A centuries old insurance clause, initially developed for the maritime industry, which is often attached to property policies at the insistence of brokers, is the basis for claims that property insurers must reimburse policyholders for the costs of their Y2K remediation expenses. Billions of insurance industry dollars are at stake in these lawsuits, and Conning & Company warns that these cases may be a sign that future litigation will focus on property lines of insurance.

In its recent study, "Y2K Remediation Costs Lawsuits: A Wake-Up Call for Property Insurers?", Conning estimates that U.S. firms spent more than $50 billion on Y2K remediation costs in 1998 and 1999 alone. This money also represents an unprecedented level of potential claims - only the losses suffered in the area of environmental and asbestos compliance and litigation are comparable. The legal basis for these claims is the 'sue and labor' clause, an obscure provision included in some property policies which requires the policyholder, at the insurer's expense, to take steps to mitigate or prevent an actual or imminent loss that would be covered by the policy.

"The use of the 'sue and labor clause' as the basis for claims for reimbursement is a stretch for the plaintiffs, but with the amount of money spent preparing for Y2K, some companies will litigate - taking a "nothing to lose" approach," said Jack Gohsler, Senior Vice President at Conning. "Even a partial settlement represents a fair amount of money. Companies might risk shareholder lawsuits if they did not at least examine the possibility of recovering Y2K expenses."

Whether the insurance industry is ultimately a winner or loser in the Y2K sue and labor cases, Conning believes that these lawsuits are just the opening round in efforts by plaintiffs to focus the same attention on the property line of insurance as on the liability line. According to Conning, property insurers need to offer coverage that effectively responds to the changing needs of their customers.

"Traditional brick and mortar property policies were not designed for the Internet Economy where new and more complex exposures continue to emerge," said Gohsler. "The industry should definitely consider developing products to respond to these emerging needs or it may find itself more frequently having to defend against litigation seeking to expand the coverage offered by traditional policies."

Most of the Y2K remediation costs lawsuits are proceeding very slowly through the state and federal courts. Most are still primarily focused on procedural issues like the scope of discovery and forum selection, so there has been little progress in deciphering the complex coverage issues presented.

Conning notes that both policyholders and insurers can find bases for their arguments in both law and logic, and predicts that the cases could drag on for several years. A key argument of insurers is that expenses incurred to insure Y2K compliance are routine business expenses - and should not be covered by insurance.

Conning also notes that sentiment among insurers has become more steadfast against any quick settlements. Insurers fear that such settlements will only encourage further lawsuits. Both plaintiffs and insurers are hoping for early court victories to establish a favorable precedent.

Northern Light

-- Anonymous, January 10, 2001