The "Millenium Bug" and Issues Facing Insurers
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An example of an incorrect calculation produced by a computer that sorts dates by year is that the year 2000, represented by "00" could be identified as a date earlier than "99", representing the year 1999. Such a computer program could result in a financial spread sheet or projection indicating the financial trend for 1999-2000 period running backward rather than forward. Used by the insurance industry, insurance company computers might report a policy running through the year 2001 as having instead expired in 1901.
Given the dearth of potential problems facing businesses and insurers, there exists the potential for significant coverage problems under both first-party property policies and under third-party liability policies.2 Some insurance companies have already taken steps in anticipation of the "millennium bug" problem, issuing new products intended to provide coverage for certain types of losses caused by 2000 computer failures.3
Prognosticators estimate that the cost to fix the problem worldwide is between $300 billion and $600 billion. In July 1997, underwriters at Lloyd's of London were informed that the year 2000 problem will lead to litigation costing $1 trillion in the United States alone.4 Significantly, the scope of the problem will be revealed in advance on September 9, 1999, due to the fact that date was chosen back in the 1960's and 1970's to represent eternity and entered into many programs.5
Although efforts have already been undertaken at many insurance companies, banks and other financial service companies to avoid or minimize year 2000 disruptions, the majority of companies (including many law firms) have yet to evaluate their year 2000 system readiness, much less plan for necessary corrective actions.6
The millennium bug problem has already generated several suits filed in California, Michigan and other states. For example, a suit filed by an owner of a fruit and vegetable store alleged that customer credit cards were being rejected due to a year 2000 computer glitch in cash registers.7
One of the initial issues confronting insurance companies is the insurability of year 2000 claims. Some insurers are seeking to avoid coverage arguing that year 2000 claims lack the fortuity requirement which is basic to the concept of insurance.8 One judicial approach to the fortuity requirement is to view the determination of fortuity subjectively, based on what the parties knew or reasonably should have known at the time the policy was entered into. This inquiry is opposed to an objective determination based on hindsight. Under the subjective approach, the requirement that fortuitous losses result from chance is not negated.9
Many insurers facing year 2000 claims may attempt to void the policy ab initio if the insured provides inaccurate or erroneous information regarding whether or not the insured failed to disclose its potential year 2000 exposure. Where their insureds know of a potential year 2000 liability or problem and fail to disclose that on their insurance applications, insurers will likely deny coverage and/or rescind their insurance contracts based upon the insured's material misrepresentations.
Reacting prophylactically, companies have begun to issue "millennium insurance" attempting both to insulate themselves from potential exposure and to capitalize on a potentially large and lucrative market. A typical policy offers an inexpensive premium of up to $5 Million for up to $200 Million of coverage. Although high underwriting is a high risk, many other insurers are readily jumping into the 2000 arena.10
The millennium bug problem involves a simple solution with potentially financially catastrophic results if not addressed. Law firms and insurers that have devoted the resources to understanding the problem and are prepared to address its implications in both the business and judicial spheres most likely will avoid its impact.
1 Jinnett, Legal Issues Concerning the "Millennium Bug", 13 No. 12 computer law 16 (December 1996).
2 Murphy & McCormak, Dissecting the "Millennium Bug": An Analysis of the Insurability of the Year 2000 Computer Failure Claims, 506 PLI/PAT 369 (1998).
3 Murphy & McCormak, supra.
4 Murphy & McCormak, 506 PLI/PST at 374.
5 Murphy & McCormak, lbid.
6 James & O'Donnell, A Primer On The Year 2000 Bug: A Role For Careful Counsel, 41 June Boston Bar Journal 4 (1997).
7 Produce Palace International v TEC-American Corp, et al, Case No. 97-3330 CK (Macomb County Circuit Court, Michigan). See, Murphy & McCormak, ld.
8 Murphy & McCormak, at 378.
9 Murphy & McCormak, 506 PLI/PAT at 377 (citing University of Cincinnati v Arkwright Mutual Insurance Company, 51 F3d 1277, 1281 (6th Cir 1995). In Jurisdictions applying the modern approach, insurers will examine whether or not the insured had actual knowledge of the potential for year 2000 computer failures. Employing the subjective standard, insurance companies will be required to support its defense using the insured's own internal records in personnel regarding the potential for year 2000 computer failures. From an economic standpoint, such extensive discovery will only increase the costs incurred in litigating year 2000 claims. Other States such as California interpret fortuity narrowly barring coverage only when the legal liability of the insured is a certainty period.
10Does Your Computer Need Millennium Coverage?, Business Week (March 10, 1997)
© 1999 Kaufman, Payton & Chapa