The nation.s insurance industry has responded to the widely predicted potential for large losses caused by the Year 2000 computer problem by attempting to create explicit exclusions to coverage in casualty and liability policies.
Even in the absence of specific exclusions, insurance companies are expected to take the position that losses resulting from Year 2000 computer errors are not covered under existing policies. For example, insurance companies will rely in defending against property claims on the "fortuitous loss" principle, which holds that a loss resulting from an expected and predictable event is not covered by insurance. Thus, a homeowner in Fairbanks, Alaska who builds an outdoor swimming pool in the summer and fails to drain it in the fall, will not be able to look to her homeowner.s policy for coverage when the water in the pool freezes in the winter and destroys it.
In the same way, insurance companies will argue that the Year 2000 computer problem is a known event which was, in effect, designed into computer programs, and which can be obviated through reprogramming. Having computers which are not ready for the Year 2000 is, under this reasoning, a choice rather than an accident. Many insurance companies have decided to circumvent the risk that this position will not be upheld by the courts by adopting explicit exclusions of losses caused by this computer glitch. For example, Insurance Services Office, Inc. (ISO), a firm which prepares standardized policies and endorsements for the insurance industry, has promulgated and filed with the insurance offices of each state a number of proposed exclusionary endorsements. Several of these proposed endorsements are of interest to businesses.
One endorsement, to be used to modify the standard commercial property policy, excludes from coverage any losses caused by the failure of any computer or other hardware to properly handle dates or times. Excluded from coverage would be not only losses caused by the insured.s computers, but also those caused by the computers of third persons. This exclusion has been approved by the insurance departments of most states. Individual insurers may use this approved endorsement, or may use their own endorsements, to modify and restrict the coverage provided by their standard policies.
ISO.s "Year 2000" property insurance endorsement also specifically excludes payment for repair, replacement or modification of any hardware or software which malfunctions due to incorrect processing of dates. These property insurance exclusions are likely to become nearly universal for new policies or renewed policies during the next twelve months. In many states, in fact, the terms of approval of the endorsement require that the exclusion be applied to the standard business property coverage.
The effect of the property insurance exclusions may not be felt on multiyear policies which will not be renewed until after December of 1999, or in situations where an earlier version of the policy governs coverage. In other cases, the exclusions will, in all likelihood, make it extremely difficult for businesses to recover from their insurers for any losses caused by "Year 2000" computer or hardware failures.
This would extend not only to economic losses, such as business closures and replaced equipment, but also to damaged property. It should have no impact on worker.s compensation coverage for injured workers (but see below regarding liability coverage for injury to others). Damaged property might result in a number of ways from a Year 2000 equipment failure.
For example, an industrial freezer could be switched off by a failure of its automated control system, causing melting of frozen foods. Process control systems in factories could fail, ruining work in progress. The failure of heating systems in cold weather climates (recall that January 1, 2000, will be in the middle of winter) could cause extensive damage to pipes and other parts of buildings. Under the new exclusionary endorsement, none of these losses may be covered.
The insurers have argued to insurance regulators that the problems inherent in the Year 2000 computer problem are a known, foreseeable issue and not a contingent risk. Any business could, according to their position, adequately prepare and make certain that its equipment will not fail or malfunction on January 1, 2000. Therefore, say the insurance carriers, it is the businesses and not the insurance companies that should pay for the costs of failing to prepare for this predictable crisis.
Also being submitted for approval are endorsements denying coverage for liabilities for personal injury and damage to property caused by Y2K-related failures. The endorsements include general liability, premises liability and products liability ("products/completed operations"). Liability insurance policies protect the insured from claims and suits from persons allegedly damaged by the insured. These policies typically obligate the insurance company to hire attorneys to represent the insured in any lawsuit filed against the insured, and also to pay the amount of an allowed claim against the insured.
In the freezer example given above, assume the frozen foods are owned by ABC Groceries, Inc., which rents space in the freezer from XYZ Cold Storage, Inc. Because of the property insurance exclusion, ABC would not be able to recover from its own insurance company for food ruined by a computer problem which caused the freezer to shut down on January 1, 2000. If XYZ.s liability policy contained the general liability exclusion, XYZ would have no insurance to cover the claim against it by ABC.
Insurance regulators have been more cautious in accepting Year 2000 liability exclusions as opposed to the Year 2000 property exclusions. In some states, the exclusions must be submitted by individual insurers along with utilization plans to make it clear that the exclusion will not be applied in a discriminatory manner. In other states, the insurance regulators will require that the exclusion endorsement must be applied on a case by case basis.
Businesses seeking to determine the scope of their coverage regarding the Year 2000 problem should:
- Make themselves aware of the specific terms of their current insurance policies;
- Learn the conditions and limitations, if any, imposed by their state insurance regulators; and
- Keep abreast of amendments and new exclusions being imposed at renewal time.
Different insurance companies are approaching this problem in different ways, and some of them are not imposing Year 2000 exclusionary endorsements on their policyholders. Some insurance companies are imposing the endorsements on certain of their policyholders but not on others. Thus, it may be possible for a business to escape having an exclusionary endorsement imposed on it by transferring its business to another insurance company.
Whether the exclusion is present or not, insurance companies are likely to resist being held accountable for losses resulting from Year 2000 malfunctions. The presence of such an exclusion, however, would certainly be an additional argument against coverage.