Magazine article Risk Management

Y2K Sue and Labor Claims and Property Insurers

Magazine article Risk Management

Y2K Sue and Labor Claims and Property Insurers

Article excerpt

Y2K has come and gone. The entire world appears to have marched into the 21st century without missing a step. Sporadic reports of minor glitches persist, but all have been easily rectified. With Y2K now behind them, most of America's six million businesses are ready to move on to the challenges of a new century.

Surprisingly, however, a handful of companies-including a number of high-tech firms-still cling to the unconventional notion that someone other than themselves should pick up the tab for their year 2000 remediation costs.

This issue originated in mid-1999 when several dozen corporations and government entities decided to try to recover year 2000 remediation expenses from their insurers. Since it has been clear for some time that standard insurance contracts do not recover attempts to improve computer systems, these organizations were drawn to the relatively obscure sue and labor clausederived from 17th century maritime law-included in some commercial property policies. Why? Businesses feared that year 2000 disruptions would create a basis for suits against company officers and directors and reasoned that the filing of a claim against their property insurers would help legitimize management's efforts and expenditures while at the same time establish a cut-through to D&O coverage. When the first such claims (and subsequent suits) were filed last year, some predicted that an avalanche of claims and suits was imminent.

No such avalanche occurred. Indeed, the deafening silence of the business community on this issue speaks volumes. To the vast majority of CEOs, risk managers and business owners in the United States it quickly became apparent that the claimants' convoluted reasoning combined with their farfetched interpretation of the sue and labor clause was a thinly-veiled attempt to escape and shift responsibility for costs that were simply a part of doing business in today's high-tech world.

The logical underpinnings of these claims unraveled well before January 1 The fact that nothing happened after January 1, even in businesses (or entire countries) that did little or nothing to address the year 2000 issue, destroys any remaining rationale for these claims, particularly those citing sue and labor as their basis for coverage. Why, then, are a handful of corporations still trying to shake the year 2000 piggybank? Because large sums of money were spent-between $ 100 billion and $600 billion in the United States alone. With such sums involved, it was perhaps inevitable that some organizations and attorneys would continue to search for ways to recover these costs.

For very good reasons, insurers strongly believe this sue and labor provision has no relevance to year 2000 remediation. In their view, plaintiffs are employing unprecedented and unconventional interpretations to this clause in an attempt to obtain insurance coverage for expenses that were never intended to be covered.

Sue and labor clauses originated centuries ago in ocean marine policies and were designed to encourage or require policyholders to prevent or minimize imminent potential loss or damage covered by the policy without forfeiting recovery under the policy, thereby reducing the insured loss. An example would be reasonable costs incurred to salvage sunken goods from the seabed. These costs would be recoverable under the sue and labor clause.

There is no analogy between recovering sunken goods from the bottom of the sea and a multi-year, meticulously planned effort to correct computer system inadequacies. The costs of maintaining and upgrading the operating systems of a business in good functioning condition-whether they be air conditioning, electrical wiring or computers-have always been assumed by the business, not its insurer. Insurance companies do not pay to install fire prevention systems in buildings or the costs of replacing old electrical wiring which threatens to short circuit and cause a fire, just as they do not pay to replace worn out brakes with new ABS systems on automobiles. …

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