Although many people are scrambling to find a hotel room in Las Vegas to ring in the new millennium, business people are hoping and praying that their Y2k compliant software and hardware will work as promised at 12:01 a.m. in the year 2000. Articles have warned how homeowners can expect that their lawn sprinklers, pool vacs, faxes and camcorders will show the wrong date. Businesses have spent billions of dollars in upgrades to insure that shutdown and disaster will not strike. The fact is, any software program that calculates or manipulates time sensitive data or any date driven function in a computer could fail. All noncompliant programs or affected programs that employ a six-digit date field may read January 1, 1900 as opposed to January 1, 2000. The failure stems from the long ago adopted process of entering dates as two-digit numbers (97, 98 or 99) instead of a four digit numbering system (1980, 1990, 2000) in an effort to save space. This prospect seems absurd that software companies created potentially catastrophic and costly problems by saving what now appears to be an inconsequential amount of space. You can now buy a computer with a hard drive having space of 3.2 gigabytes for less than $1,000.
For the past several years, articles have been written and seminars have been given opining as to the various causes of action that may exist should you or your business be affected by the millennium bug. There are also hundreds of articles written as to who you can sue and what coverages may be available in the context of either first or third party loss. First party coverage is typically that type of personal insurance one maintains on their house, car, business or property, for losses that may occur. Third party coverage is insurance for general liability which your business or you may incur, it also includes errors and omissions, professional liability directors and officers, and general liability type coverages. The following causes of action may exist in claims against makers or sellers of software/hardware systems that fail.
FRAUD
This is the strongest claim in most cases. It would be unusual for a maker of software to state explicitly that software or other equipment is "Year 2000" compliant. There may be representations in software that this is the last accounting software you will ever need, etc., state-of-the-art, sales brochures, ads and user manuals describe it as software you will never outgrow. The industry purportedly was aware of the problem by at least September 20, 1996 when the problem was mentioned in a Dilbert comic strip.
EXPRESS WARRANTY
The statement suggests the equipment is Year 2000 compliant may be an express warranty.
BREACH OF MAINTENANCE AGREEMENT
There may be a separate contract in which the seller or maker agrees to continue the equipment for a certain period of time.
UNFAIR DECEPTIVE PRACTICE STATUTE
Silence in some circumstances can be deceptive and you do not have to prove intent under many unfair and deceptive practice statutes.
IMPLIED WARRANTY
The federal statute (Magnusen Ross Warranty Act) can be used only by consumers. They can sue for breach of written or implied warranties and collect damages and attorneys fees. 15 U.S.C. §1301, et seq.
PRODUCT LIABILITY
Courts generally do not allow recovery under products liability theory for pure economic losses. Some cases however, there might be physical injuries such as computers running factory machinery, elevators, hospital equipment for property damage to a computer will result in injury to another.
NEGLIGENT MISREPRESENTATION
Advertisements and/or statements made about a produce or the ability of a vendor to make sure your system is Y2K compliant.
BREACH OF CONTRACT
Claims could be made from specific contracts with software or hardware manufacturers themselves or as general contract breaches under Article 2 of the UCC. The threshold question would be whether software equates to "goods" as defined within the UCC. In most jurisdictions, this would not be a problem since there is case authority that "off the shelf" software is a good and the UCC warranties, both express and implied, would be applicable.
CONSUMER PROTECTION STATUTES
The Arizona Deceptive Trade Practice Act and Consumer Protection Act, A.R.S. § 44-1521, et seq.
Although the problem is a result of computer programmers seeking to save space in computer programs by using only the last two digits of the year for recording dates, the fix is not so easy and has already proven to be very expensive. Estimates of the cost of upgrading computer systems to eliminate the Year 2000 software limitation are staggering. The world costs of correcting computer programs is expected to be between $300 and $600 billion. On top of that will be costs of claims brought against the companies that have for the past 3-4 years touted themselves as being able to provide year 2000 compliant software and fixes.
STATUTORY PROTECTION
United States Congress recognizing the potential for a Y2K disaster enacted the "Year 2000 Information Readiness Disclosure Act." Congress in an attempt to encourage businesses to promptly and candidly disclose a readiness for the new millennium and over a concern about the potential for legal liability associated with any disclosure exchange of year 2000 readiness enacted a federal law stating that the disclosure concerning projections or estimates of year 2000 processing capabilities of an entity, product or service would not be admissible in a subsequent legal action unless it was made with knowledge of its false, misleading or inaccurate content. Similarly, the Arizona legislature is currently considering a bill that would require an aggrieved party to give written notice to a prospective defendant giving them an opportunity to cure any defect or problem precipitated by Y2K failure. This will would provide a defendant with affirmative defenses if they made attempts to notify buyers of potential problems and their intent to cure any problems associated with Y2K issues (Arizona legislative session 1999) (Senate Bill 1294).
"CGL" INSURANCE POLICIES
Commercial general liability (CGL) policies will likely be viewed as potential source of insurance coverage for Y2K claims. These policies provide coverage for damages as a result of bodily injury or property damage to third parties. In most CGL policies, the express language requires that any bodily injury or property damage be caused by an "occurrence." An occurrence is generally defined as an accident, including a continuous or repeated exposure to conditions which result during the policy period and bodily injury or property damage neither expected nor intended....
The Y2K problem has been known for many years. Software users and designers have been aware of the Y2K programming limitations and laid out warning scenarios including airplane, train and elevator accidents. Governmental agencies have considered the need for legislation and regulations to address the problem.
All the factors support an insurer's argument that policy holders knew or should have known of the substantial likelihood that loss would occur as a result of any Y2K problem. Insurers will likely reserve rights or decline coverage based upon the application of an "expected or intended clause." The question will become whether a "reasonable person" would have purchased appropriate computer systems software or sought expertise to maintain safe and functioning computer operations given their knowledge of the Y2K problem.
KNOWN LOSSES
An insurance policy does not cover losses that are known at the time the policy becomes effective. The basis premise for this limitation and coverage is to prevent insureds from incurring a loss and then merely going out and purchasing coverage rather than insuring against the risk of loss. It is anticipated that many Y2K injuries or claims will constitute "known losses" both with respect to software design and software purchase. Insureds may argue that they are entitled to coverage because the loss was not a certainty at the time their policies were issued.
BODILY INJURY
It is expected that there will be fewer Y2K claims for bodily injury as opposed to property damage. No one knows for sure but hopefully nuclear reactors, air traffic control systems, and signal lights across the United States will not all simultaneously fail. The more likely scenario is that there will be glitches in systems whether elevators, water supply or refrigeration systems that will cause losses.
With respect to bodily injury claims, however, some will occur perhaps as a result of elevator system failures or possibly medical device failures such as pacemakers? The elevator example presents the typical type of bodily injury claim as a result of the sudden movement or stoppage of an elevator causing injury to passengers. Again the question becomes as to whether the insured/owner knew of the probable failure of the elevator system causing the bodily injury and took no steps to prevent it? Under these circumstances, an insurer may exclude coverage in that the bodily injury that occurred to a third party was expected or intended based upon the standpoint of a "reasonable person."
PROPERTY DAMAGE
Within the CGL policy, the definition of property damage would include:
Physical injury to tangible property; and
Loss of use of tangible property that is not physically injured.
There will be numerous disputes regardless of the actual impact of Y2K to computer systems as to what harm or damage constitutes "property damage." There will be claims where companies determine that the computer chip and software must be replaced for the machinery or system to run properly and submit claims for property damage. There will be situations where failure of the computer system causes damage to the plant, its inventory or machinery causing it to fail or break which is alleged to be property damage.
Clearly, steps being taken now by companies to repair or replace systems so that they are Y2K compliant are not entitled to reimbursement for "loss of use" or "physical injury" to property caused by the necessity of making everything Y2K compliant. Such upgrades are now considered routine system maintenance.
Many courts have held that electronic data and software do not qualify as "tangible property." The destruction of the data itself is not insured because it cannot qualify as tangible property as defined by the typical CGL policy. See Magnetic Data Inc. v. St. Paul Fire & Marine Company, 430 N.W.2d 43 (Minn. Ct. App. 1980).
The strongest argument for coverage for property damage under a CGL policy will be where failure of computer software causes damage to plant machinery, elevators, refrigeration systems, nuclear reactors, etc. Although such damage would fall within the definition of property damage, there are various exclusions that might be applicable and need to be considered.
COVERAGE ISSUES UNDER TYPICAL CGL POLICY
It is anticipated that once Y2K claims are made, each and every claim will be analyzed with respect to whether the type of bodily injury or property damage was expected or intended and what steps were made to remediate the problem that exists. Several defenses likely to be analyzed by an insurer are:
TRIGGER OF COVERAGE
This will be analyzed separately from the property damage or bodily injury claims. The question is when did the defect occur? When there was a failure of the product, when the product was manufactured, when the product was sold, when the product was installed.
MITIGATION AND REMEDIATION
What attempts were made by the policyholder/insured to prevent damage once there was an occurrence within the meaning of the policy, generally an insured is obligated to take steps to mitigate damages.
"OWNED PRODUCT" OR OTHER BUSINESS RISK EXCLUSION
In situations where the product is "your work" or "your product" may not be covered. For instances, in the legal market place to the extent that your own management system employees "fixed" any potential software problems, there may be limited or no coverage based their inability to fix the problem and resultant damage or shutdown to your business.
ERRORS AND OMISSION COVERAGE FOR Y2K LOSSES
Errors and omissions (E&O) policies insure professionals for claims against them arising out of their professional services. Insurers are bracing for several different types of claims based upon the Y2k/millennium bug issues. It is anticipated that the following professionals will be sued because of bodily injury or property damage caused by Y2K issues:
Attorneys
Who else; attorneys who give bad advice about the scope of the problem potential impact if they are business clients who are responsible for fully drafted sales or service contracts may find themselves exposed to malpractice lawsuits.
Remediation Consultants
Many companies have advertised and taken on the "burden" of getting businesses into compliance with anticipated Y2K problems. Given the stakes and high costs of remediation, expectations are high that those who have hired remediation consultants will not experience any problems:
Guess again!
Software Design Professionals
Those who originally designed noncompliant software will obviously be the likely targets of Y2K lawsuits for having known about the problem; failed to warn; and forcing business to expend thousands of dollars to purchase new software that is Y2K compliant.
Accountants
Those who fail to anticipate the decrease in corporate earnings or business failures may be targeted by investors/management.
Insurance Agents and Brokers
Insurance professionals are likely targets for either their failure to be compliant therefore failing to send out renewal notices, premium notices, etc., or their failure to have procured certain types of coverages that may have minimized Y2K losses (e.g., business interruption insurance, etc.).
E&O policies are almost always written on a claims made basis. It is anticipated that there will be coverage issues as to what is a "claim" under an E&O policy. A claim is generally the event that triggers coverage and many times is an actual lawsuit against the professional. Most applications and/or policies ask the professional if they are aware of any claim or circumstances that might lead to a claim at the time they apply for insurance. It may become a factual question as to what was known by the insured as it related to Y2K issues. In anticipation of such claims, many policies already contain specific Y2K exclusions.
CONCLUSION
No one really knows the extent to which the millennium bug will cause problems after January 1, 2000. You may be either an individual or business making a first party claim for property damage or an individual or business defending a claim because of a Y2K failure as having a CGL (liability policy) a directors and officers policy (D&O) or a for professional negligence (E&O). The individual facts of each claim are going to be important in determining whether coverage exists.