Magazine article Risk Management

Millennium Clashes: Who Will Pay?

Magazine article Risk Management

Millennium Clashes: Who Will Pay?

Article excerpt

Today, for all the uncertainty concerning what will or will not actually happen to computer-driven systems as we bid 1999 good night, there is just as much doubt surrounding the issue of coverage for related claims. That risk managers will interpret policy language in the broadest terms possible, and insurers in the narrowest, is not unexpected; but it is likely the interpretations that matter will come from the courts.

When the federal government made companies liable for environmental clean-up in 1980, insurance companies reacted by constructing legal arguments to exclude claims for the cost of the clean-up. When it comes to claims related to the year 2000 computer problem, it may well be "deja vu all over again."

Time Out

For the uninitiated few, a quick explanation:

The year 2000 problem is simple in concept, but difficult to fix. Most older software programs and computer chips track four-digit dates (such as 1998) with only two digits (98), simply assuming the presence of the "19". When "19" becomes history on January 1, 2000, computers and software that are not compliant will not be able to recognize the new century. They will continue to assume the "19", reading 2000 as 1900.

The consequences will vary from company to company, but will likely be pervasive and disrupt fundamental business processes. Computers may cancel accounts or add late charges. Process control equipment may grind to a halt. Elevators and subways may stop.

On the Courts

The impact of potential litigation on our civil judicial system could be catastrophic. Legal settlements and verdicts related to the year 2000 problem are predicted to total between $100 billion and $1 trillion.

Part of this expense will arise when businesses using and selling computer equipment and software seek to have their insurance companies cover costs of fixing the glitch or addressing any damage that occurs to the business because of an unfixed bug.

Coverage by Coverage

In preparation for the wave of coverage litigation, the insurance industry is uniformly embracing the position that current policy coverages do not extend to year 2000 issues. Attorneys for insureds, however, are already considering actions against insurance companies to seek coverage under four kinds of policies:

Business Interruption--These claims require that the interruption result from an event that is dependent on chance. Insureds who suffer an interruption in business stemming from the failure of a noncompliant embedded chip controller will likely be able to argue that the unexpected interruption of business was indeed a matter of chance. Insurance companies, on the other hand, could argue that since the problem has been anticipated for years, any business interruption is predictable, and therefore not covered by a business interruption policy.

The first reported settlement of litigation involving the year 2000 problem occurred in the fall of 1998, between Produce Palace International and TEC-America. While the case did not involve a claim for insurance coverage, its fact scenario shows hypothetically how a business could sue its insurance carrier for payment under a business interruption policy. In the case, Produce Palace claimed it lost business when operations were interrupted because of faulty credit card processing on TEC-America equipment, which was not year 2000-compliant. Though Produce Palace accepted a $250,000 settlement from TEC-America for damages, the company could have made a claim under its business interruption policy. If its carrier denied coverage, Produce Palace could have sued it for reimbursement of losses. The insurer then could have defended itself by arguing that because the problem is well known, it is not "fortuitous," and all systems should have been upgraded and in working order in anticipation of 2000.

Directors' and Officers' -- There are not yet any reported decisions involving claims against corporate officers or directors arising out of the year 2000 problem. …

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