venture capital, financial services and technology. He may be reached at [email protected].

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Even if an insurer has not engaged in wrongdoing, it may still be vulnerable to stiff fines or criminal penalties if, when faced with a threatened probe or litigation, it fails to preserve potential evidence.