One of the great difficulties for insurers is identifying and quantifying their potential exposure to year 2000 problem related claims, explains James Amberson. Coverage for claims will depend upon the individual facts, policy wording, territory and jurisdiction.
The following series of questions is intended to assist underwriters in identifying policy terms which may provide coverage for year 2000 related claims. It is not exhaustive nor is it legal advice. Underwriters are encouraged to seek legal advice in reviewing their policy wordings and exposures.
* What policy trigger or triggers apply?
* Is there a potential to accumulate limits over multiple policy periods?
* If policy wordings include a claim series clause, would claims due to the year 2000 problem be considered to be one claim or multiple claims?
* Are the year 2000 problem and resulting losses fortuitous?
* From whose perspective must the fortuity be?
* What degree of corrective action needs to be demonstrated in order to establish fortuity?
* Was the use of two-digit year programming in computers an intentional act?
* Would limitations in coverage due to intentional acts apply if embedded chips or software are incorporated into products of others?
* If the use of two-digit programming resulted in cost savings for companies who suffer a loss due to the year 2000 problem, will these savings be used to reduce their awards and settlements?
* What risks does an insurer face as a result of its position on the scope of coverage or response to the year 2000 problem (for example, bad faith, regulatory action, etc.)?
* Policies which expire after 1 January 2000 are clearly within the time period that problems will emerge. What policies has the insurer issued which extend beyond this date?
* Has the claims department become involved in determining an insurer's position and strategy in responding to year 2000 related claims?
* Is there a difference in the application of coverage for year 2000 related claims between market standard policy wordings and broker or custom policy wordings?
* Is software a "product" and/or a "service"?
* Does the answer differ between mass market software and custom developed software? If so, how much customisation is necessary before mass market software becomes custom software?
* Does the customer purchase a product or a license to use?
* If software is a service, does the distinction differ for embedded chips?
* If software or embedded chips are incorporated into other products, does the distinction change?
* Is the distinction the same in every jurisdiction or territory within the coverage grant?
* What effect does this distinction have on the standard of liability and the statute of limitations?
* When did the use of two-digit coding for the year cease to be the "state of the art"?
* Does a state of the art defence apply? If yes, would this defence also apply for services?
* After considering the above issues, would third party liability, products liability, professional indemnity, financial loss coverage and/or some other coverage potentially cover losses caused by software?
* Would coverage apply for bodily injury due to the year 2000 problem in applications, processes or products?
* Which applications, processes or products present a risk of bodily injury?
* Would coverage apply for ensuing loss to property due to the year 2000 problem in software applications or computer processes?
* If yes, would consequential damages or loss of use be covered? What are the conditions under which consequential financial loss would be covered?
* Would consequential loss include the cost of compliance conversion of software, data bases, testing programmes and other programming?
* Is damage to, impairment of or loss of data considered to be material damage, damage to tangible property or property damage?
* If data which is stored electronically is in a changed state due to the effects of the year 2000 problem, would that constitute material damage, damage to tangible property or property damage?
* If year 2000 related losses are considered to be material damage, damage to tangible property or property damage, would business interruption, contingent business interruption or extra expense coverage be triggered?
* Would these coverages pay for expenses to correct the problem?
* If data is proprietary, is it considered to be property?
* Is there any legal precedent on these issues?
* After considering the above issues, would property insurance, business interruption, third party liability, products liability, professional indemnity, financial loss and/or some other coverage potentially cover losses caused by software?
* Are computer programmers, computer consultants and other providers of computer-related services considered to be "professionals"?
* Are there any licensing, educational or practice related requirements applicable to these providers?
* Is there a principle of malpractice for computer-related service providers under law?
* Are computer-related service providers subject to a professional standard of care?
* Which professionals may present exposures due to the impairment of their information technology infrastructure?
Directors, officers and trustees
* To what extent are directors and officers obliged to evaluate the extent of their enterprise's risk posed by the year 2000?
* As of what date are they obligated to address the problem?
* Is the head of management information or information technology considered to be a director or officer?
* Are there specific regulations on the disclosure of the risks to the enterprise from the year 2000? If yes, are these risks solely those of the enterprise's own information technology suppliers and customers?
* Have trustees evaluated the risks to trust beneficiaries from the year 2000 problem (such as external service providers, investment strategy, etc.)?
Miscellaneous policy wordings or extensions
* Does loss of documents cover apply for loss or damage to data?
* What local or individual cover provisions may be exposed to year 2000 related claims (for example, contractual liability, product warranty, failure to supply, etc)?
* Can claims under product recall or removal and replacement coverage (for example, Aus- und Einbaukosten and répose et dépose) be triggered prior to any bodily injury or property damage?
* Would these coverages respond for upgrades or remedial work after the manifestation of the problem?
* If the policy wordings provide for incident reporting, is there an exposure to a laundry listing of incidents?
* Does the policy wording provide the option for an extended reporting period under which claims could be covered?
* After considering the above issues, what is your level of comfort with your degree of exposure under non-life policies which you underwrite? What is the estimate of that exposure?
Obviously, the magnitude of the year 2000 problem and its financial implications may lead individuals and companies to seek payment from insurers. However, whether an insurance policy will respond will depend upon the individual facts, policy wording, liability standard, jurisdiction, court discretion, political-economic pressures and "deep pocket" mentality. The degree to which an insurer will be affected will depend upon the amount of exposed business on its books.
The property/casualty market continues to be soft. Multi-year policy periods, lack of renewal proposals or tacit renewal practices and competitive concerns that underwriting scrutiny will adversely affect premium income or market share, combine to exacerbate the situation.
In a market such as this, it is the talented underwriter who can address this risk while retaining and growing a book of business. Alternatives available include: underwriting assessment by use of specialised questionnaires or proposals, risk selection, coverage limitations, pricing techniques and, risk management. The year 2000 problem clearly presents significant exposures which should not be ignored.
The insurance industry's response
Interest in the problem is growing but it has not been as publicised as in some European or American markets. Hong Kong and Singapore regulatory authorities have asked insurers about the ability of their information technology systems to handle the year 2000. A few insurers in Asia, mostly multinationals, are addressing their exposure under liability insurance policies. However, this practice is not yet standard.
The Asian Wall Street Journal reported on 13 January 1998 that some Thai bankers did not believe that they were exposed to year 2000 problems as Thailand observes the Buddhist calendar. However, the underlying programming is on the Gregorian calendar. Other businesses in Asia may be under a similar misconception. Unfortunately, the currency crisis is diverting attention from addressing the year 2000 problem or making it more expensive to purchase compliant software or tools.
The Ministry of Finance in Japan has added year 2000 compliance to its list of items to be addressed in audits of financial institutions, which would include insurance companies. Some Japanese insurance companies are preparing corporate statements on the issue.
The Association of British Insurers (ABI) issued a report which was prepared by legal counsel regarding the potential exposure to loss under property/casualty insurance policies. The result of this evaluation is the introduction of year 2000 exclusions for property/casualty business, which clarifies the position that related claims were not intended to be covered. Several UK insurers have developed their own exclusions, but the extent to which they are applied varies.
The Insurance Services Office Inc. (ISO) and the American Association of Insurance Services (AAIS) have proposed exclusions to property/casualty insurance policies. The consumer and technical advocacy committee of the Independent Insurance Agents of America (IIAA) on 30 December 1997 issued a letter urging state insurance commissioners not to approve the ISO's suggested exclusions. The IIAA is urging that specific directives be established regarding when the exclusions may be used.
Some associations, such as the German liability association and Dutch insurers' association, are studying the issue, as are some insurers. However, it appears that the issue has not received widespread, uniform attention.
James Amberson is a professional indemnity specialist on the European referral desk for General & Cologne Re, global casualty facultative, based in Cologne. E-mail firstname.lastname@example.org