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Sunday December 12 2:05 PM ET

Insurance Cos. Target for Y2K Suits

By MICHAEL WHITE AP Business Writer

LOS ANGELES (AP) - Insurance companies could wind up the big losers in the worry over Year 2000 computer glitches, whether or not the millennium bug actually strikes Jan 1.

In recent weeks, four big companies and two local government agencies have filed multimillion-dollar lawsuits against their insurers to recoup the cost of upgrading computer systems. Others are waiting in the wings with claims, attorneys say.

Xerox Corp (NYSE:XRX - news). has sued its insurer for $150 million in Y2K remediation costs. Nike is seeking reimbursement of an estimated $110 million layout for Y2K preparations.

Others that have sued are Unisys Corp (NYSE:UIS - news)., GTE Corp (NYSE:GTE - news)., the Port of Seattle and the Royal Oak, Mich. School District. The lawsuits, filed since July, altogether seek about $700 million from insurers.

Ultimately, insurance companies could face hundreds more lawsuits seeking repayment of much of the estimated $100 billion spent in the United States to prepare computers and chip-dependent devices for the turn of the century.

``They're going to end up paying a huge amount in attorneys fees, if not a huge amount in settlements,'' said Ron Weikers, a Philadelphia attorney specializing in Y2K litigation. ``I think you're going to see a lot of these cases.''

Insurance industry attorneys contend that the plaintiffs are basing their cases on a shaky legal argument rooted in 19th century maritime law that encouraged ship owners to make emergency repairs when away from home.

Insurers were willing to bear the cost because repairs were far cheaper than the cost of replacing a ship and cargo lost at sea.

Unlike an emergency on the high seas, businesses have known for years about the potential of Y2K glitches, said Jack Pomeroy, general counsel for FM Global, a Rhode Island-based insurer targeted in the Nike and GTE lawsuits.

``There are lots of reasons why this isn't covered,'' he said.

The lawsuits are unique among the estimated 85 Y2K actions filed in the United States so far. Most other lawsuits accuse software companies or programers of providing products that are likely to fail on or after Jan. 1.

Many of those have stalled in court because actual damage hasn't occurred yet and isn't likely to until after New Year's Day

Filings also have slowed as a result of federal legislation approved in July that gives businesses 90 days to fix computers that break down. The measure limits class action lawsuits.

``Those things have had a dampening effect on the filings. Beyond that, I think a lot of people just haven't suffered a lot of losses,'' said Bruce Webster, a PricewaterhouseCoopers director who has testified before Congress about Y2K problems.

The insurance lawsuits differ because they don't hinge on whether any actual damage ever occurs.

For insurance companies, the lawsuits based on the so-called ``sue and labor'' clause inserted in many large commercial policies amount to a sort of boomerang. The purpose of such provisions, which reimburse the insured for prevention of loss of property, ultimately is to protect the insurer, not the insured.

``They are misapplying this particular clause,'' said Dan Zielinski, a spokesman for the American Insurance Association, which represents 370 commercial property insurers.

``It's disappointing, but we, the industry, have a very firm legal position,'' he said.

Insurance companies contend that Y2K-related problems are not the result of unforseeable events, like a broken mast, but a deliberate decision by computer programmers. The two-digit system was adopted decades ago to save computer memory space.

``This is not a defect,'' said Zielinski. ``This equipment is operating as it was intended. They're upgrading what may be obsolete equipment. That is not insurable.''

The problem stems from the practice of using two digits to represent a year in computer programs. The fear is that computers and other equipment that depends on microprocessors will misread the ``00'' that will pop up to represent the year 2000 as 1900 and systems will malfunction.

Companies and government agencies have tried to correct the problem by having programmers review computer codes and fix the dating systems.

Some problems already have cropped up. In 1997 Produce Palace International in suburban Detroit won a $260,000 settlement after its equipment crashed while trying to process a credit card set to expire in 2000.

In Maine, a glitch caused the motor vehicle department to classify 2000-model autos as pre-1916 ``horseless carriages.''

More small-scale breakdowns are likely despite the best efforts of programmers to cull through computer codes, said Bernie Reiter, a programming consultant based in Boulder, Colo.

``Jan. 1 will be quiet. It's a holiday,'' she said. ``It's going to happen further down the line.''

-- (, December 13, 1999

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