While the summer has seen a lull in legal news related to the Year 2000 problem, there have been two noteworthy developments. The first is the enactment of the federal Year 2000 Readiness and Responsibility Act, commonly referred to as the "Y2K Act," which seeks to limit the amount of anticipated Y2K litigation. The second is the filing of "sue and labor" lawsuits by insureds, against their insurance companies, seeking indemnification for their Y2K remediation costs.
The Y2K Act
On July 20, 1999, President Clinton signed into law The Year 2000 Readiness and Responsibility Act, Pub. L. No. 106-37; 113 Stat. 185; 15 U.S.C. ' 6601, et seq. The product of compromise between plaintiffs. trial lawyers and consumer advocates and the business and technology communities, the Act establishes procedures for lawsuits seeking damages relating to a Y2K failure, and generally is pro-defendant. Significantly, the Y2K Act applies to all lawsuits filed after January 1, 1999, and therefore includes lawsuits filed before the Y2K Act.s enactment. (Section 4(a).) The Y2K Act is Congress. second attempt to address the Y2K bug. The first was the 1998 enactment of the Year 2000 Information and Readiness Disclosure Act, which provides limited protection to Year 2000 readiness disclosure statements.
The Y2K Act, however, goes well beyond its 1998 predecessor by structuring and limiting Y2K litigation. It attempts to minimize litigation by requiring a plaintiff to notify the prospective defendant of the failure, permitting the prospective defendant 30 days to respond with a remedy, and an additional 60 days to cure the problem. (Section 7(a)-7)e.) Further, the complaint must allege that the Y2K defect is material, and state, with specificity, the nature and amount of each element of damage, and the factual basis for the calculation. (Sections 3(4), 8(b).)
Once a lawsuit is filed, the Y2K Act attempts to limit a defendant.s liability in two important ways. First, it limits liability, in most cases, to proportional, rather than joint and several, liability. (Section 6.) Consequently, a plaintiff cannot seek to require one defendant to pay the damages caused by a partner defendant. Second, the Y2K Act requires proof of punitive damages by clear and convincing evidence (currently the standard in California), and limits damages for individuals or small companies (50 or fewer full-time employees) to the lesser of three times compensatory damages or $250,000. (Section 5.)
In an apparent response to the numerous Y2K class actions that led the first wave of Y2K litigation, the Y2K Act places special constraints on class action litigation. Congress imposed an additional requirement for class certification, mandating a finding that the alleged Y2K defect be a "material" defect for the majority of the class. (Section 15(a)(2).) The Y2K Act also confers federal courts with original jurisdiction on Y2K class actions, with some limited exceptions. Interestingly, it further requires that the class notice not only clearly and concisely describe the nature of the lawsuit, but also disclose the attorneys. fee arrangement and provide an estimate of the amount of total fees to be paid. (Section 15(b)(3).)
There are several additional provisions of interest. For example, the Y2K Act includes protections for: (i) state and local governments from federal regulatory agencies for Y2K failures (Section 4(g)); (ii) consumers for their failure to make mortgage payments as a result of Y2K processing errors (Section 4(h)); and (iii) "innocent bystanders." Innocent bystanders are potential defendants who are not manufacturers, sellers or distributors of a product or provider of a service, are not in substantial privity with the plaintiff, and the nature of the claim is such that the plaintiff must prove that the potential defendant had actual or constructive knowledge of the Y2K problem (e.g., fraud, breach of fiduciary duty, interference with contact or economic advantage or negligent misrepresentation). In this circumstance, the Y2K Act heightens plaintiff.s burden of proof by requiring it to prove that the potential defendant had actual knowledge or reckless disregard of a known and substantial risk of Y2K failure. Importantly, the Y2K Act does not apply to personal injury or wrongful death claims. (Section 4(b)-4(c).)
The Y2K Act is a small step toward limiting excessive Y2K litigation. By forcing parties to attempt to resolve the problem prior to filing suit, and eliminating some of the incentives of filing Y2K actions, the Y2K Act may prove to be an effective means of containing the economic consequences of the Y2K problem.
Insurance Coverage for Remediation Costs: Is the Sue and Labor Provision the Answer?
The second noteworthy Y2K news of the summer is the filing of "sue and labor" lawsuits by insureds, against their insurance companies, seeking indemnification for their Y2K remediation costs. Some companies believe that the sue and labor provision of insurance agreements provides coverage for expenses incurred in evaluating and remediating potential Y2K problems. Focusing their efforts and hopes on a relatively obscure provision of insurance contracts, corporate giants such as GTE Corporation, Xerox and Unisys Corporation recently filed suit seeking reimbursement for their Y2K remediation costs. According to a recent Wall Street Journal article, over 100 companies have filed such claims or alerted their insurers.
The sue and labor provisions (also known as preservation of property clauses) originate from 17th century maritime policies, in which the costs incurred in saving the ship or cargo could be recovered under the insurance policy. Typically, the provisions provide that the insured can "sue, labor, and travel for, in and about the defense, the safeguard, and the recovery of property or any part of the property insured" where there is actual or imminent loss or damage to insured property.
Citing this provision, companies are seeking to recover their Y2K remediation costs, asserting that these costs were incurred to avoid actual or imminent losses due to Y2K failures. The argument is that if these remediation costs were not incurred, the companies would have suffered damages many times these costs.
However, the insurance companies disagree and are denying coverage (hence the lawsuits), asserting a multitude of legal arguments for their denial. Such denials are not surprising, given that nationwide remediation costs are in the billions, if not hundreds of billions, of dollars. Generally, the insurance companies. defenses to coverage have four bases. First, the companies argue that the sue and labor provision is limited to imminent or actual damage, which allegedly does not include damage that might occur a year or more from the date of the expense. Second, they contend that the loss is not a covered loss, because these costs are ordinary business costs, have occurred from a well-known event and therefore, are not fortuitous or accidental. Further, the loss would be to intangible property, which is excluded under most policies. Third, the companies assert that since these costs were first incurred several years ago, and coverage was not sought until recently, the insured failed to provide timely notice and proof of loss as required under the policy. Finally, they argue that such losses are expressly excluded under the exclusions for Year 2000 remediation expenses and/or damages commonly found in more recent policies.
The lack of timeliness defenses raised in these first lawsuits should act as a warning signal that potential plaintiffs should notify their insurance companies immediately if they would like pursue indemnification for their remediation costs. While coverage is far from assured, waiting until the first decisions come down most likely will preclude coverage, should such coverage exist.
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