Companies faced with Y2K claims by their customers will undoubtedly turn to their liability carrier for defense and indemnity. However, it is questionable whether all or any Y2K claims will be covered. In addition to the obvious arguments that the claims are not an "occurrence/accident" or the damages sought are not "property damage," there may be some additional exclusions which apply.
Year 2000 Exclusion
Many insurers writing commercial general liability policies which will be in effect during the year 2000 have included Y2K exclusions in their policies which preclude coverage for seemingly any and all claims arising out of Y2K malfunctions. While a cursory review of the exclusions appear to cover all claims, the soundness of the exclusions will not be determined until they are litigated and thus far none have.
Expected or Intended Injury Exclusion
Most CGL policies contain an exclusion which precludes coverage for "bodily injury or property damage expected or intended from the standpoint of the insured." Arizona's court's have narrowly construed this exclusion in the commercial context and require a two prong analysis: (1) review of the insured's subjective intent to cause harm and (2) a review of whether harm was substantially certain to occur. As a general statement, when a court reviews the "subjective" intent of the insured, the determination of whether there will be coverage will be largely dependent upon each individual circumstance.
Sistership Exclusion
This exclusion excludes coverage for damages claimed as a result of recall, inspection, repair, or adjustment of the insured's work product or impaired property. The exclusion applies where products similar to the insured's are withdrawn from use to prevent the failure of other products which have not yet failed, but are suspected of containing the same defect. In the context of Y2K claims for coverage by software engineers and vendors, this exclusion may apply assuming that the product has not yet failed or caused an occurrence.
Products/Completed Operations Hazard
This exclusion precludes coverage for claims caused by products that have been relinquished by the policyholder and have been put to use by third parties. This exclusion bars coverage for injuries that occur after the insured has completed work on a particular operation. The inquiry into the application of this exclusion will focus on when did the injury occurred prior to or subsequent to the completion of the product.
Professional Services Exclusion
The purpose of this exclusion is to preclude coverage which would usually be afforded in an errors and omission policy. A CGL policy was not designed to provide coverage for liability arising from the conduct of professional services, e.g. computer professionals providing negligent consulting.