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The Complex Insurance Coverage Action's Case Management Process: From Complaint Until Trial - The Policyholder's Prospective

July 1, 2002, John E. James

This article has been published for 
Mealey's Conference on New Insurance Issues in the Northeast 
June 6-7, 2002

I. INTRODUCTION

Policyholders and their counsel often are under the impression that efficient litigation management is a one-sided affair.  While the objective for them, as with virtually all plaintiffs, is to obtain recovery as soon as the administration of justice in a particular jurisdiction will permit, insurance companies and their counsel appear in many cases to seek the opposite.  The insurers' perspective is perceived to be to prolong the day of reckoning because the costs of litigation, particularly in complex coverage cases, usually are less than the earning power of the retained value of the policyholder claims asserted against them.  The task for the policyholder in larger cases is to find a way to achieve a resolution of the claim relatively quickly without sacrificing its worth unduly.  In smaller cases the policyholder usually faces the prospect that the costs of the controversy may be greater than even a successful end result.  As will be discussed in the following sections, policyholders therefore need to understand the trade-offs between efficiency in litigation management and the maximization of the ultimate return at the end of the case.

II. PRE-COMPLAINT PREPARATION

As in any case, from the plaintiff's perspective, the policyholder, theoretically, has the advantage of knowing what its claims are and in some cases the time to investigate, analyze, and prepare them so that the Complaint is merely the tip of the proverbial iceberg, with the principal weight and content of the policyholder's case to be revealed as the case management process unfolds.  In the ideal world, the policyholder and its outside counsel will have pored over the company's insurance policies to determine which policies apply to the underlying losses or damages at issue.  In the case of long-tail claims, such as those environmental and products cases that have defined the atmosphere of complex insurance coverage litigation since the 1980s, the policyholder may have secured the services of consultants who could reconstruct a policyholder's insurance coverage if not all the policies had survived the vicissitudes of changes in corporate ownership and risk manager identity and competence.  If the policyholder were extremely well prepared it even may have sought to approach its insurers to engage them in dialogue concerning the resolution of some or all their claims without resort to litigation, a prospect that almost never worked in the 1980s and 1990s with respect to the more controversial environmental and products claims.  Prudent policyholders and their counsel would only have undertaken this approach if they had their complaints ready to file in the jurisdiction of their choice.

In that regard, knowing the right jurisdiction and the right choice of law to govern the dispute could make or break the case.  In the early days of the complex environmental and products cases, when the law in most jurisdictions was unclear on many key coverage issues, policyholders' counsel gamely predicted how the law should be resolved - if they were lucky, they got the right result, but in many cases the insurers held the field.  The value to the policyholders who were bold enough to file early with respect to coverage issues that were new was that there was a high degree of uncertainty relating to the outcome.  Insurance companies cannot abide uncertainty - their entire corporate culture rests on known experience and empirical data from which they can extrapolate relatively certain pricing and profits.  Many policyholders obtained favorable settlements with their insurers, usually after an expensive period of litigation because of the uncertainty factor.

As indicated above, the ideal situation for a policyholder in a coverage dispute is to have the luxury of time to develop and understand its case so that it will have a better sense of its attainable goals.  Many policyholders, however, confront a different situation when the nature of the underlying liability they face requires more immediate action.  This situation often occurs when the policyholder is seeking payment of defense costs, but it also happens in cases in which the nature of the underlying action, or more likely, the policy requirements mandate a prompt decision as to the need to file suit.  In those types of situations, policyholders and their counsel need to coordinate their activities in a manner that will permit them to strike first in the jurisdiction that is most convenient from a choice of law perspective as well as from an administrative standpoint.  While coordination with counsel in the underlying action(s) that are the source of the coverage dispute is important in any case, that effort is even more critical in situations with time exigencies.

Finally, for the corporate policyholder in a major environmental or products liability coverage case, one of the most important preliminary tasks is document control.  It is vital to locate all documents that have any conceivable relevance to the coverage action.  While corporate document retention policies and programs may well have resulted in the destruction of pertinent records in the ordinary course of business, the moment that a coverage action is contemplated is the moment when a hold must be ordered as to any further discarding of possibly relevant documents.  The order to preserve all available records must come from the highest levels of the company in order to be effective.

It cannot safely be assumed that older records no longer exist even when a company is meticulous about destroying documents no longer needed for business purposes.  If there are or have been underlying claims or cases in litigation, copies of older documents often are in the hands of underlying plaintiffs' and defendants' counsel.  Many companies are notorious for having large circulation lists, and many businesspersons are packrats with their personal files.  With respect to more recent documents, hard copies may no longer exist, but retrievable electronic versions likely are available.

III. PRELIMINARY MOTION PRACTICE

Personal and subject matter jurisdiction rarely are issues in insurance coverage actions, with the possible exception of foreign insurers, most notably Lloyd's and other London market companies.  Insurance companies generally do business in all states and are usually subject to general long-arm jurisdiction or, more likely, consent to jurisdiction provisions that are part of each state's insurance code.  These provisions condition the right to do business on the insurance company's agreement to be sued in that state's courts.  If the policyholder brings the action in the courts of either its state of incorporation or principal place of business, there is little chance that a court will refuse to permit the litigation to go forward.

However, there can be problems that the policyholder may face in retaining the jurisdiction of its choice.  For example, when the case is a complex one but the policyholder chooses not to file a comprehensive action, involving all potential insurance disputes and insurers on the risk as to a particular subject matter (e.g., environmental sites, asbestos, or a defective product), then the insurance companies may be in a position to file a competing action in a jurisdiction viewed as more favorable to them by expanding the scope of the case and the number of parties.  The insurance companies' alternative filing in another jurisdiction often will be accompanied by a motion to dismiss or stay in the policyholder's chosen forum.

Insurers that have sold excess coverage at higher levels to the policyholder sometimes file motions on non-justiciability grounds, i.e., that the damages sustained by the policyholder in the underlying action(s) will never reach their level of coverage.  Policyholders are well-advised to risk such motions by being all-inclusive as to the insurance companies brought into the action in order to avoid a more comprehensive insurer initiated alternative action elsewhere.  Such motions are not routinely granted and even when they are the dismissal or stay is without prejudice to the excess upper layer insurers being brought back into the litigation.  Further, while in some cases the insurers may not be bound by the proceedings in their absence, as a practical matter the exposure of insurers that are dismissed as the result of a non-justiciability motion rise and fall on the fortunes of the remaining defendants against which the policyholder's claims are justiciable.  Finally, insurers filing such motions in effect waive the possible defense of late notice; it is inconsistent to take the position that the policyholder should have given earlier notice of a claim that is not yet ripe for adjudication.

Another procedural issue that is sometimes a matter of early motion practice concerns federal versus state jurisdiction.  When many insurance companies are involved, and especially when Lloyd's of London syndicates with members residing in this country are parties, federal jurisdiction often is unavailable because of a lack of complete diversity.  Sometimes insurance companies have sought to remove part of a case from state court and then request to have it transferred to another federal forum perceived to be more convenient or favorable, but such efforts have met with limited success.

IV. THE CASE MANAGEMENT ORDER

In view of what seems at times to be interminable negotiations between policyholders' and insurers' counsel with respect to the content of the case management order, it may be asked whether from the policyholder perspective it is in its interests to subscribe to such a process, rather than relying upon the normal workings of the civil system in a particular jurisdiction.  The answer is invariably yes, except in the most simple and straightforward coverage disputes with perhaps one or two insurers and a limited amount of coverage at issue.  However, even in cases where there are not multiple defendant insurance companies, the cases can be sufficiently complex in terms of issues and coverage limits to support the use of a case management order.  Even if a case management order were not used in a coverage action, there would be some sort of scheduling order, however rudimentary, that would be required by the court's normal civil rules.  The typical insurance coverage litigation case management order takes those basic features and expands upon them to meet the special needs of the particular case.

The traditional components of the case management order in a complex insurance coverage case are discussed below.[1]

A. CONFIDENTIALITY ORDERS

The preparation of a separate stipulation and order concerning the protection of "confidential" information is usually the first and least confrontational part of the case management process.  Indeed, the parties usually begin negotiating this document separate and apart from the case management order itself and in many cases the case management order will simply indicate that the discovery procedures, as outlined in that order are subject to the "Confidentiality Order" provisions, that may already have been approved by the court.  Confidentiality orders are conventional features of virtually all civil litigation, especially between commercial combatants which have their own business and strategic reasons for desiring to keep sensitive information from public view.

From the policyholder perspective the driving force behind the need for a confidentiality order is to ensure that sensitive documents do not fall into the hands of the underlying claimants by whom they are being sued or by potential underlying claimants waiting to be represented by an aggressive plaintiffs' bar.  In practice, while the confidentiality order in the coverage case will protect a number of sensitive documents from being obtained by plaintiffs in the underlying actions, in most cases the vast multitude of documents have already been subject to discovery in the underlying actions usually under confidentiality orders in those cases.  At bottom, the policyholder's principal need for the confidentiality order is to keep sensitive documents from disclosure to potential new plaintiffs who may seek to sue the policyholder with respect to the same underlying occurrence or claim.

Lastly, a principal policyholder advantage in having the confidentiality order is to keep privileged communications among the policyholder's underlying counsel and even its coverage counsel from falling into the hands of the insurance companies' counsel.  The disclosure of privileged communications usually happens in one of two ways:  (1) the inadvertent production of a privileged document; or (2) in those cases in which the trial court determines that the policyholder's privileged communications are "in issue" or "at issue" because the policyholder has injected an issue into the coverage case that can only be addressed in fairness by the insurance company defendants if they are given access to the privileged communications.  Needless to say, the insurers' access to the policyholder's privileged communications in the context of insurance coverage litigation is controversial and each jurisdiction and each case within each jurisdiction has its own peculiar outcome depending on the facts of the case.

While the benefits of the confidentiality order to the policyholder are manifest, it is the policyholder that bears the heavier weight of compliance.  Firstly, the insured will almost always have many more documents that are subject to discovery than the defendant insurers.  These documents relate primarily to the merits of the underlying action for which coverage is sought and can run the gamut from thousands of documents that relate to, for example, the waste handling practices at plants that are the subjects of environmental suits to the policyholder's risk management files that relate to the insurance coverage at issue.

On the other hand, insurance companies' compliance with the confidentiality order requirements is relatively easy, simply because they have fewer documents to produce.  In many cases a policyholder will seek the production of "generic" document production from insurers and their trade organizations.  As a result of the confidentiality order in the pending and prior cases, this places the added burden of re-discovering those generic documents from the same insurers and their trade associations, even though counsel for the policyholders often already have had confidential access to the same information in other cases, and depending on the terms of the confidentiality order as applied to third parties may even have copies of the documents.  However, such administrative inconvenience is usually a small price for the policyholder to pay in return for the protection obtained against disclosure of the policyholder's own records to adverse underlying claimants.

Typically, a confidentiality order will define the kinds of documents and information that are protected and to be treated as confidential.  Usually, each jurisdiction has a rule or statute that defines the parameters of the process for identifying what is "confidential," but confidentiality orders frequently extend those boundaries to the broadest extent possible.  Because the decision as to the definition of what documents and information qualify as "confidential" is consensual among the parties, courts have very little, if any, interest in challenging the almost inevitable over-breadth of such definitions.  The parties are loath to challenge the over-designation of documents and information as confidential for fear of a tit-for-tat response.  In the scheme of things in a complex insurance coverage litigation, the protection from public view that each party seeks for its documents is just one of those issues that does not excite controversy.[2]

B. LIAISON OR COORDINATING COUNSEL

The advantage that policyholder's counsel maintain in almost every coverage case is the representation of a single party on one side of the case, whereas there are many counsel for the multiple insurers on the other side arising from the numerous participations in the coverage sold by companies the businesses of which are largely independent of one another.  Insurance companies have different interests depending on the amount and time on the risk, the coverage attachment point, and many other factors; therefore, common counsel usually is out of the question.  But, for the sake of both sides, a case management order should provide for coordinating counsel, allow joint consultations without antitrust concerns or the risk of waiver of any privilege or work product protection, prohibit duplication of discovery and legal issue presentation, and permit the deferral of crossclaims.

One of the principal values of liaison counsel is administrative.  First, while there can be national liaison counsel, it is essential to have local liaison counsel who are familiar with the local rules and practices both written and unwritten.  The local liaison counsel are indispensable in scheduling matters with the court and in addressing court questions concerning the status of the case generally as well as on more discrete issues.  It is simply easier for judges and their administrative staffs to deal with local counsel on such matters.  This fact underscores the importance of having local liaison counsel for the defendants who can speak with one voice for the numerous defendants, especially on scheduling issues that should not be controversial but which would delay the case interminably if there were not a local defense counsel liaison who must effectively force the defendant insurers to reach consensus on such matters.

C. PHASING

The fundamental premise that is the foundation of the case management order process is that there are inherent efficiencies in the "phasing" of the principal stages of the case.  Stated more simply there is a belief held by policyholders, insurers, and the courts that a rational plan should be crafted for accomplishing certain goals in a certain order and in a specific time frame.

That is usually where the agreement ends.  While there is more frequently than not some agreement among policyholders and insurers as to what the goals are, there is almost always disagreement as to the order in which those goals should be reached and, most significantly, in the time that should be allocated to reach those goals.  While, as discussed below, the principal area of disagreement as to phasing relates to discovery issues, the fundamental conflict between policyholders and insurance companies on phasing covers the entire spectrum of case management.  Most significantly, in virtually all insurance coverage disputes the policyholder wants a trial date established by the court as early as the court's schedule permits and within a realistic time frame for the policyholder to prepare its case.  On the other hand, for insurers as a general matter, and there will be occasional exceptions, no trial date is too late.

Apart from the merits of the claims of the coverage case, the insurance companies' position is driven by the obvious economics of retaining the amount in dispute and benefiting from the investment income on that amount which presumably will exceed the costs of litigation and the reduced present value of the claim even if interest will ultimately accrue on the coverage amount in dispute.  Apart from this economic reality, insurers have a mantra that emphasizes the need for a rational, deliberate (viz. slow) approach to the development of the case, especially if it is a complex one.  The insurance companies will emphasize with varying degrees of merit depending on the case, that they are at a substantial disadvantage in that most of the information required to establish their defenses (apart from the terms of the policies) is within the hands of the policyholder plaintiff.  Accordingly, in the insurers' case management scheme, the court should never set a trial date until all the preliminary matters, largely discovery, are complete or virtually complete.

This approach is anathema to the policyholder.  It is essential that the policyholder obtain a trial date from the trial court as soon as possible because it is the principal leverage that the policyholder has to force insurers to meet interim discovery schedules and to emphasize the dilatory conduct of the insurers if they do not meet those schedules.  The history of insurance coverage litigation over the last two decades has shown mixed results on how courts have handled phasing.  Early in the process when the courts' case loads were somewhat lighter than they are today and when the complexity of coverage cases was not readily apparent to the courts, they were inclined to be liberal in permitting the insurers to take substantial amounts of time for and quantities of discovery from policyholders, often without setting a trial date.  This approach comported with the generally liberal approach to discovery and a more laissez-faire sense of case management, especially in the state courts where a majority of the insurance coverage cases were filed.

In part because of the proliferation of litigation and in part because of the antagonism of Congress and state governments to unnecessary and wasteful litigation, there has been a decided trend in the opposite direction more recently with greater pressure placed on courts to get cases with merit through the system more quickly and with less expense to the courts, taxpayers, and the litigants.  This trend has helped policyholders move cases forward more quickly, cases that might otherwise have been mired in four to five years of discovery before a trial date was even set.  Therefore, today more than ever the policyholder's first imperative is to establish a realistic trial date and to schedule the discovery and other pre-trial matters within that time frame.

D. CHOICE OF LAW

While choice of law is an issue that implicates a number of facets of case management such as preliminary motion practice and discovery it is worthy of separate consideration because, as discussed above, it is crucial to so many aspects of the case and, indeed, can make or break a case if the law on a particularly central issue clearly favors one side or the other.  There is usually agreement between policyholders and insurers about the need to have choice of law resolved early.  It simply makes sense from the perspective of both sides to know the law or laws that will govern the action.  An understanding of the applicable law will enable the parties to better focus their discovery, dispositive motion, and trial preparation efforts.

That does not mean, though, that choice of law is without conflict.  There is always tension in scheduling when choice of law briefing should take place and substantial conflict as to the parameters of choice of law discovery and how much time should be allotted to that phase.  The contours of the disputes between policyholders and insurance companies on this issue are predicated to some degree on the legal standard that the jurisdiction employs in the choice of law analysis.  In the many jurisdictions that use the Restatement (Second) of Conflict of Law's "most significant relationship" test, there are a number of factors that courts consider in applying this test which has the effect of encouraging the parties, especially insurers, to seek a broad array of documents that invariably relate to the merits of the litigation as well as purely choice of law considerations.

For example, insurers will use §188(2)(c) and (d), the place of performance and location of the subject matter of the contract, respectively, to request the production of documents that may overlap to a greater or lesser degree with documents concerning the merits of the underlying action.  To a great extent, the most the policyholder can do to avoid overreaching by the insurers in this area is to secure a case management order with a limited discovery period for choice of law and to exercise good judgment in tailoring its responses to the insurers' document requests to withstand any motion to compel.

Another factor that the insurers will endeavor to use in the debate over the period of time allocated to choice of law will be to stress the need for the time required to obtain information from third parties, i.e. the insurance broker intermediaries that the policyholder and the insurance companies used to one degree or another in effecting the sale of the coverage.  The documents in the possession of the brokers as well as the deposition testimony of the broker representatives involved in the sale of the insurance to the insured relate to §188 (2)(a) and (b) of the Restatement's most significant relationship test.  While third-parties in any civil action are often reluctant participants in the process, brokers, because of their past, present, and prospective business relations with policyholders and their insurers are usually more forthcoming and an argument by the insurers that a great deal of time is required to deal with this aspect of the case is less than compelling.

E. WRITTEN DISCOVERY

The part of the case management order process that customarily elicits the most conflict between policyholders and insurers is the amount and timing of written discovery.  Of course, there will be myriads of variations on this process depending on the type of insurance coverage at issue, the nature and extent of the underlying cases or claims for which coverage is sought, and the number of parties, principally insurance company defendants that are involved in the litigation.  The types of written discovery fall into the traditional categories in any civil case: production of documents from parties, interrogatories, requests for admission, and third-party document production, but as discussed below there are many aspects of this part of the case that are unique.[3]

1. Policy Related Discovery

The first aspect of discovery in the phasing process that is addressed concerns the production of policy related material.  The plaintiff policyholder will be expected to provide to the defendant insurers all policies that are allegedly implicated by its claims, i.e. primary, umbrella, excess umbrella, and excess.  Secondly, the policyholder will be required to produce all insurance placement, risk management, and claims files that relate to the insurance coverage at issue and the underlying claims for which coverage is requested.  Thirdly, the insured will be expected to produce all documents that relate to lost or incomplete policies that are at issue.  On usually the same time table, although in some cases shortly behind the policyholder's production, the insurers will be expected to provide documents in the same categories described above as well as their underwriting files for the policies.  In addition, the policyholder may be able to obtain in the case management order, rather than through separate document requests, the insurers' claims files and loss runs for the claims at issue.

The production of the "non-privileged" portions of insurers' claims files, whether as part of the case management order or in separate document requests, almost always generates discovery motion practice based on the insurers' assertion that at least some of those claims files include privileged work product such as witness interviews and the claims-handler's comments on coverage issues.  Indeed, in some cases involving areas of coverage in which there has been a traditional reluctance by the insurance industry to provide any coverage, insurers have made an extraordinary effort to conceal their claims files by creating special claims units whose members are all lawyers, or in some cases by ceding the claims function to "outside" law firms, which in some instances are merely law firms that do nothing but handle a particular insurer's claims and have no other significant clients.  As in all insurance coverage disputes the court's resolution of these conflicts varies depending on the law of the jurisdiction and the nature of the facts in a particular case.

The policyholder's best approach to the production of claims files is simply to argue that the insurers' business is investigating and paying claims and they should not be permitted to transmute this non-privileged business activity into an area of immunity because lawyers happen to be performing a business function.  While this argument has much greater strength as to claims files generated before a coverage action is filed, some courts have allowed production of claims files even after the filing of the case, although usually with greater sensitivity to protecting real lawyer opinion work product as opposed to fact-based work product.

After the production of the insurance policies and policy related material, it is useful to have a provision in the case management order that provides for some schedule during which the parties can obtain stipulations concerning the authenticity of the policies, as well as any secondary evidence relating to lost or incomplete policies.  This provision is generally more important to the policyholder than to the insurance companies and in many cases, absent the policyholder's request for intervention from the court, this process will drag on for years, even up to the very date of trial.  It is important for the policyholder to know, and one would think the same logic would apply to insurance companies as well, the specific terms and conditions in the policies that are in issue in the case.  Because the policyholder will be taking deposition discovery of insurance company underwriters and claims representatives, it is important that the examinations be based upon the insurance policies that are in fact deemed by all parties to be the authentic policies governing the dispute.

Invariably, there will be some minor differences between the policy material in the possession of the policyholder and in the possession of the insurance companies.  It is in the interests of the policyholder to minimize those differences unless they relate to key aspects of the dispute.  Obviously, in some instances, the files of brokers may have to be included in the process of authenticating the policies.  In the past, especially with London market insurers, the brokers' files have been significant to the process of policy reconstruction and authentication, unless the risk management department of the policyholder was very conscientious in maintaining all the insurance policy related material that was received from London market insurers, some of which may not been received until after the policy period expired.

2. Merits-Related Discovery

a. The Magnitude Of The Burden On Policyholders

The next phase in the written production process is invariably the most contentious.  While in theory the production of documents related to the merits of the case is to come from both the policyholder and the insurance companies, in fact the overwhelming number of documents will be produced by the policyholder.  In complex cases, it is not unusual for the policyholder to produce literally millions of documents that are requested by the insurance companies.  While the policyholder may object to the breadth of the discovery requests, courts are reluctant to prevent the insurance companies from obtaining all documents that are likely to lead to the production of admissible evidence at trial when there are millions of dollars of coverage at stake.

b. Other Site Or Product Production

Of course, until recently, the discovery rules in the federal courts and the state courts have been liberal with respect to discovery.  The discovery zeitgeist has changed in recent years but the policyholder should still be prepared in complex cases to produce boxes upon boxes of documents, and myriads of electronic data files, to the insurers.  For example, while there are fewer environmental insurance coverage cases now than a few years ago, in a typical case of that sort, the insurance company defendants would seek the production of virtually every piece of paper relating to the operation of all of the policyholder's plants or facilities, to the extent that they had even a remote connection to the pollution liability for which the policyholder was seeking coverage from the defendants.  Because many environmental insurance coverage actions involve multiple sites, the policyholder could conceivably face the production of tens of millions of documents to the extent that there is not some provision in the case management order that phases and limits the document production to certain test sites.

To the extent that they consider it useful to their case development, insurance companies have sought production relating to the policyholder's knowledge of environmental problems or practices at sites other than the one or more test sites that are the focus of the first trial phase.  This approach is taken in order to support an argument, for example, that while the policyholder had taken preventive measures at one site but not another, it therefore should have "expected or intended" the environmental damage at the site where such measures were not taken.

Fortunately, in that regard, many courts have ordered that the case management process be limited to a single test site or a small group of test sites.  In some cases, even the insurers have agreed that it is impractical from both an economic and trial perspective to have more than one or two test sites as the initial focus of the first trial in the case and that document production should be limited to those sites as well as the "corporate knowledge" that may be more readily available in the policyholder's headquarters.  Perhaps the most compelling reason for this limitation of discovery to the test site(s) is that as a practical matter, virtually all such cases are resolved, as to all sites, after motion practice or trial with respect to the test site(s).  Nevertheless, even with the early selection of a test site, insurers may be disposed, if the stakes at issue warrant it, to press for written discovery from other sites owned or operated by the policyholder.  The policyholder should vigorously resist such discovery.

c. Coordination Of Discovery By Insurers

Because of the extensive costs that the policyholder will incur with respect to written document production, it is imperative that the case management order contain language that strongly encourages or mandates that the insurance companies cooperate in their discovery of documents from the policyholder and that duplication be avoided.  For the most part, it is in the economic interests of the insurance companies to consolidate their efforts in seeking document production, not only as a matter a cost efficiency but also in order to coordinate their strategic objectives in defending against the coverage claims of the policyholder.

d. Location Of Document Production

Because of the magnitude of document production in complex cases, the case management order customarily contains a provision that addresses how and where the document production will take place.  The policyholder will sometimes decide that it is easier and safer to produce copies of some responsive documents to the defendants.  This practice usually occurs when the number of documents is less burdensome and related to discrete categories of information.  It is also a preferred method when there may be substantial communications with counsel and executive management that need to be screened before review by the insurance companies.

On the other hand, there are many more documents located at the policyholder's plants and facilities that the policyholder would prefer be reviewed by the defendant insurance companies on-site.  Accordingly, the policyholder should seek, and case management orders in general contain, language that gives the option to the producing party to:  (i) make the documents available at a location mutually agreeable to the parties, (ii) at the location where the documents are maintained, or (iii) some other location, usually the city in which the action is pending or the city in which the policyholder's counsel is located.  There is also usually standard language in the case management order that requires the documents to be numbered by the producing party in such a fashion as to indicate the source of the production.  This coding system has obvious benefits for both the policyholder and the insurers in keeping track of written discovery and in properly identifying documents on a privilege log.

e. The Costs And Logistics Of Document Production

Because of the cost of document production, the parties generally endeavor to reach agreement on the use of a common service organization that will be responsible for the document copying or at least agree upon a specific cost per page for document production.  The resources for massive document productions have become increasingly sophisticated over time.  It would not be unusual for a party, either the producing or requesting party, to have its own copying service bring copying machines to a remote plant site and have the entire document production prepared right at the location.

In any event, as document retention and document production have become more technologically sophisticated, there are any number of service organizations that can provide the logistical support to handle massive document productions on a fairly expedited basis, but at a cost.  The cost factor affects both policyholders and insurers, but more of the cost will fall on the policyholder.  The policyholder will have to absorb the internal and external labor costs of searching for documents and making certain that they are organized and secure and reviewed for privilege.  While the insurers will be seeking more documents than the policyholder, the copying costs will be roughly equal because the policyholder will need a set of whatever documents are selected by the defendants.

The one theoretical advantage that the producing party should have is that it should have more corporate knowledge than the other side about the nature and content of its documents.  That advantage frequently is theoretical only because the coverage case may span decades of coverage and activities that are the source of the underlying liability with significant changes in corporate identity and personnel.

Another emerging source of cost for the policyholder in responding to document discovery requests relates to information in electronic form.  While the electronic information age has made the retention and use of information easier, its production in litigation is still costly in part because the electronic information age has caused a quantum leap in the amount of information generated.

f. Internal Document Organization

Of course, the case management order will not dictate the manner in which each party handles internally the massive accumulation of documents after production to the other side.  In complex cases, it is routine for the policyholder and insurers to use either in-house resources or outside service organizations to create computerized databases of varying sophistication to keep track of the documents that have been produced.  The most expensive option for database retrieval is a system in which documents are actually placed in full text on a computer system so that the party can perform full text searches of all the documents on the system, much as one would with a computerized research database, like LEXIS or Westlaw.  More typically in very large document production cases, the parties will employ some form of coding system that will enable them to categorize and keep track of documents but without the enormous expense of putting the entire document on a database.  Obviously, there can be hybrid arrangements with some very important documents being made available for full text searching and other documents simply subject to retrieval through a coding system.

g. Privileged Documents

An integral part of the document production process obviously relates to the protection of privileged documents and communications.  While provisions in a case management order relating to the handling of privileged documents benefit both the policyholder and the insurance companies, it offers greater advantages to the policyholder by virtue of the fact the policyholder will almost always be producing more documents and presumably there will be a greater number of privileged communications that will need to be reviewed, logged, and in some cases recovered if inadvertently produced.  In cases with large document productions, it is beneficial to have a provision in the case management order that permits a policyholder to make all of its documents available for inspection by the other side, including privileged documents, with the provision that the producing party, prior to the production of the documents selected by the opposing side, can "pull-back" privileged documents.

The timing of the producing party's right to pull back privileged documents can be tailored from case to case but for the most part it is to be done within a reasonable time after the inspection by the party requesting the production of documents.  Ideally, from the policyholder's perspective, it would be preferable to review documents subject to production for privileged communications before the inspection by the opposing side.  However, the pace of the litigation and available litigation resources may not permit that approach and the use of a "pull-back" provision provides the necessary protection.  Of course, once insurers see a privileged communication that has information that may be beneficial to their case, they will usually find a way to attempt to challenge the privileged nature of such a document.

The process of document production also requires the preparation of a privilege log that identifies the privileged documents that are being withheld by the producing party.  Traditionally, the case management order will identify a number of categories of information that need to be set forth in the privilege log.  These categories, typically, include the author of the document, the identity of the addressee(s), the identity of persons to whom copies were sent, the general subject matter of the document, the type of document (e.g. letter or memorandum), the date of the document, and the nature of the privilege asserted.  Also, the case management order usually makes clear that privileged communications contained in documents created after the coverage litigation was initiated, or after a date mutually agreeable to the parties at which it was clear that there would be litigation, do not need to be listed on the privilege log.

h. Inadvertent Production Of Privileged Documents

The inadvertent production of privileged documents is one of a litigator's worst nightmares.  Because it is a problem that affects both the policyholder and insurance companies, the case management order almost always contains a set of provisions dealing with the process for addressing the waiver of the privileged status of such documents that have been produced "inadvertently."  In many cases, the case management order will take a phased approach in dealing with inadvertently produced documents.  This approach will apply two sets of standards or requirements for the return of the privileged document without waiving its privileged status depending upon when the privileged document is either discovered to have been produced by the producing party or within a certain period after the document was produced to the other side.

Again, from the policyholder's perspective, it is important, especially in large document production cases, that the triggering date for this process be the date of discovery of the inadvertent production.  Insurance companies will seek a provision in the case management order in most instances, unless the law of the jurisdiction is clearly to the contrary, that sets the triggering date as a certain period after the date of production without regard to the date when the policyholder discovers the inadvertent production and requests the return of the documents.  The problem for the policyholder with the second approach is manifest.  In massive document production situations, the policyholder's counsel may not discover that a privileged document has been inadvertently produced until well after the insurers have been provided with copies of the documents.

In any event, whether the trigger date is the date of discovery or some date after the alleged inadvertent production, there will usually be two sets of standards that apply to the treatment of the inadvertent production.  For example, a case management order might apply one test if the party discovers that it has inadvertently produced a privileged communication and notifies the other side within sixty days of the discovery, and a different test if notice is given to the opposing side of the discovery of the inadvertent production of the privileged communication more than sixty days after the discovery of the inadvertent production.  Under the circumstances of early notice (i.e. within sixty days of discovery), a typical case management order would require the return or destruction of the privileged document and in any subsequent motion practice in which the insurers challenge the privileged character of the document, they could not rely upon the fact of its inadvertent production as a basis for attacking the privilege.

If, on the other hand, the notice is sent more the sixty days after the discovery of the inadvertent production, then there will usually be a process less favorable to the policyholder that requires the parties to meet and confer to determine if the parties can agree on whether the document production constitutes a privilege waiver, i.e. a foregone conclusion.  When there is the inevitable absence of agreement on this issue, then the policyholder claiming privilege will be required to seek a determination from the court or discovery master as to whether the document is to retain its privileged status.

Case management orders vary at this stage as to the precise burden on the policyholder to establish that the privilege was not waived by the inadvertent production.  Insurers will sometimes argue for a rebuttable presumption of waiver.  In other cases in which the insurers have sufficient concern for their own privileged communications, the case management order may be more neutral and simply place the onus on the producing party to file a motion for a protective order with the mere production of the document not being determinative of waiver without the demonstration of other circumstances.  Generally, courts that are asked to resolve inadvertent waiver of privilege issues in the context of such case management order provisions look at the precautions taken by the producing party to avoid the production of privileged documents and the alacrity with which the producing party seeks to recover the privileged communication.

i. Interrogatories

Case management orders address the use of interrogatories as part of the discovery process and the provisions are relatively straightforward and non-controversial.  Interrogatories, as a general proposition, while still essential to the discovery process, are becoming a less favored tool in that process.  Accordingly, in the case management order, the policyholder and insurers may be inclined to place a specific limit on the number of interrogatories that can be propounded with respect to the merits of the case.  Additionally, there may be a separate number limitation as well as a later separate phase for contention interrogatories that is set near the close of discovery.

j. Requests for Admission

Requests for admission also do not figure prominently in any controversy between the policyholder and the insurance companies in crafting the case management order.  In some orders, requests for admission can be used from the outset of written discovery and in other cases the case management order permits requests for admission only at the end of the entire discovery process at which point they can be used more effectively to elicit admissions or denials as to facts that should be relatively clear at that point as a result of the other discovery processes.  Indeed, in some cases, like contention interrogatories, requests for admission may be phased at the conclusion of all discovery, including expert discovery.  Again, as with interrogatories, the parties may elect to use numerical limits on the number of requests for admission.

F. DEPOSITION DISCOVERY

1. Preliminary Depositions

Depositions are obviously a critical part of any complex insurance coverage litigation.  In terms of phasing, the deposition process usually is held in abeyance until there has been substantial completion of production of documents.  There are two exceptions to this rule.  One exception relates to the case of elderly or infirm witnesses.  The case management order will usually permit the parties to take the depositions of such persons at any time in order to preserve such testimony if the witness may not be available at a later phase in the case when general deposition discovery is permitted.  This provision is particularly important in cases where the underlying facts relating to the policyholder's liability may emanate from circumstances extending back many years or decades.  The other exception relates to the phasing of records depositions on a parallel track with document production to permit inquiries as to the adequacy of either side's document production.

2. Substantive Deposition Phasing

Apart from these exceptions, the principal point of negotiation between the policyholder and the insurer defendants is how soon substantive depositions can commence.  As a general rule, the case management order will provide a specific time period for document production after which depositions may begin.  To the extent one side is dissatisfied with the quantity or quality of the document production when that point is reached, that side may seek to modify the case management order in order to permit the extension of time for document production before commencing depositions.  Insurance companies are not reluctant to extend the document production phase as long as possible as part of their general strategy to prolong the case.  Obviously, it is in the interests of both the policyholder and insurance companies that depositions not be taken on more than one occasion because of the discovery and production of documents after the completion of depositions.  However, there is a point when substantial document production is complete and the policyholder should endeavor to persuade the court to adopt that as the point for the beginning of depositions rather than the date when the insurers subjectively feel that they have obtained every document that they want or need.

3. Informal Interviews

One process that has occasionally been embraced by both policyholders and insurers as a screening device to determine whether certain depositions will be required are informal interviews of prospective deponents.  These interviews are usually conducted by telephone, not transcribed, not taken under oath, and limited to a short period of time.  To the extent informal interviews are used, the policyholder usually requests a provision in the case management order that the interviews should be treated as non-events, viz. the interviewed witness's statements in the interview cannot be used independently or at the witness's subsequent deposition if one is taken.

The primary benefit of informal interviews, and it is a substantial one, is that they may show that it is pointless to take the depositions of certain witnesses.  However, there are drawbacks to the process as well.  From a cost standpoint, the party may have to prepare the witness twice, once for the interview and again for the deposition.  The last thing a policyholder wants is a potential witness blurting out information that is inaccurate, that leads to an unnecessary deposition, or that raises questions about other potential witnesses.  Thus, preparation for the interview is required even if the testimony given in the interview has no legal effect.  Also, the interview may be inconclusive, in which event a subsequent deposition is almost always required if the litigation economics warrant such action.[4]

4. Location of Depositions

The case management order customarily contains a provision that identifies the geographical location at which witnesses are to be deposed.  In the case of current employees of the parties, there may be some flexibility on this point, depending primarily on where the principal place of business of the policyholder is in relation to the venue of the case.  If the policyholder's principal place of business is in or near the state where the action is pending, then it is likely that the parties will agree that with respect to the deposition of current employees, the depositions may take place in the city where the action is pending or at the parties' principal places of business.  To the extent that the policyholder's principal place of business is not close to the state in which the action is pending, then the insurers will inevitably press for a provision in the case management order that requires the policyholder to bring its employees to the jurisdiction in which the action is pending to be deposed.  As a general rule, the insurers will prevail in seeking this kind of provision because in most states, absent extreme economic hardship, the plaintiff, by selecting the forum, is expected to make its witnesses available in that forum.

Another facet of the deposition location issue relates to former employees of the parties.  Again, in order to increase the costs for the policyholder, the insurance companies will press for a case management provision that requires policyholders to bring former employees to the city in which the action is pending to be deposed.  However, in seeking this kind of requirement, the insurers are faced with the fact that the policyholder has no legal power to force a former employee to come to the jurisdiction in which the action is pending even if the policyholder pays all the expenses related to that deposition.  Accordingly, the insurers will attempt to create case management order language that requires the policyholder to detail the efforts made to persuade former employees to appear for depositions in the city in which the action is pending and to require the policyholder to pay for insurers' costs in attending the depositions should they be able to convince the court or discovery master that the policyholder's efforts have been perfunctory.

5. Third-Party Depositions

The depositions of third parties presents another set of problems that are typically addressed by the case management order.  Generally, there is language that encourages the parties to work together to coordinate the timing and location of such depositions as well as to coordinate the subpoena process or letters rogatory that are necessary to compel the deposition, unless the third party appears voluntarily.  In some cases, the production of documents from third parties is included in the earlier date dealing exclusively with document production which is generally more effective because it permits the parties to make use of those documents with respect to any witness and not just the third party witness.  On the other hand, in some cases the third parties' production of documents pursuant to subpoena will be connected with the third party deposition.

6. Coordination And Conduct Of Depositions

The policyholder will want to obtain a provision in the case management order that requires the defendants to coordinate their depositions of the policyholder's present and former employees.  Generally, the language of the case management order will require that counsel for one of the defendants be designated as the lead counsel and undertake to conduct the preponderance of the examination of the witness without foreclosing the right of other defense counsel to ask non-duplicative questions.  Notwithstanding the interest of the insurer counsel in creating an appearance of committed advocacy for their respective clients' interests as noted by their presence on the deposition transcript, the insurers generally recognize that it is not only more cost effective but more effective as a matter of deposition practice to have one lawyer who is principally responsible for conducting the deposition of a witness.  The one exception to this rule might relate to a risk manager or someone who is involved in the procurement of the insurance at issue who may have knowledge that is specific to multiple defendants.

Also, this portion of the case management order usually provides that a party that does not attend a deposition is deemed to have waived its right to seek a later deposition of that witness.  It is also in the interests of the policyholder to have a provision in the case management order that prevents any subsequent deposition of a witness without the demonstration of good cause for doing so.  Some case orders will also attempt to provide micro-management of the deposition process, including provisions on the form of objections, provisions relating to on the record and off the record coaching of witnesses, instructions not to answer, and motions for protective orders.  In other cases, the parties will simply leave these specific issues to resolution under the appropriate civil rules of the court in which the action is pending.

7. Expert Depositions

Expert discovery is the last phase of the deposition discovery in the case management process.  Of course, expert discovery includes more than depositions and it is customary for the case management order to require each party to submit written opinions and curriculum vitae of their primary expert, along with all documents that the expert has relied upon in preparing the expert's report or opinion.  There is also a provision for the designation of rebuttal expert witnesses after the identification of the primary expert witnesses.  The same process as to the preliminary production of opinions and supporting documents is applied to those expert witnesses as well.  The expert depositions will then go forward with the primary experts preceding the rebuttal experts.  Obviously, the expert phase of the case is undertaken at a point close to the dispositive motion practice phase of the case and the trial because in complex coverage cases it is usually necessary for the underlying factual information to be developed before the nature and extent of expert testimony can be formulated.

The principal sources of controversy relating to be the expert deposition process are not usually a function of the case management or phasing processes but whether certain experts are permitted to testify in the case at all.  A prime example relates to the policyholder's use of insurance experts to inform the court, and especially the jury, concerning the customs and practices in the insurance industry with respect to the underwriting of coverage and handling of claims.  The insurance company defendants routinely attack the use of these experts on the ground that such experts will be giving opinions on issues of law that should strictly be reserved for the court.  Motions in limine on this issue are usually filed shortly before or during trial.

For the most part, the courts have permitted policyholders to use insurance experts to a greater or lesser degree that varies from jurisdiction to jurisdiction, to explain the customs and practices in the insurance industry with respect to the underwriting and claims-handling practices for commercial insurance policies and also in some cases to discuss the actual features of those insurance policies and how they are designed to work as a practical matter when a coverage issue arises.

The other experts, who are less controversial, are experts who will testify about matters related to the merits of the underlying claims.  For example in environmental insurance coverage cases, there will be experts addressing issues relating to the historically accepted pollution control practices in a particular industry, the nature of the environmental contamination at issue, remediation of those problems, the costs associated with that remediation, and related matters.[5]

G. CASE DISPOSITIVE MOTIONS

It is tempting for both policyholders and insurers to file motions for summary judgment or partial summary adjudication to try to narrow the scope of the case and obtain law of the case rulings, if not an outright disposition of the coverage dispute in its entirety.  Ordinarily this temptation should be resisted by the policyholder.  The outcome of such motions tends to be a mixture of denial because of material factual issues and bad rulings because of presumptions in favor of the non-moving party.  The briefing process also telegraphs the policyholders' theories of the case to the opposition, increases expense and causes delay in the progress of the case to trial.  Because policyholders appear to fare better both on the merits and in terms of settlement leverage by getting a case to jury trial, it is in the policyholder's interest to have issues of fact that will defeat summary judgment and permit the case to proceed to trial.

One important qualification to this general rule on dispositive motion practice from the policyholder's perspective concerns a dispositive motion on the duty to defend.  If there are policies in issue that provide a duty to defend, an early motion is in order because the duty to defend issue should be limited to a comparison of the allegations of the underlying complaint against the policy terms.  Indeed, there can be some complex coverage cases in which defense costs are the principal issue in the coverage dispute.  In those cases, the policyholder has a clear mandate to have early dispositive motion practice on that issue.[6]

Whatever the policyholder's preference may be as to the timing of dispositive motion practice within the case management process, it is inevitable that the insurers will move for summary judgment, usually on a host of issues.  It is the strategic aim of insurance companies to construct a multitude of obstacles to coverage, some of which might dispose of the case completely (e.g. late notice) and others that will simply carve out discrete parts of the policyholder's case.  Paradoxically, the insurers' penchant for conducting a scorched earth discovery process frequently aids the policyholder by creating factual disputes that cannot be resolved on summary judgment.  The hope of the insurers obviously is to establish a formidable array of undisputed facts, that when coupled with the policy language and applicable legal princiiples will result in complete or partial summary judgment.  This process has been sufficiently successful for insurers in at least reducing the p