Kevin J. Walsh
Jay N. Heinrich
Introduction
An important element of a company's Year 2000 plan is an evaluation of the insurance coverage that may be available for Year 2000 related claims. To begin an insurance coverage evaluation, a company must identify the types of Year 2000 related losses and liabilities it may face and then determine which of its insurance policies those losses and liabilities implicate. The company also must become familiar with the issues most likely to arise in coverage disputes and should prepare (with counsel) its positions in those disputes. When considering Year 2000 related insurance concerns, a company should consider both property/casualty ("first-party") and liability ("third-party") coverages.
In the property/casualty context, a company whose property has been damaged by a Year 2000 related failure may look to its insurers for reimbursement for the costs of repair or replacement of damaged equipment or machinery. A company that is forced to shut down or partially shut down operations while repairing its computers or machinery may look to its business interruption coverage for reimbursement of profits lost during the shut down. Other specialized property policies such as Electronics Equipment coverage, Inland Marine coverage, or Boiler & Machinery coverage should also be reviewed.
In the liability context, a company that gets sued for personal injury or property damages resulting from its products or services will likely look to its general liability insurers for defense costs and indemnification of a settlement or judgment. A company's directors and officers will look for these same benefits from the Directors and Officers (D&O) Liability policies if they are sued by shareholders for the actions they took, or failed to take, regarding the Year 2000 problem. Any errors and omissions or other professional liability policies should also be reviewed.
Each insurance policy, therefore, must be carefully scrutinized. There are different forms of coverage and a multitude of available options whose wording may differ in significant and coverage-determinative ways. It is the wording of a policy that will ultimately determine coverage. Therefore, a company must start now to evaluate its insurance policies and determine which issues are most likely to affect its coverage for Year 2000 related losses and liabilities.
Issues Most Likely to Arise in Coverage Disputes
The battle lines between insurers and policyholders are already drawn. Insurer advocates contend that coverage for most Year 2000 losses is not available under present insurance products. Policyholder advocates, on the other hand, point to the broad wording of property and liability policies and argue that policyholders should have significant protection. Below are some of the issues most likely to arise in coverage disputes. Prevailing on one issue does not mean there will not be determinative. All the issues below, therefore, and others must be reviewed before you can make out your coverage position.
Not A Covered Cause
Insurers will likely argue that Year 2000 claims do not arise out of a "covered cause" or "covered peril". Many property policies limit coverage to defined causes - e.g., fire or windstorms. Computer malfunctions or data processing errors are typically not found in such a list of defined perils. Therefore, insurers will argue, these policies do not cover Year 2000 related claims.
While this argument will be successful against policies with named perils, it will not be successful if the policyholder has "all risk" property insurance. An "all risk" policy protects the policyholder from loss however it may occur and does not require that the loss arise out of a particular peril in order to recover. The "covered cause" defense is, therefore, irrelevant to the coverage issue presented by Year 2000 claims under an "all risk" property policy.
Fortuity
A general principle of insurance law prescribes that insurance only covers fortuities, i.e., events that are not "expected or intended" by the insured. Although the term fortuity is more commonly used in property/casualty policies, the same concept is included in liability policies in terms of specific exclusions for expected or intended occurrences. Insurance companies will argue that the Year 2000 problem has been known for quite some time and has been widely publicized. Accordingly, insurers will argue, all insurance claims based on the Year 2000 problem should have been anticipated and are, therefore, excluded from coverage as a non-fortuitous loss. The legal principles applicable to the fortuity defense, however, establish that whether a loss is fortuitous or not is a highly fact-sensitive inquiry. Any time you have a fact intensive inquiry, the litigation is likely to be hotly contested.
Physical Loss or Damage to Property
A very difficult issue likely to arise in coverage disputes involves the policy language in both property/casualty and liability policies that requires "damage to property," "physical loss or damage," "physical loss," "injury," "tangible property" and the like. All of these terms will raise difficult issues, likely to engender coverage disputes: What constitutes damage? Is physical damage required or only physical loss? Is economic loss covered? What is tangible property? Does physical touching satisfy physical damage? These are issues likely to be raised in this area, but are certain not to be the only ones.
The language of the policy is always the starting point for any analysis. A simple grammatical analysis of the damage clause may provide the best arguments for or against coverage. Insurers will also argue, however, that common insurance industry practices-i.e. how policies always have been interpreted-may preclude coverage. Like so many other aspects of the Year 2000 problem, the parties and the courts will not-at least initially-have Year 2000 cases to look at or rely upon and, therefore, will have to look at precedents established in other contexts, such as, perhaps, in the areas of asbestos and environmental coverage. While Courts were generally sympathetic to insureds in the asbestos and environmental areas, Year 2000 issues are arguably different, in that policyholders knew about the problems sufficiently early to take preventive steps. That may engender distinctly different coverage decisions.
Trigger
An insurance policy only covers a specified time period. The trigger issue assumes that a loss has occurred, but poses the question of when the loss occurred. The law regarding when a loss occurs is complicated, and different jurisdictions follow different trigger theories. Extrapolating from arguments used in the asbestos context, the four most likely trigger theories are: "Installation," "Manifestation," "Continuity," and "Actual Injury." These trigger theories will determine which policy a policyholder may claim under. The issue is particularly important for Year 2000 claims because policies in effect in later periods may contain exclusions that significantly cut back available coverage. Accordingly, policyholders may seek to access earlier-in-time policies on the basis of case law that supports the triggering of coverage before damage is discovered (i.e. installations or continuous).
Exclusions
Most insurance policies contain risk exclusions. These exclusions take many forms and the list of exclusions seems to get longer and longer. Each of these exclusions has to be carefully analyzed.
A company's insurance policy also may contain specific Year 2000 exclusions. Some exclusions are very broad, excluding all losses arising from Year 2000 failures. Other exclusions preclude coverage for damage to the computer system but still allow coverage for ensuing losses.
Steps Insurers are Taking to Prepare for Coverage Disputes
Even if a company's current policy has no Year 2000 exclusions, next year's policy may. Many insurers are trying to avoid future coverage disputes by adding specific exclusions or endorsements. Most state regulators have already approved standard form Year 2000 exclusions so insurers may exclude coverage for these potential disruptions. (Some insurance companies are not sending out the Year 2000 endorsements since they are concerned that the endorsements may put them at a competitive disadvantage.)
Some insurers also are marketing specialty Year 2000 policies. These policies generally require large deductibles and expensive quarterly audits. These new policies as well as the endorsements to existing policies are likely to be used in future disputes by the insurers as evidence that traditional policies did not cover Year 2000 claims. Of course, the counter argument is that the fact that such policies and endorsements were added is itself evidence of the ambiguity of traditional policies.
Conclusion
Although it is too early to tell exactly how widespread Year 2000 related losses will be, it is certain that companies facing Year 2000 related losses and liabilities will look to their insurers for compensation. As the Year 2000 approaches, companies must assess their Year 2000 risk, determine their insurance needs, and make an educated examination of their past coverage as well as policies currently being offered to assess whether those policies will address the risks they face as a result of the Year 2000.