Bracing for the Millennium Bug
Consider liability cover to protect businesses facing Y2K claims
Doing nothing about the millennium bug threatening computers around the world is not an option, even if doing "something" amounts to efforts to insure against losses from the electronic crash expected to accompany the arrival of 2000.
The problem that is threatening many businesses and government operations stems from the fact that date fields in most computers are limited to the last two digits of the year; the century designation of "19" is simply assumed. That means computers won't recognize "00" to signify 2000, so they may treat it like 1900 all over again.
The result could be disruption or shutdown of many computer systems-and chaos for the public and private entities that rely on them.
Efforts to make computer systems year 2000, or Y2K compliant are expensive and time-consuming, and whether they will work is still a matter of speculation. Many companies simply have not initiated realistic steps to address the problem.
Meanwhile, the specter of liability grows for companies regardless of whether they take steps to make their computer systems Y2K compliant. That is why businesses and their lawyers should consider how insurance policies can be used to provide a cushion against claims.
Existing insurance policies as well as the new policies hitting the market may both provide coverage against claims by other entities that a company's failure to achieve year 2000 compliance has resulted in damages to them.
Although the two types of policies are seemingly redundant, Y2K lawsuits have not yet been filed, so it is difficult to predict whether existing policies will be sufficient. Moreover, insurers may attempt to add exclusions to existing policies for liabilities arising out of the problem, which policyholders should seek to avoid or keep as narrow as possible.
These types of common business insurance policies may provide some measure of Y2K coverage:
Directors and officers insurance. Claims against corporate directors and officers for failing to adequately convert internal systems or describe financial exposure to shareholders will likely arise. These policies are written on claims-made basis, so the key policies will be those in effect in 1999 and 2000, when most claims can be expected. Commercial general liability insurance. Disputes will arise about whether claims for losses from Y2K computer errors are covered by insurance that normally covers property damage, or bodily, personal or advertising injury. Business interruption insurance. This is usually tied to covered loss under a property policy. If there is no coverage under the property policy, the business interruption coverage may not apply.
Several insurance companies are marketing year 2000 policies written on a claims-made basis.
These policies focus on whether the policyholder has mitigated potential losses. The policyholder must have a corrective plan, provide progress reports regarding implementation, and permit technical and legal audits. The policies usually provide for claims disputes to be handled through mediation or arbitration, not the courts.
J&H Marsh & McLennan in New York City, in consultation with several underwriters, is promoting a product that provides up to $200 million coverage. The policy offers three types of coverage:
Liability coverage for claims alleging wrongful acts of the policyholder arising from Y2K problems of the policyholder or specified service providers. Coverage for business interruption caused by the policyholder's or service provider's year 2000 problems. The policies cover some expenses during the period the policyholder corrects the cause of the loss. "Hot site" expense coverage applies to expenses the policyholder incurs after Jan. 1, 2000, to use a qualified business to remedy certain on-site problems. Various exclusions include willful noncompliance with the policyholder's year 2000 corrective plan.
The insurer AIG in New York City is offering a policy as "blended financial insurance." The premium arrangement is similar to reinsurance; for a maximum coverage of $100 million, the policyholder pays premiums of $60 million - $80 million. If no losses occur, much of the premium is returned.
Year 2000 policies should be reviewed carefully, especially since some exclusions may eliminate since some exclusions may eliminate the coverage your client is trying to buy.
Meanwhile, now, not the next millennium, is the time to review potential liabilities for Y2K problems and how businesses can use insurance to protect against liability claims.
Clarissa Weiant, a lawyer with McKenna & Cuneo, assisted in the preparation of this article.
For more information, please contact: