{"id":32225,"date":"2008-03-26T16:35:41","date_gmt":"2008-03-26T21:35:41","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/uncategorized\/the-year-2000-computer-challenge-to-the-insurance-industry.html"},"modified":"2008-03-26T16:35:41","modified_gmt":"2008-03-26T21:35:41","slug":"the-year-2000-computer-challenge-to-the-insurance-industry","status":"publish","type":"corporate","link":"https:\/\/corporate.findlaw.com\/corporate-governance\/the-year-2000-computer-challenge-to-the-insurance-industry.html","title":{"rendered":"The Year 2000 Computer Challenge to the Insurance Industry"},"content":{"rendered":"
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Most computer systems in use today can only record dates in a two-digit format, i.e., 98 for 1998. This format is very common in older systems and software that were designed when computer memory was expensive, but it also exists in contemporary systems and software applications. The two-digit date field threatens to cause computers to fail to operate properly when years after 1999 are used, because the year 2000 is indistinguishable from the year 1900.

While the problem is easy to rectify for a single line of programming code, if one multiplies the problem millions of times over for each time a date field appears, it is not hard to imagine why the tab for fixing this Year 2000 ("Y2K") computer problem is placed as high as $75 billion in the United States and $600 billion worldwide. Moreover, this amount does not take into account associated litigation costs and damage awards. Such litigation costs are estimated at from $2 billion to $1 trillion while the costs of damages and punitive awards are being placed in the $100 billion range.<\/p>

Given the huge amounts at stake, it is inevitable that businesses are searching for different ways to offset any anticipated expenditures related to the problem. Already, law firms that traditionally represent policyholders are pointing to insurers as likely "deep pockets" to foot the bill. Having previously recovered billions of dollars for asbestos and environmental problems, corporate policyholders and their counsel need little encouragement to see insurance as an untapped resource for funding an expensive Y2K fix. This all but guarantees that insurers again will face the prospect of massive, high-stakes litigation over the question of whom pays to correct an expensive, societal problem.<\/p>

If anything, the Y2K problem may represent a more serious challenge to the insurance industry than the asbestos and environmental liability problems. While payments for asbestos and environmental claims fell almost entirely on liability insurers, carriers that underwrite property, directors and officers ("D&O") and errors and omissions ("E&O") policies are also expected to become targets of Y2K litigation. Thus, carriers writing such policies find themselves threatened with the same type of financial shocks from high-stakes litigation that liability carriers have become all too accustomed to facing in the recent past. Reinsurers ultimately are subject to similar problems; however, because their liability derives from that of their cedents, most appear to be taking a "wait and see" approach to this issue.<\/p>

Anyone dependent on computers to produce a product or provide a service might seek coverage from their liability carriers when third parties make claims based on Y2K problems. Most such claims will seek a defense and indemnity for lawsuits based on Y2K problems such as the inability of a point of sale system to process post 1999 debit or credit cards. However, we cannot rule out the possibility of claims arising out of torts, i.e., when an airplane crashes or an elevator fails due to a Y2K problem.<\/p>

Key issues associated with liability coverage will include: (1) whether the Y2K related damage is not covered because it was an expected or intended result of the failure to correct the Y2K problem earlier; (2) whether there is no coverage for Y2K related damage because the Y2K flaw constitutes a "loss-in-progress;" (3) whether delay in informing the insurer about a Y2K problem constitutes "late notice" of an occurrence; (4) whether the Y2K problem can be said to have caused nonrecoverable economic loss or recoverable damage to tangible property; and (5) whether the Y2K problem triggered a policy that was in force when the defective system or program was installed or when the Y2K problem manifested itself.<\/p>

Claims-made coverage raises additional issues related to whether the claim was made and reported during the policy period. Thus, at least one policyholder's firm has advised its clients to provide notice under an existing claims-made policy of potential Y2K problems if a Y2K exclusion is being added to a policy on renewal.<\/p>

In contrast to liability insurers, property carriers will be asked to reimburse the insured for in-house Y2K problems arising out of the insured's own systems. While property insurers will probably prevail against Y2K claims made under policies that only cover a named peril, they remain subject to the prospect of substantial liability under all risk policies. With respect to such policies, a key issue will be whether there is an exclusion that may apply, such as those for "input, programming or processing errors."<\/p>

Assuming there is coverage, property carriers may face additional claims for the cost of business interruption. Business interruption coverage typically compensates the insured for lost profits or earnings incurred due to a covered peril. Such coverage adds a costly dimension to the Y2K challenge confronting property carriers.<\/p>

If a corporation's directors are sued because they allegedly failed to address the Y2K challenge, D&O policies might be triggered unless it can be shown that the insured misrepresented the extent of his knowledge about potential liability for the Y2K problem. E&O policies may also cover claims made against Y2K problem consultants if a Y2K fix goes awry. Because most contemporary E&O policies are written on a claims-made basis, issues related to when the underlying claim was made and reported will be of critical importance in determining whether carriers assume liability under such policies.<\/p>

What can insurance companies do now to help manage this potential Y2K liability? First, insurance companies should amend their underwriting guidelines to include specific inquiries concerning Y2K risks and, in appropriate cases, consider including Y2K exclusions at renewal. Second, insurers should ensure that claims handlers understand the Y2K problem as well as any applicable defenses. Third, insurers should review their book of business to attempt to assess their potential Y2K liability. This should include actively monitoring the growing number of Y2K lawsuits that have been filed against parties that use computers in products or services. Fourth, insurers should consider issuing bulletins to their insureds about the Y2K problem. Placing their insureds on notice about the problem now may help support a future occurrence, loss-in-progress or late notice defense. Finally, carriers should consider following the lead of companies that have already offered Y2K insurance. Providing such insurance eases the ability of a company to add Y2K exclusions to its policies.<\/p>

In sum, the Y2K problem poses the greatest challenge to the insurance industry since the asbestos and environmental claims crises of the 1970's and 1980's. Given this challenge, the insurance industry cannot afford to merely await the Millennium. Rather, it must take a proactive approach to the prospect of Y2K inspired lawsuits.<\/p><\/div>","protected":false},"excerpt":{"rendered":"

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