Decision: hold, or not to hold: insurers must decide whether a litigation hold is a necessary step in the claims process.

As part of my work with the American Bar Association, I recently received a great question from the manager of the coverage litigation department of an insurance company: Is a claims department required to issue a litigation hold for all coverage denials?

The term "litigation hold" refers to a party's obligation to preserve evidence. This duty always has existed, but it has become a more difficult issue in the computer era because electronically-stored information is inherently fleeting. It is constantly being saved, changed and erased. Electronically-stored information quickly can become unavailable.

The obligation to provide a litigation hold often is drawn from a series of decisions concerning discovery obligations, such as in Zubulake v. UBS Warburg, from the United States District Court for the Southern District of New York. The Zubulake court held that: "Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents."

The key question is: When does a claims department "reasonably anticipate" litigation?

Courts have not yet given a clear answer to this question. I have not found any cases addressing an insurer's obligation to issue a litigation hold. That said, I would argue that litigation holds are not required in every denial.

The reality is not every denial causes insurers to anticipate litigation. In fact, litigation arises from only a small percentage of all denials. Litigation is the exception, not the expectation.

Also, practical and economic considerations--factors that are considered in both Zubulake and the Federal Rules of Civil Procedure--militate against litigation holds in all denials. The amendment to Federal Rule 26(b)(2) expressly recognizes that "undue burden or cost" are limiting factors in the obligation to produce electronically stored information. Equating denials with litigation anticipation would keep insurers in a constant hold mode. The burden would be crushing.

Finally, while policyholders surely want to maximize their access to insurers' information, policyholders may want to pause before arguing that litigation is anticipated at very early dates. The litigation-hold obligation applies to policyholders as well as carriers. Moreover, early anticipation of litigation is a two-edged sword because anticipation is a critical element in the qualified protection given to trial preparation materials under Rule 26(b)(3) of the Federal Rules of Civil Procedure and many state law counterparts.

An early date for anticipation of litigation might make more material subject to a litigation hold, but the early date also might extend trial preparation protection to more material.

The 2006 amendment to the Federal Rules try to address these issues in Rule 26(f) that requires the parties "to discuss any issues relating to preserving discoverable information," including "electronically-stored information." Hopefully, these early conferences will resolve many of these issues. But if litigation was anticipated long before the suit began, this conference will occur long after the preservation obligation began. Conferences will occur after parties will have had to decide whether litigation anticipation required a litigation hold.

Ultimately, anticipation of litigation, much like relevance and other discovery issues, is likely to be a factually intensive question, decided case-by-case. And as the law develops, we will almost certainly see conflicting decisions on this issue.

Alan S. Rutkin, a Best's Review columnist, is a partner at Rivkin Radler LLP, Uniondale, N.Y. He may be reached at [e-mail].