http://www.latimes.com/business/cutting/20000110/t000002960.html

Insurers May Become Target as Y2K Lawsuit Bonanza Fades

Computers: Some large companies have already gone to court seeking to recover costs of repairing their systems.

By ASHLEY DUNN, Times Staff Writer

The relatively smooth passage of the world through the year 2000 problem has turned the prospect of a litigation Armageddon into a bust for now, but some lawyers are predicting that new suits may arise in the coming months--this time against insurance companies. Experts had once discussed the possibility of a wave of lawsuits over the computer glitch in such grandiose terms as "hundreds of billions of dollars" or even "trillions of dollars." But with so few reports of serious problems, the chances of major suits over malfunctions or corporate negligence have become slim. "Fortunately, I didn't invest much of my career in Y2K," said Orlando, Fla., attorney Ralph Losey, who had prepared himself to be a Y2K legal expert. "Frankly, I'm relieved. It would have been boring to just do Y2K work for a decade." Lou Marcoccio, research director at the Stamford, Conn.-based technology research and consulting firm GartnerGroup, said the cost of litigation now may end up being so low that "it's not even worth dissecting." But there is still one legal area that may heat up in the next few months--the effort by some companies to reclaim their repair costs from insurers. This time, lawyers are talking in slightly more restrained terms about suits that could total only in the billions. Instead of a wave of litigation sweeping through every facet of commerce, they say that any battles in the future will likely be between huge corporations and insurance companies--entities that have the resources to wage protracted litigation. GTE Corp., Xerox Corp., Nike Inc., Unisys and a handful of other companies around the country have already filed suits against their insurers, claiming that they should be able to get back their repair costs in much the same way that they would be compensated for accidental or unexpected damage to their computer systems. Xerox, for example, filed suit in July seeking to reclaim the entire $180 million it spent to fix its Y2K problem. The company claimed that its insurance policy from American Guarantee & Liability covered losses from "any destruction, distortion, or corruption of any computer data, coding, program or software." Xerox also argued that a clause in its policy, known as a "sue and labor" clause, allows it to recover money spent to prevent a calamity from occurring. The classic example of sue and labor is of a company sandbagging its factory to prevent flood waters from destroying it. If the company has a sue and labor clause, it could recover the cost of the sandbags under the theory that, if it had let the flood destroy the factory, it would have cost the insurance company much more. American Guarantee has argued that not only was the Y2K problem not covered by Xerox's policy, but also Y2K was not a problem that sue and labor was intended to cover. Who might prevail in these insurance cases is not clear, in part because insurance policies vary so much. But if some of the cases are successful, they will almost certainly open the way for others. One attorney who did not want to be identified said that a series of litigations would likely ensue with insurance companies then suing software companies and equipment makers for providing defective products. David Slawson, a professor at the USC School of Law and an expert in contracts and insurance law, said that one key to the suits would be to determine how early companies realized that their programs and computer systems would have a Y2K problem. "If they bought their equipment and they knew Y2K was a problem, I think they're just stuck," he said. For the mass of lawyers who flocked to seminars on Y2K law, read stacks of books and assembled gigabytes worth of Web pages touting their Y2K practices, these final legal battles are largely academic. Only larger companies will have resources to pursue such suits and, with such uncertain prospects, only a few of those will enter the fray. "Everyone should keep their day jobs," said Reed Kathrein, who was part of a Y2K team at the law firm of Milberg Weiss Bershad Hynes & Lerach. "I don't see many plaintiff's actions at this point. Well, no one has called us." The prospect of a wave of lawsuits was one of the most troublesome aspects of the Y2K problem. In some ways, the legal issues were more worrisome than the technological ones because the glitch itself was well understood and relatively easy to fix. The legal issues were complex and varied, potentially covering litigation over fraud, breach of contract, personal injury and a variety of shareholder actions against company directors for failing to prepare. The possibilities were endless. What made the problem such an inviting prospect for attorneys was precisely the same reason it was such a vexing problem for technologists--it was spread through every part of the world and every stratum of life, from the biggest corporations to the tiny mom-and-pop shops. A year ago, lawyers were certain that their prospects were good. The fear of litigation eventually drove Congress to limit damages related to the Y2K problem--a move that seemed to dampen the enthusiasm a bit for Y2K lawsuits. Most lawyers agree that instead of a huge volume of suits, the litigation in the future will likely evolve into a small group of big cases that will drag on for years. For all the other lawyers, Y2K will have been just be a quirky fad that came and went.

-- Martin Thompson (Martin@aol.com), January 10, 2000