Insurance company profitability has always depended as much on managing legal risk as it does on successful sales and marketing, but as of Dec. 1, 2006, the challenge of minimizing legal costs has become more difficult.

The reason is that changes to the Federal Rules of Civil Procedure (FRCP)–the government-mandated rules of engagement for all legal proceedings–impose greater risk and expense on carriers to ensure that they are complying with a sweeping update of rules that govern the process of electronic discovery.

While the changes are long overdue, the new rules create burdensome obligations on both property/casualty and life/health carriers that demand more skillful application of technology to legal matters and an unprecedented level of coordination between the general counsel and chief information officer.

A higher bar

The revised rules require carriers to be much better at identifying, finding and producing potentially millions of electronic documents scattered across the country that can be used by plaintiffs or defendants in a legal proceeding. At the same time, the new rules make it far more difficult to hide behind the defense that finding documents is too expensive or difficult.

In this new environment, insurers need to have a clearly defined process of extracting electronic documents from mainframes, desktops, laptops, PDAs and specialized IT applications and turning them into admissible evidence for legal proceedings. They also need to be prepared to address the challenge of organizing and preserving unstructured data that resides on technology platforms that were not designed to be document retention systems.

To be FRCP compliant and make the most of the rules, insurance companies need to do the following:

o Establish a definable and defensible IT process. The new rules require all companies to clearly spell out their information technology processes to opposing counsel and articulate the process far earlier in a legal action at the first meet-and-confer meeting. To achieve this objective, companies need to implement a fixed business process for managing all electronic discovery requests. The process should establish permanent rules, including rules that minimize the duplication of data and prevent the inadvertent disclosure of privileged documents. In satisfying this obligation under the new rules, carriers should not provide opposing parties with so much access to information systems that they might compromise security or divulge trade secrets.

o Centralize corporate-wide data collections for all legal actions into a single, enterprise-wide repository. The new rules impose a greater responsibility on companies to ensure the integrity of data and avoid the inadvertent spoliation of electronic information. To minimize risk, carriers need systematic storage protocols to create a single, complete copy of all data to eliminate the duplication of records and demonstrate that corporate data is reasonably accessible. The best way to achieve that objective is to establish an independent, online data repository that can be used by hundreds of legal teams and create a discovery lifecycle management protocol.

o Standardize the form of production for all electronically stored information. The new rules reward companies that have a single production format for all electronic discovery requests. The production format is central to the electronic discovery process because it defines whether the documents are to be prepared in Microsoft Word, as an image file or some other format. The format decision is very important because it has a direct bearing on cost and speed with which the documents can be produced. Under the new rules, companies now have a real incentive to establish a consistent, corporate-wide production format. This will enable insurers to reasonably reject requests from opposing counsel for alternative production formats that increase cost and risk.

o Establish corporate control over data. Insurance companies typically engage a large number of law firms to represent them in legal matters, and today those firms frequently control the electronic documents. Because of the greater process imposed by the new rules, insurance companies have a unique opportunity to more closely manage their repository of electronic documents. Better control of sensitive corporate documents reduces the risk of losing documents or of inadvertent disclosure to opposing counsel. It will also eliminate the risk in having vital corporate information disbursed among the information management systems of dozens or even hundreds of outside law firms.

o Focus on cost control. The new rules add to the already high cost of managing and storing millions of electronic documents over potentially many years. An effective way to reduce the overall costs is to eliminate unnecessary duplication of privilege reviews. Once a document has been reviewed for privilege, the results of that review can be captured and reused in subsequent proceedings in which such documents might be relevant. Streamlining the process can result in substantial cost savings. The highest single cost of discovery is the attorney time required to review data prior to its production.