Publisher Date: Jul 2003 Volume: 50 Issue: 7

Morgan O'Rourke
Risk Management
New York

According to government estimates, public and private organizations in the United States spent more than $100 billion to upgrade their computer systems to prevent year 2000 problems. Many companies turned to their insurance companies to recoup their losses, resulting in protracted legal battles when the insurers balked at the idea that they should pick up the tab.

Finally, in a March 2003 ruling to determine responsibility for payment of year 2000 remediation expenses, a federal judge in the U.S. District Court of New Jersey dismissed a $381 million lawsuit filed against five insurance companies by GTE, which contended that its remediation efforts were covered under its insurance policies.

GTE, which became Verizon Communications after a merger in 2000 with Bell Atlantic Corp., claimed that its year 2000 work benefited the insurers by preventing a recoverable loss as per the "sue and labor" clause of its property insurance policy. This clause is a relic of seventeenth century marine insurance policies that covered emergency situations in foreign ports and encouraged shipowners to make necessary repairs before more costly damages could occur. Typically the clause provides that the insurance company will reimburse the insured for any costs incurred during efforts to prevent an imminent loss or actual damage.

Judge Alfred Wolin found that the insurance companies, which included Allianz Insurance Co., Allendale Mutual Insurance Co. (now FM Global after a 1999 merger), Affiliated FM Insurance Co., Federal Insurance Co. and Industrial Risk Insurers, were not responsible for year 2000 problems because of two policy exclusionsdesign defect and inherent vice. Essentially the issue of incorrect date processing due to two-digit year fields that characterized year 2000 problems was found to represent a preexisting internal defect in the design of GTE's com-puter systems. Therefore any repair costs were not covered under the policies and the sue and labor clause did not apply.

"This was one of the largest and hardest fought Y2K claims," says William Erickson, an attorney for the Boston-based firm of Robins, Kaplan, Miller and Ciresi LLP, who represented Allianz. "Many companies were waiting to see Judge Wolin's opinion."

Although GTE was seeking one of the highest damage awards, companies such as Xerox, Unisys, Nike, K-Mart and Owens Corning have also filed lawsuits with total damages exceeding $500 million. These judgments are still pending.

Insurance company defendants, however, now seem to have a growing precedent on their side. In June of 2002, the Washington Appellate Court also found that the $11 million spent by the Port of Seattle on its year 2000 problem was not covered under its commercial property policies. The sue and labor clause was again thwarted by the inherent vice exclusion.

Insurance News Net

-- Anonymous, August 07, 2003