This is not another doom-and-gloom forecast of how the Y2K problem, or millennium bug, will cause the world to end Jan. 1, 2000. Rather, it addresses a major question: If damages result from the Y2K problem, will insurance companies pay the resulting claims?
Staking your claim
The answer seems to be yes, maybe and no. That’s because there are three types of claims, including:
- Claims for loss of revenues and profits if a business cannot function. This type would not be covered by regular property or business interruption insurance policies. Therefore, a loss that results from computers shutting down probably would not be covered under current policies.
- Claims for damages by third parties harmed by products that fail or services that cease to be delivered. If a medical device such as a ventilator fails, for example, this could cause serious injury and be life threatening. A liability lawsuit in this instance should be covered, unless insurers add an exclusion to existing policy language.
- Claims against companies that have financial problems resulting from Y2K noncompliance. These might come from shareholders who feel that stock prices decreased because company management was not proactive in addressing the Y2K issue. This type of claim would normally fall under a directors and officers liability policy, which protects senior management from claims for economic damages as the result of mismanagement and poor decision making.
Unless insurers specifically add exclusions to such policies, these coverages should respond to claims resulting from alleged Y2K mismanagement.
Taking action
So what can a company do? What can you expect insurers to do?
- Protect any existing coverage. Insurers are asking businesses to complete Y2K questionnaires so they can decide whether existing coverage should apply to Y2K risks or if they should add Y2K exclusions. Policyholders must take action to prevent an exclusion from appearing on their policies.
- Don’t complete every questionnaire received. Some ask unanswerable questions or require listing every piece of equipment a firm owns or uses. Others state they are warrantees that will be attached to the policy itself. Therefore, if a mistake is made on the questionnaire, coverage for a claim could be voided.
- Prepare a description of your Y2K plan. Include the scope of the problem within the organization, the plan for remediation, the resources dedicated to the plan, time frames and progress to date. If insurers balk at accepting the description, offer to review it verbally (in person or by conference call) to answer questions.
- Consider additional coverage. Several new insurance products have been introduced specifically to protect organizations from Y2K claims. Companies should work with their insurance brokers or consultants to determine if these should be considered.
- Review the insurance implications of using Y2K consultants. Companies that use them must assess the consultants’ insurance coverage. Companies should ask suppliers that manufacture products with computer chips about their Y2K remediation efforts and insurance coverage. If consultants or manufacturers contribute to a firm’s Y2K problems, their ability to help if a loss occurs may be limited to the valid and collectable insurance they have.
In looking ahead to 2000, there is the possibility that disputes over claims resulting from the millennium bug could wreak havoc on a firm’s ability to protect itself from lawsuits or recover for business interruption claims. Firms should proactively address these issues with insurers now, before losses occur, and position themselves for maximum protection in the event the worst case becomes reality.
Geoffrey D. Fallon is a vice president with the Columbus office of J&H Marsh & McLennan, an international insurance and risk management consulting firm. He can be reached at 461-6400.
