This is the eleventh in a series of articles in which Christopher Hamel-Smith addresses some of the key legal issues arising out of the Y2K challenge. They were written in order to make a contribution to the Trinidad & Tobago business community’s efforts to prepare for the transition into the Year 2000 and to manage the associated risks. Forming part of a broader series on "Information Technology and the Law" by the same author, these articles were first published in the "Business Guardian" over the period June 10, 1999 to September 9, 1999.

Insurance is all about managing risk and preparing for contingencies. Customers of insurance companies (apart from thieves and scamps) hope to avoid suffering losses in the first place. Nevertheless, because we know that we cannot eliminate certain risks, we protect ourselves by buying insurance. Clearly, no responsible person will rely on insurance cover as a primary line of defence against Y2K losses. Rather he will pro-actively do everything possible to reduce his Y2K risks.

However, as we have seen, Y2K risks are pervasive. They can be managed but cannot be eliminated. Accordingly, Y2K contingency planning is necessary. This includes taking whatever steps we can to maximise our insurance coverage and to preserve our rights to an indemnity in the event that we suffer any significant Y2K related losses.

But Is Y2K Cover Available?

The availability and price of insurance cover is determined by the insurers' assessment of the risk being considered. Insurance professionals use a claims history to make predictions about losses and to price various risks. However, one of the peculiarities of Y2K is that it is hard to find useful precedents on which to base an assessment of the extent of the various types of risk posed by Y2K. The reality is that no one has any reliable basis on which to predict how severe the effects of Y2K may be. This includes the insurance industry which simply does not have a claims history that it can analyse and use as a base for its predictions about Y2K losses. It is therefore very difficult for insurers to provide Y2K cover.

Faced with the potential for significant losses, huge uncertainty and the absence of a claims history for Y2K losses, the insurance industry has predictably taken a very cautious approach to the Y2K issue. This is true not only in Trinidad and Tobago but also internationally. In the first place, the insurers maintain that Y2K losses are inherently uninsurable since it is a certain and predictable event. Indeed, they point out that it is the obvious and necessary consequence of the choice made by software developers when they designed their software to only accommodate two-digit dates. They conclude that this means that Y2K losses lack the quality of "fortuity" necessary to make them insurable risks. Just to be sure, however, many insurers have been adding specific Y2K exclusion clauses to their policies.

However, it is by no means clear that the "fortuity" argument applies to all types of Y2K related losses. Further, careful examination of the language of Y2K exclusion clauses will show that some are total exclusions but others are not and still allow for some cover. For example, some Y2K exclusions being added to property damage policies still maintain cover where the loss and damage results directly from a defined or named peril, such as fire or explosion. With this type of exclusion, if a loss is caused by fire or explosion, the insured will have a much better chance of recovery even if the fire or explosion is itself caused by a Y2K related failure, perhaps in some electrical device.

What Next?

A wide variety of types of insurance are used to manage business risks which may be implicated by Y2K. These include policies that provide cover against:

  • Property damage;
  • Business interruption;
  • Public liability; and
  • Directors and officers’ liability.

Depending on the combined effect of the fact pattern that leads to a particular loss and the precise terms of the relevant insurance policy, you may have a greater or lesser chance of being indemnified against various types of Y2K related losses. Clearly, important questions arise relating to the existence, scope and adequacy of cover available under a company’s various policies.

With the assistance of their brokers, companies need to conduct a thorough review of their existing insurance coverage and of the options available to maximise and preserve such cover. As part of this exercise, the company and its brokers should:

  • Examine the terms and conditions of existing policies, including any specific Y2K exclusions;
  • Shop around for the best available cover, while recognising that there will be significant limitations on what is available;
  • Reconsider policy limits in the context of increased risks associated with Y2K;
  • Consider whether to notify insurers of any possible or anticipated claims, particularly as some policies may mandate immediate notification even at this time in order to preserve the insured’s rights; and
  • Consider the need for any Y2K disclosures to insurers, particularly when purchasing or renewing policies as well as when responding to their Y2K questionnaires.

By conducting such a thorough review of your company’s insurance situation you will put its house in order with respect to one important aspect of its risk management strategy. This is something that your company needs to do on a regular basis even in the best of times. However, many of us simply have not found the time to do it. It is particular important to attend to this review now, when we are approaching a period of increased risk associated with Y2K. Like many other aspects of Y2K contingency planning, the results of this exercise will be valuable even if (as we all hope) we suffer no Y2K related losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.