Enough with the iceberg analogy already!
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updated 8:45 a.m. 14.Sep.99.PDT
'Y2K Iceberg Dead Ahead!'
by Craig Bicknell
3:00 a.m. 14.Sep.99.PDT
"Jettison the cargo! Jettison the cargo!" the captain screams as
the ship rolls past 50 degrees, top-heavy in the heart of the
worst hurricane of 1849, teetering on the edge of calamity.
Overboard go the heavy sacks of millet, and the ship tucks into
the swells, riding out the storm.
Read ongoing Y2K Coverage
Back in port, the ship's insurer says, "Thank you for saving the
ship, Captain," and cuts a check for the lost grain. A clause
called "sue and labor" in the ship's insurance policy covers the
comparatively small costs the skipper took to prevent an
expensive disaster.
Cut to 1999. A corporate chief technology officer stares in
disbelief at the calendar, shuddering as time marches inexorably
into the path of Y2K.
"Jettison the two-digit code!" he barks. Out go the bug-ridden
systems, ostensibly averting untold catastrophes.
"Thanks for saving us a fortune in claims," says the insurance
agent and cuts a check for the overtime programmers, replacement
software, and hardware.
Not.
Welcome to the eye of a new hurricane, the raging debate over
whether the sue and labor clause, born of ancient maritime law
but still included in most property policies, should cover the
hundreds of billions of dollars that corporations have spent
preparing to weather Y2K.
Companies say yes, insurers, no. Third-party experts say, maybe.
In a nutshell, the sue and labor clause says that insurers will
pay for steps policyholders take to protect property in the face
of imminent danger from an unforeseen peril. Insurers would
rather shell out a few pennies for preventive measures than big
bucks for damage.
Should sue and labor cover Y2K? "It's not a crazy claim for
companies to make," said David Leebron, dean of Columbia
University Law School.
With billions of dollars at stake, many companies figure that, if
it's not crazy, it's worth a shot.
"This is big news," said Matthew Jacobs, a partner at Kirkpatrick
& Lockhart, a law firm that in March filed suit on behalf of
Xerox, which is trying to recoup US$183 million in Y2K
remediation costs from its insurer, American Guarantee. "There
are going to be billions and billions of dollars in claims."
Over the spring and summer, 20 other companies have filed suits
against their insurers for a total of $10 billion in claims.
Dozens of further suits are pending. Claims could ultimately top
$150 billion, say lawyers for policyholders.
Insurers were blindsided by the sudden tempest of sue and labor
suits. Sure, they expected claims, but for actual damages coming
after Y2K. Their eyes were trained on the squall line building on
the far side of midnight 2000.
"They were quite surprised," said Bob Hartwig, chief economist at
the Insurance Information Institute, the insurance industry trade
group that's leading the insurers' campaign against the Y2K sue
and labor suits. "It's an unprecedented, novel, and frankly wrong
interpretation of an obscure clause."
It's not that insurers aren't prepared to pay out on legitimate
sue and labor claims, he insists. "If Exxon could've put a
containment boom around the Exxon Valdez within 10 minutes of the
spill, the insurers would have been happy to pay for it."
But to the insurers' way of thinking, Y2K sue and labor claims
are bogus for any number of reasons.
First off, Y2K isn't an unforeseen disaster. Everyone knows
exactly when it's coming and has known for many years. Xerox, for
example, says in its own annual reports that it's been working on
Y2K prep since the early '90s. Why has it just filed a claim now?
According to the law, it should have notified the insurer right
away.
Moreover, the Y2K bug isn't a scourge of nature. It's a design
flaw. Why should insurers pay companies to upgrade their hardware
and software? The stuff goes obsolete every three or four years
anyway.
"If you decided to build an icebreaker out of paper, and just
before you hit the ice pack, you decide to pull over and outfit
the ship with steel, that's not a covered event," said Hartwig.
The claim about saving money in the face of imminent catastrophe
doesn't wash either, he said. No one really knows what's going to
happen come midnight 2000, much less whether it will be
catastrophic.
"It'd be like filing a claim for earthquake damage because you
think there's going to be an earthquake," he said. "It should
strike everyone as strange that people are suing to recover
losses when there haven't been any."
That's a bunch of hooey, say lawyers for corporate policyholders.
"If you take [the insurer's argument] to its logical extension,
they're saying there's no Y2K problem," said Robert Carter,
partner at the Washington office of McKenna & Cuneo, which
represents Unisys in a sue and labor case. "That really strains
credulity."
If the companies didn't take action ahead of Y2K, lawyers said,
the insurers might withhold claims for the resulting damage,
pointing to the very same sue and labor clause and saying, "Why
the heck didn't you try to prevent this?"
"Is Xerox supposed to let all its computers break down?" said
Jacobs.
As for the insurer's claim that Y2K is a known, predictable --
and therefore uncovered -- event, policyholders argue that the
only thing anyone knows for sure is the date. There are all kinds
of unknown and unknowable risks, lawyers say.
"As long as there is some element of uncertainty, whether it be
timing, or extent, or magnitude of loss, then it's an insurable
event," said Carter.
While the insurers may be publicly dismissing the suits as bogus,
they've recently begun to add specific clauses to their property
policies that exclude coverage of Y2K remediation costs. If they
didn't think the policies covered such costs in the first place,
why did they need the exclusion?
"Doing that admits there is coverage in policies without the
exclusion," said Carter.
The insurers wave off the accusations like blowflies.
"We added that as more of a clarification than an exclusion,"
said Hartwig. "If everyone thought they were going to be abducted
by aliens and started trying to bill us in advance for building
shelters, we'd put out a clarification for that, too.
"These suits collapse under the weakness of their arguments. We
hope judges will recognize that and dismiss them."
Insurers are hoping one of the big cases will be scuttled early
by a judge, thereby sinking the raft of me-too cases. A
preliminary judgement could come within two to three months.
Insurers' hopes aside, it's not likely that all cases will be
dismissed, said experts. It depends on the specific terms of each
policy and the claims the company makes against it, said Stanley
Parker, an attorney who specializes in Y2K litigation at Buchanan
& Ingersoll in Pittsburgh.
Some property policies don't include sue and labor clauses, and
some that do don't count computer data -- the most likely Y2K
casualty -- as covered property. Companies without such clauses
don't have much hope, said Columbia University's Leebron.
Many policies do cover the destruction and deterioration of
computer data and software, however. In cases based on those
policies, lawyers from each side will launch a flotilla of
complex arguments that could last years in court.
"Ultimately, there's going to be a real battle of the experts
over what was the purpose of the Y2K remediation," said Jacobs.
The insurers, for their part, hope judges and juries will be
compelled by the insurers' simple take on the plaintiffs'
nautical metaphor.
Said Paul Glad, the attorney in charge of the insurance practice
at Sonnenschein Nath & Rosenthal in San Francisco: "Bottom line:
There's not insurance covering you if, because of some design
flaw, the hatches on your ship are going to open at some precise
moment six years hence and you're going to sink."
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