The abbreviation "EDD" stands for "Electronic Data Discovery," and is also commonly referred to as "E-Discovery." A recent survey indicates that the EDD market grew 94 percent to $833 million in 2004 from the previous year, and projects the EDD vendor costs in the United States to grow to $2.8 billion

Such costs, incurred in litigation, frequently are treated and paid by insurers as disbursements in connection with insured claims. These costs are substantial and will only grow larger over time.

However, litigants may be required to spend substantial monies on EDD even before litigation commences, raising an issue as to whether and when insurers will pay for EDD-related expenses.

Historically, civil discovery was a relatively straightforward process. This process almost exclusively involved an exchange of paper copies of documents that reflected the responsive paper records of the producing party.

With the advent of electronic information, today's discovery process addresses a markedly different scope of requested information, and courts have, necessarily, taken steps to address these issues.

Generally, courts have adopted a simple rule: the more sophisticated the information technology in which a business invests, the greater its digital information preservation obligations.

Additionally, the more ways in which a business seeks to share information and enable access to information, the broader its preservation obligations.

In 2004, in Zubulake v. UBS Warburg, a federal court in New York issued a series of important decisions on litigants' duties with respect to EDD.

The key ruling in the Zubulake ease for insurers and buyers of commercial insurance dealt with the complex discovery issue of "litigation holds."

A litigation hold is simply a communication within a business organization ordering that all information--whether paper or digital--relating to the subject of a dispute being addressed by a current or impending litigation be preserved for possible production in the litigation.

A party's failure to timely impose a litigation hold can result in court-ordered sanctions, including both monetary sanctions and the imposition of adverse inference charges relating to the information destroyed because an effective litigation hold was not put in place in a timely manner.

Businesses cannot afford to take the requirement that they issue litigation holds lightly.

Executives of Phillip Morris realized this firsthand in 2004 when a court in the District of Columbia imposed a $2.7 million fine against the company after finding that company emails had been erased in contravention of an existing litigation hold.

The court ordered that the company's e-mail custodians not be permitted to testify at trial. Moreover, each of the 11 executives named in the litigation received individual fines of $250,000.

In another case, a district court adopted in full a judge's recommendation regarding a plaintiff's motion for sanctions based upon the defendant's failure to preserve relevant documents.

Zubulake made it clear that litigation holds are appropriate not only when litigation actually has commenced, but also when the prospect of litigation appears to be "reasonably anticipated."

Thus, the duty to preserve documents can arise well before a complaint has been filed, with the duty to preserve subjectively imposed on a party that believes litigation is reasonably anticipated.

As a California federal court has pointed out, the point at which litigation will be deemed to have been reasonably anticipated is an issue of fact, and will be decided by a court based on the specific facts of that case.

In Housing Rights Center v. Sterling, the court granted the plaintiff's adverse inference motion, and rejected the defendant's argument that a litigation hold was required only when litigation was commenced.

The court held that the litigation hold should have been put in place when the plaintiff sent a demand letter to the defendant--a full year earlier.

The Zubulake court also held that outside counsel must undertake certain duties once litigation against its client is, in fact, reasonably anticipated.

These measures include identifying the need for, and managing the scope of, the litigation hold, maintaining communication with client's employees and information-technology personnel to determine whether all potential sources of information have been inspected, and performing ongoing compliance monitoring.

The Zubulake decision also addressed the issue of cost-shifting where the scope and size of the discovery sought by the requesting party places a disproportionate burden on the producing party in terms of efforts or costs.

Judge Shira A. Scheindlin identified a series of factors courts should consider in determining whether to shift some or all of the costs associated with EDD production to the requesting party.

Such cost-shifting considerations will prove increasingly important over time, particularly in litigation where there is a notable mismatch in the size or wealth of the parties to the litigation.

Litigants will not be able to use anticipated EDD-compliance costs alone as a means of forcing the other side to the settlement table.

In addition to taking UBS' counsel to task for ineffectively obtaining and producing UBS e-mails, Judge Scheindlin also held that outside counsel must undertake certain duties to ensure that its client is properly managing its EDD responsibilities once litigation against its client is pending or reasonably anticipated.

These duties place outside counsel in a difficult position in their dealings with their clients, and put clients in a difficult position in their dealings with their insurers.

Given that broader document retention and search efforts result in an allocation of additional client resources and cost, an immediate tension is created between the outside counsel's broad and ongoing obligations, and the client's interest in minimizing the disruption and cost attendant to a given litigation.

Moreover, outside counsel are now expected to undertake and develop a strong familiarity with the numerous nonlegal issues related to electronic data management and storage.

This, too, results in additional expense for clients. Most insurance policies do not spell out the insurer's payment obligations for EDD costs, leaving the issue unresolved until an insured claim is actually presented.

Buyers of commercial insurance also need to consider the inevitability of EDD obligations and costs in responding to claims against insured businesses.

Given the likely materiality of EDD costs, it makes sense for insureds and their D&O insurers to discuss the possible approaches to EDD efforts and vendors at the outset of the case.

And it makes sense for the insureds to obtain the D&O insurers' consent before incurring EDD costs--especially if the insurer will be asked to pay for any of those costs.

Without a prior agreement between the insured organization and its insurers, insurers may refuse to pay for any EDD expenses incurred without their consent, even if they might subsequently benefit from the defense of a claim.

JOHN F. MCCARRICK is a partner in the Insurance and Reinsurance department of Edwards Angell Palmer & Dodge, a national law firm. He may be reached at riskletters@lrp.com.