Insurance companies, do you think your covered??? : LUSENET : TimeBomb 2000 (Y2000) : One Thread

This is a rather long article but one that should interest everybody. It would appear that insurance companies are preparing their legal arguements before the event occurs andhave very good legal standing. Do we have any insurance or legal type people in the crowd??


Year 2000 non-compliant software operates exactly as it was designed to operate. It will cause problems -- as foreseen by software designers and widely publicized to others -- only because it is used with dates designating the Year 2000 or later that repeat the digits used to designate years at the turn of the last century. The widespread awareness of the existence and implications of the Year 2000 problem raises the threshold question whether losses caused by the programming decision can be considered accidental or fortuitous as required by insurance policies.

Insurance is based on a fortuity principle, i.e. that coverage is extended only to losses that the insured did not know or expect would occur.(3) The fortuity principle is firmly rooted in public policy and the insurance contract. The fortuity requirement prevents the insured from passing on to others losses that the insured knows will come to pass. There would be no rational economic basis for an insurer to provide insurance for a loss that the insured knows will or fully expects to occur. The fortuity requirement therefore is reflected in the implicit terms of the insurance agreement.

Express contract language also reflects the fortuity requirement. Most commercial general liability insurance policies provide coverage for "all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage . . . caused by an occurrence." In many policies, "occurrence" is defined as "an accident, including a continuous or repeated exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured." The term "accident" is synonymous with the term "fortuitous."(4) Moreover, the words "neither expected nor intended" independently bar coverage for non-fortuitous harm. Intentional harm is under the control of the insured, and harm that is "expected" is far more likely to occur than is "accidental" harm upon which insurers actuarial calculations are based.

Case law addressing the fortuity requirement has most often turned on the "expected or intended" clause of the policy or the "known loss" principle. Whether a loss is considered to be "expected or intended" or is a "known loss" generally is a fact-specific question. As with many issues requiring the resolution of competing factual assertions, these issues typically engender extensive litigation and discovery. Moreover, courts have taken varying positions on the standards governing when a loss is expected or intended or constitutes a known loss.

"Expected or Intended" -- The Year 2000 problem and its likely implications have become common knowledge. Support for this argument is easy to find both in the popular press and in legal and computer industry publications. The New York Times alone has published over 75 stories mentioning the problem, starting as early as 1988. Moreover, trade organizations and publications in the computer industry likely have been warning of such problems since even earlier than the popular press. This also is true of legal and insurance publications. Software designers and users have been aware of the substantial probability of harm from the Year 2000 programming limitation for years. Numerous commentators have laid out warning scenarios including airplane and train accidents and delays, government benefits left unpaid, failing medical and security systems, the destruction of business data and records, dangerously mislabeled products, and assembly line shutdowns. The President, Congress and various government agencies have considered the need for legislation and regulations to address the problem. Recently the President proposed "Good Samaritan" legislation to Congress which would limit liability for "Year 2000 statements." The goal of the legislation is to encourage information sharing that would help minimize Year 2000 problems. In addition, Representatives David Dreier (R-CA) and Christopher Cox (R-CA) introduced the Y2K Liability and Antitrust Reform Act, which would limit liability concerning certain types of Year 2000 claims.(5) In addition, both the Senate and the House of Representatives have formed special committees to address Year 2000 issues. All of these factors will support the insurers arguments that policyholders knew or should have known that it was substantially probable that loss or liability would result from the Year 2000 problem. The Year 2000 problem undoubtedly will implicate a number of questions about the application of the "expected or intended" clause that have arisen in other contexts.(6)

For example, is the question whether harm from the Year 2000 programming decision was expected or intended to be determined by reference to an objective "reasonable person" standard or a subjective standard? In other contexts, policyholders have urged, and some courts have held, that a subjective standard applies, focusing on policy language specifying that injury must be expected or intended "from the standpoint of the insured." On the other hand, insurers urge, and many courts have held, that this phrase reflects a requirement that the expectation of harm be judged by the standard of a reasonable person standing in the shoes of the insured.

Under the subjective standard, a policyholder may be encouraged to remain consciously ignorant of possible harm in order to seek insurance coverage for such harm if and when it occurs. For example, even though numerous management, technical and legal experts are recommending that companies conduct Year 2000 audits to determine which of their systems are at risk and in need of upgrading, the subjective standard may encourage software designers or purchasers to ignore such guidance and bury their heads in the sand. In this way, a subjective standard may encourage risk taking activity by shielding a user from loss.

Denying coverage when harm is expected under an objective "reasonable person" standard, on the other hand, serves the important public policy goal of encouraging insureds to purchase appropriate computer systems, chips and software, and to maintain safe, functioning computer operations. If an insured knows that it will bear the cost of failing to plan and manage activities as a reasonable person would, then the insured likely will act more responsibly. The objective reasonable person standard also is more workable because it does not turn on a policyholders own possibly self-serving testimony about its knowledge and intent.

Of course, even if a subjective standard is applied, the insurer may use circumstantial evidence to show what the policyholder actually expected or intended. If the insured is a technically sophisticated entity that places substantial reliance on or develops computer systems, then this is strong circumstantial evidence that the insured would have understood the limitations of its computer system, and therefore had an awareness of the Year 2000 problem.(7)

Another question that arises in applying the expected or intended limitation is the level of expectation of harm that is required before coverage is unavailable for the loss. For example, must the policyholder know that a loss is substantially certain to occur or is a substantial probability of loss sufficient to bar coverage? The better reasoned decisions hold that damage was "expected" "if the actor knew or should have known that there was a substantial probability that a certain result would take place."(8) Further, coverage is barred even if the resulting harm is not of the precise character or magnitude that the insured expected.(9) In the Year 2000 context, if a programmer knew that a computer inventory system would read dates falling in the year 2000 as dates in the year 1900, but did not know whether the computer system would then order products labeled "00" to be destroyed or returned to sender, this would not alter the conclusion that the loss was expected. The nature of the harm and the amount of loss may differ, but in either scenario the likelihood of resulting harm is known.

A particularly interesting aspect of the expected or intended limitation in the Year 2000 context is the question of whose knowledge or expectation of harm is controlling in determining whether a corporation is entitled to coverage. Under ordinary principles of agency law, the knowledge and expectation of any employee acting within the scope of his or her employment constitutes the knowledge and expectation of the company.(10) In the Year 2000 context, this means that, to the extent a company employs sophisticated engineers or computer systems personnel, the understanding of those employees that harm was likely to occur may be sufficient to bar coverage.

Finally, to the extent that questions about the expectation of harm resulting from the Year 2000 software limitation appear murky, it is important to recognize that the burden of proof on the question of expectation rests on the insured. The policyholder is given the burden of showing that coverage exists in the first instance, i.e., that there was an "occurrence."(11) In order to be an "occurrence," most general liability policies provide that the bodily injury or property damage must be "neither expected nor intended." Requiring the policyholder to demonstrate that there has been a covered "occurrence" is consistent with general principles of burden allocation in litigation; the insured is the party with greatest access to the evidence relevant to establishing expectation of harm.(12)

"Known Loss"  As noted earlier, commercial liability insurance policies do not cover losses that are known at the time the policy becomes effective. Reflecting the fortuity requirement, this "known loss" or "loss-in-progress" principle is fundamental to the insurance system.(13) The principle prevents insureds from shifting known losses rather than mere risks to an insurance company and other insureds.

In many cases, Year 2000 injuries will constitute "known losses" both with respect to software designers and many software purchasers. Software designers were aware that they had a choice between using two-digit date fields or four-digit date fields. Some have justified the decision not to make software Year-2000 compliant based on their belief that non-compliant software would not be in use at the end of the millennium. That argument implicitly recognizes, of course, that programmers knew that the software had an important limitation and would cause injury if used past the year 1999 or in conjunction with dated data.(14)

In addition, ever since the Year 2000 problem was identified, it has been widely publicized and commenters have been predicting various likely consequences. Some companies may have received industry alerts or regulatory warnings concerning the foreseeable harms that will be caused by the Year 2000 software limitation. For example, the Securities and Exchange Commission recently issued a "Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies, Investment Advisers, Investment Companies, and Municipal Securities Issuers;" and the Federal Financial Institutions Examination Council ("FFIEC") has issued guidance outlining the responsibilities of senior management and the board of directors of all federally supervised financial institutions, providers of data services, senior management of each FFIEC agency, and all examining personnel for addressing the business risks associated with the Year 2000 problem.(15) These various factors support the argument that many policyholders have purchased insurance with full knowledge that Year 2000 non-compliant software and embedded chips posed a genuine threat to their date dependent systems and products and that a failure to cure the problem would result in injury to third parties or their property.(16)

Some policyholders may contend that, despite their knowledge of likely loss, they are entitled to insurance coverage because the loss was not a certainty at the time their policies were issued. Some courts have accepted this narrow interpretation of the "known loss" doctrine even though it virtually eviscerates the doctrine.(17) Many jurisdictions, however, recognize that, where substantially probable harm from a preexisting condition is known to a policyholder before it purchases an insurance policy, coverage is barred by the "known loss" doctrine.(18)

-- y2k dave (, November 27, 1999


What about Life Insurance policies? If people end up dying due to starvation, freezing to death, or by other unforsakeable conditions, will the insurance companies have some loop hole that releases them from liability of paying the benefits?

-- Desiree Wilson (, November 27, 1999.

As an agent and having done adjusting in the past, I can only tell you to call the COMPANY, not the agent, and ask to speak with an ADJUSTER and go over your policy. Although many policies cover for loss of food due to power outages, READ the EXCLUSIONS, then call and ask for yourself. I can say that it is very doubtful that the companies will take on this problem. This year has been very difficult to get coverage (if you can at all) for y2k if you are a computer person. We have had many calls and my boss cant help these folks. The coverage, if available is very expensive. My guess, is NO there will be no coverage. bottom line, it would bust the companies. BTW, many companies are having there own problems with billing already. Have any of you noticed that many companies now want 2 months up front when you renew? HMMMM.... Last week a big company called our office to ask if WE were y2k ready. Thats all it took was our saying "oh yeah" scarey that they take word over the phone isnt it? Just food for thought.

-- consumer (, November 28, 1999.

Just skimmed this, but I can tell you this much: insurance companies have learned through years of asbestos and pollution litigation that U.S. courts will stand plain policy language on its head, the better to clean out the deep pockets. Many millions have been spent exploring those obscure Latin phrases "expected or intended" and "sudden and accidental." Y2K will bring its own amusing legal riddles, such as, "Is data tangible property?"

This could be the mother of all legal gravy trains.

-- Thinman (, November 28, 1999.

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