Port suing over Y2K
Dec 6, 1999
George Erb
In a case that could have enormous implications for the insurance industry, the Port of Seattle has sued seven insurers over who must pay for up to $11 million worth of computer repairs necessitated by the so-called Y2K bug.
It is the first such lawsuit in Washington and one of only a handful in the country, observers say.
The stakes are especially high for the insurance industry. If courts rule that insurance policies cover Y2K repairs, the insurance industry would get stuck with a larger share of the nation's repair bill, which is expect to run into billions of dollars.
"I think the insurance companies are going to be running scared over this issue," said Colleen Christensen of Claflin & Christensen LLP, a Seattle litigator who represents policy holders in disputes with insurers. "It's huge."
The insurance industry is hoping that standard provisions in its policies will prevent a proliferation of Y2K lawsuits. "I'm hoping that we won't see many at all," said Eric Goldberg, senior counsel for the American Insurance Association in Washington, D.C.
The port filed suit Nov. 16 in King County Superior Court against the Lexington Insurance Co. of Boston, the Unigard Insurance Co. of Bellevue and five other insurance companies, including Underwriters at Lloyd's of London.
According to court documents, port officials in 1997 began assessing whether the agency's computers, software, circuit boards and computer chips could be damaged by the Year 2000 bug. The Y2K bug arises in systems that use just two digits to denote the year, so 2000 can be mistaken for 1900.
By last year, the port had determined that 232 computer systems in its aviation and marine divisions were vulnerable to the Y2K bug. In some cases, port computers had already lost data and electronic components because of the glitch, court papers say.
The port has so far spent $7 million on the problem, and the agency believes the cost of repairs could reach $11 million, according to Mealey's Year 2000 Report, a legal journal that specializes in Y2K issues. Port officials could not be reached for comment.
The port reported the loss to the seven insurance companies, which began looking into the matter in 1998. Now, months later, the port believes the insurance companies will deny its claim, according to court documents.
A spokeswoman for Unigard said the company doesn't comment on pending litigation.
The outcome of the case could hinge on two legal issues, attorneys say.
The port says provisions in its insurance policies provided coverage for such things as "electronic data processing system equipment." One provision included coverage "for loss due to computer virus," according to the lawsuit.
How much weight the court gives these provisions could have broader implications for other insurance companies. "It will make other insureds look back at their policy coverage and see if they have anything like this," Christensen said.
The case also revolves around a so-called "sue-and-labor" clause, a centuries-old legal provision that is now appearing more often in insurance policies for large organizations.
It works like this: A policy holder that sees a potential for damage -- such as a ship with a crack in the hull -- has to tell the insurance company and take steps to minimize the loss that it will claim under its coverage, Goldberg said.
In the port case, attorneys may argue whether the agency was trying to minimize Y2K damage to its computer systems for the benefit of the insurance companies, or just trying to replace old computers for its own benefit -- at the insurance companies' expense.
At least four companies and two public agencies have sued their insurance companies over Y2K losses this year, said John Hayes, managing editor of Mealey's Year 2000 Report. In one case, an insurance company sued its corporate customer.
Corporations that are taking on their insurance companies over Y2K coverage include Unisys Corp. and GTE. Last summer, Xerox Corp. filed a $183 million lawsuit in Connecticut against the American Guarantee & Liability Insurance Co. The day before, the insurance company sued Xerox in New York.
In Portland, Nike Inc. on Nov. 9 sued the American Home Assurance Co. And in Michigan, the Royal Oak school district last month sued the Michigan Association of School Boards/School Employers Group, an insurance pool for school districts.
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