AVOIDING THE BYTE OF THE MILLENIUM BUG: INSURANCE COVERAGE FOR Y2K

by Brenton N. Ver Ploeg, Esq.

"Nobody expects the insurance industry's response to claims of coverage for a problem of the magnitude of Year 2000 liability to be open arms."

Europe in the year 999 approached the millennium's end in barely concealed panic. Many of the nobility, in furtherance of the widespread religious belief that the world would come to a close along with the first millennium, deeded their entire lands and material goods to the church with the expectation of a greater reward to come. Jan. 1, 1000, dawned as before, however, and not much changed on history's timetable except that the church had a very good year financially. This time we might not be so lucky.

With the close of the second millennium only a bit more than an orbit away, present-day prophets of doom anticipate not planetary death but global paralysis because early programmers, in an effort to save precious space, decided to represent years with two digits instead of four. As the international computer network confronts the year 2000 flaw, also known as the millennium bug, data will become unreliable and systems will shut down.

The problems may last well into the next decade, impeding or halting the communications, travel and electrical power even of those who wouldn't recognize a computer should it byte them on the leg. The ensuing commercial chaos is sometimes projected to include the collapse of many companies and perhaps whole industries and economies dependent upon the global network.

This article is not about the technical problems. It is, however, a short primer for those likely to incur potential legal exposure or liability to others as a consequence of the year 2000 computer glitch likely to darken the world's dawn on Jan. 1, 2000.

The scope of this brief piece obviously cannot hope to touch the wide range of potential year 2000 litigation, a problem variously estimated at an eventual cost between $500 billion and several trillion U.S. dollars, but is limited to the question of litigation that may occur over insurance coverage for such losses. The presence or absence of coverage will, in many cases, spell the difference between economic survival and disaster for the defendants. And the defendants? Well, any person or entity using computers or computer chips to provide services to anyone else. In short, just about all of us. Small wonder the world quakes and lawyers clear the decks for action.

If you operate a business, you are at once a potential defendant and plaintiff in Y2K litigation. This is particularly true if you operate any sort of system with custom applications, i.e., the bigger you are, the harder you may fall. Various estimates gauge the number of Fortune 500 companies that may fail as a result of the millennium bug from a low of 1 percent to 3 percent (five to 15 companies) to a high of 15 percent (a staggering 75 companies).

All sizes, however, are subject to the risk, and, for those hoping for a bit of poetic justice, law firms are no exception.

Well-counseled American businesses faced with losses large and small employ a common mantra – check the insurance coverage. With stakes of this size, the battle will doubtless become intense, particularly when insurers have already made it plain that they don't wish to become the guarantors of programmers long retired. The stakes are high, and the facts unique, but the cases will turn on long established rules of policy construction. So, where to look?

Coverage and strategies

Errors and omissions (E&O), often known as malpractice, coverage is fast eroding as a possible harbor for coverage. Not only have nearly all insurers disclaimed Y2K coverage in their new and renewal policies, some smaller operations have already been notified that their current E&O coverages provide no insulation from such claims.

The lesson for the policyholder seems to be to act fast. If expenses are being incurred in an effort to forestall Y2K damages, it is better to be in an argument about whether such expenditures are actual losses (and not efforts to prevent loss) rather than to confront express expenditures for policies renewed from here on out.

A related issue is the question of whether a disaster whose exact date is known is the sort of loss contemplated by insurance, and the battle will often turn on the question of feasibility and chance. The closer the date, of course, the more certain the knowledge. Many of the same issues will apply to the terms of general liability insurance, all of which should also be reviewed for potential coverages. These coverages often include direct coverages for the insured known as business interruption insurance, again with the customary proviso that a compensable loss must be based on a chance event.

Directors and officers (D&O) coverages will become critical if a public company fails to become year 2000 compliant. Typical exclusions include:

  • Any fines or penalties in a criminal suit, action or proceedings.
  • Where the loss represents a personal profit or advantage illegally taken by the officer or director.
  • Where the loss was brought about by the fraudulent, dishonest or criminal acts of the director or officer, provided that the acts brought about or contributed to the claim adjudicated.
  • For bodily injury, sickness, disease or death of any person, assault, battery, mental anguish, or emotional distress.
  • For damage to or destruction or loss of use of tangible property.
  • For injury based on invasion of privacy, wrongful entry, eviction, false arrest, false imprisonment, malicious prosecution, libel or slander.

Unless these exclusions change dramatically, an insured's efforts to forestall its year 2000 exposure should qualify it for coverage, though its efforts are negligent or even – with the always-present benefit of litigation hindsight – grossly negligent.

Here as elsewhere, however, an insured cannot falsely diminish its projected year 2000 problem on insurance applications without exposing itself to the possibility that the entire contract could be rescinded on grounds of misrepresentation. Honesty remains the best policy if you want to keep a policy.

All-risks insurance traditionally provides the broadest range of coverage and covers any loss not specifically excluded. It's not the right time of the century to let such coverage lapse.

Coverage issues

Nobody expects that the insurance industry's response to claims for coverage on a problem of this magnitude will be open arms. The language of commercial policies can very widely, however, and it's not possible to generalize about the existence and the interrelationship of coverage and exclusions clauses except on a policy by policy basis. Delay in providing notice, however, may be fatal because the above-described successive revisions of insurance policies will exclude the millennium bug by precise description.

If the losses are already occurring – as they are in cases where time and effort is being expended to insulate you from the liabilities that can be associated with the potential collapse of your systems – a claim should promptly be lodged.

Resolution of these issues will, from case to case, be resolved either by the judge as a matter of law or, depending on the circumstances, only by a jury trial. The first Y2K lawsuit filed in the United States (for a restaurant's cash register system that would not accept credit cards with expiration dates beyond 2000) has just been settled, however, and nationwide litigation on the subject is already well in evidence. Also recall that the bug is likely to appear in increments rather than a sudden rush, such as with municipalities and corporations beginning a fiscal year on April 1, 1999, that will not close until March 2000. Present attention may be the best defense to future coverage exclusions.

Costly losses

Human nature being what it is, the efforts to have all software year 2000 compliant will likely fail in a number of cases. It is obvious, however, in an environment where the losses could run into trillions of dollars, that shifting the cost of eventual failure to an insurer may offer the opportunity for substantially diminished exposure. In some cases, insurance coverage will be the only bar to the company's destruction. Insurance coverage issues for the millennium bug, in short, cannot sensibly be placed on the do list for some other day, much less something to do for those of us lucky enough to have the elevators functioning when we return to work from the New Year's holiday in 2000.

Coverages should be evaluated immediately, and, if no other options are available, a cost-benefit approach should be applied for purposes of obtaining some of the optional (and doubtless expensive) special coverages for the millennium bug now coming on line in the industry, in order to avoid even less savory choices. (You want it fast? Cheap? Right? Pick two.)

Brenton N. VerPloeg, Esq. holds a bachelor of science degree from Northwestern University and graduated from Hastings College of the Law, University of California, in 1973. His civil trial practice firm specializes in complex and scientific litigation, attorney negligence, and all types of insurance disputes with emphasis in matters of coverage and bad faith.