Insurance brokers cannot always "avoid E&O," and often are faced with the separate but related decision of how best to "defend E&O." This process typically begins as soon as the broker reasonably believes an E&O claim might be asserted. This month we address the importance of litigation hold memoranda and retaining records, both electronic and paper, when litigation is pending or foreseeable.

Parties to a lawsuit are under a duty to preserve what they anticipate to be requested in a litigation. Failure to do so could lead to severe penalties against the offending party. The duty to preserve begins when the party in possession of the evidence knows litigation by the party seeking the evidence is pending or probable, and the party in possession of the evidence can foresee the harm or prejudice that would be caused to the party seeking the evidence if the evidence were to be discarded.

Failure to preserve the evidence can lead to sanctions of varying degrees, from a finding in favor of the harmed party, suppression of evidence, an adverse inference (an instruction to the jury that the evidence was destroyed by the offending party) and fines. Three factors are used to determine which sanction is to be imposed :

1. The degree of fault of the offending party
2. The degree of harm to the other party
3. Whether there is a lesser sanction that would avoid substantial unfairness to the aggrieved party.

Ultimately, the severity of the sanctions depend upon the efforts taken to preserve relevant information. The court reviews what steps a company took to implement a litigation hold and then monitor employees' compliance. Thus, it is advisable for an insurance agency, once litigation appears imminent, to develop, implement and monitor a litigation hold process that is reasonable and defensible under the circumstances. The nature and scope of a particular litigation hold process varies widely depending on the company and the litigation matter.