Y2K Insurance Issues

Given the dollars involved, aggressive attempts will inevitably be made to recover losses from any available source -- the most obvious of which is insurance. Depending on the nature and timing of the claim and the period covered by the policy, the prospects for coverage range from good to almost nonexistent. Among the most likely areas for coverage are products liability and officers' and directors' claims.

In the products area, most liability policies will not provide coverage for damage to or replacement of the product itself. There is only coverage for resulting damage, and then only if such damage fits within the policy definitions of "property damage" or "bodily injury." California courts have generally held that pure financial loss is not "property damage" in the absence of physical injury to "tangible property." Thus, to invoke the standard products liability coverage, the insured must show that the claimed harm involves bodily injury to a person or physical injury to some property other than the product itself. Taking the earlier example, where an embedded chip on an intake infiltration device at a water treatment plant fails and discharges millions of gallons of untreated wastewater that sickens thousands of individuals and causes flooding damages to hundreds of buildings, the third party bodily injury and property damage claims against the device's manufacturer would probably be covered. However, the cost of recalling and correcting the devices would be excluded.

With regard to directors' and officers' liability, shareholder claims based on poor business decisions and managerial incompetence for failing to recognize timely solutions and take steps to correct a Year 2000 problem would fall squarely within the definition of a covered "wrongful act" in most directors' and officers' policies. Myriad other potential coverages (and exclusions) will no doubt be brought into play as the full scope of the Year 2000 problem becomes known. It will therefore be critically important for clients to recognize and consider the potential for coverage when dealing with these matters.