Y2K still a problem in courts

Amy Fletcher Business Journal Staff Reporter

Y2K came and went without much disruption, but the bug is still being a pest.

At least in courtrooms.

Companies spent tens of millions of dollars to upgrade their systems to ensure factories would run, inventories could be tracked and checks could be written when calendars hit Jan. 1, 2000.

Now those same companies are duking it out with property insurers to recoup the losses.

It is an uncertain legal area, with more cases being settled than decided in court. And it is somewhat risky for McKenna & Cuneo LLP, which has developed an insurance recovery group that focuses on Y2K and other insurance recovery cases. The firm's largest office is in Washington, D.C.

One of a dozen McKenna attorneys that specialize in Y2K, Lino Lipinsky is a partner in the firm's Denver office. Lipinsky became interested in Y2K issues after being bombarded for years with information from his brother, who works for IBM. The light bulb went off, and Lipinsky became an expert on the issue, lecturing nationwide from 1997 to 1999.

After Lipinsky's wife, Diana DeGette, was elected to Congress in 1996, he began looking for a firm with a Washington office. Lipinsky, whose background is in commercial litigation, wanted to pursue Y2K cases.

To most of the firms he contacted, "the year 2000 was the stuff of science fiction," he said. "It was McKenna that took the idea seriously."

Although it was able to draw on existing disaster law for a foundation, the McKenna & Cuneo group was embarking on new territory. One of its first tasks was to develop legal Y2K audits for clients.

"You put yourself in the shoes of a potential adversary," Lipinsky said. "We did a lot of brainstorming."

The firm helped clients protect themselves if systems failed and ensure they were not the subject of lawsuits. McKenna is now one of a few firms that work on Y2K insurance recovery cases and is the only national firm in Denver with a policyholder recovery practice, Lipinsky said.

"It's very exciting to help to invent a new area of law," he said. "Whenever you work in a new area of law, there is uncertainty and there is risk."

More than 20 companies have filed Y2K recovery cases, including Qwest Communications International Inc., GTE Corp., Unisys Corp. and Nike. McKenna has worked on five, representing policyholders.

Lipinsky represents Kmart, which filed a lawsuit to recover $80 million from its property insurer and will go to trial next year. Lipinsky also is lead attorney on a case for Owens Corning.

"This is the tip of the iceberg," he said, adding that many more businesses have already notified their insurers that they plan to file Y2K claims.

Insurance companies are fighting them.

"There is nothing in the contract language of most policies that says it's covered, and while there is no special exclusion for Y2K, it's just not covered," said Carole Walker, executive director of the Rocky Mountain Insurance Information Association. RMIIA represents property and casualty insurers in Colorado, New Mexico, Utah and Wyoming. "Insurance only covers accidents. It's impossible to insure something you know is going to happen."

The cases are based on what is called a "sue-and-labor" clause, which is designed to encourage the policyholder, at the carrier's expense, to mitigate property losses by taking preventive action. For example, a ship owner who finds a crack in the hull of his ship and has to fix it to avoid further damage may be reimbursed by the insurer.

But with Y2K cases, there was not necessarily any physical damage. In many cases, companies were not protecting themselves against the loss of their actual computers but the data they held. However, in a significant ruling last year, a U.S. district judge in Arizona said "physical damage," as mentioned in property insurance policies, is not restricted to the physical destruction or harm of computer circuitry but also includes loss of data.

So far, cases have either settled outside the court or been dismissed on technical grounds not related to the core issues of the case. For example, New York judges have thrown out cases where companies missed the deadline for notifying their insurer of their intent to file a claim, as specified in their policies. New York has strict notification regulations.

"It's going to depend on the language of the policy and the state where it is being litigated," Lipinsky said. "We are still waiting for the definitive ruling in one of these case on the merits."

The insurance industry says, even under the sue-and-labor clause, the cases have no merit. There are about five conditions which must be met before sue and labor can be activated, said Bob Hartwig, chief economist for the Insurance Information Institute in New York.

"There are a number of law firms who were really hoping in the late '90s that this would be something they could seize upon for years to come. ... It was a trial lawyer fantasy that didn't pan out," he said. "How utterly preposterous it is to think somehow the insurance industry could have been the bag holder for the entire Y2K remediation process that went on in every case in America. The logic in that is lacking."

Some of McKenna's Y2K clients pay for services on an hourly basis. In other cases, the firm's compensation will be related to the outcome.

In addition to uncertain outcomes, the cases are expensive and take a long time to pursue because of the lengthy discovery process. Earlier this year, Unisys dropped its suit after two years of litigation because of internal financial considerations, and it will be two years before Lipinsky takes his Owens Corning case to court.

http://denver.bcentral.com/denver/stories/2001/10/08/story6.html

-- Martin Thompson (mthom1927@aol.com), October 08, 2001