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LONDON-Underwriters may begin to exclude coverage for losses caused by the "Year 2000 problem" from insurance and reinsurance policies as they come up for renewal to avoid potentially massive insurance claims following the turn of the century.
At least two insurance products are being marketed that could offer alternative coverage, including a program launched last week by J&H Marsh & McLennan Cos. Inc.
However, the market is so soft now that it's hard to imagine many underwriters imposing Year 2000 exclusions unless all underwriters agree to exclude the coverage, executives say. The exclusions also may not hold up in court.
And the millennium problem may be so enormous that it would be uninsurable anyway, some risk managers say.
The Year 2000 problem is on everyone's lips at the moment, though the exposure was first recognized in the 1980s. Companies are spending millions to be "Year 2000 compliant" and are making sure their suppliers and service providers also are compliant.
Warranties also are being included in U.K. purchase orders to guarantee that products a company buys will be free from problems caused by the millennium time bomb. Such a warranty recently was included in the purchase order agreement of the Legal & General Assurance Society Ltd. in London.
The Year 2000 problem arises in computer hardware and software, as well as in microprocessors used in all sorts of equipment, from streetlighting and air conditioning to medical devices.
Observers are concerned that at 12 a.m. on Jan. 1, 2000, the clocks in most computers and microprocessors will go awry because they are programmed with a two-digit date field for the year. So the clocks will read "00" and time-senstive programs may assume that it is 1900 and not 2000.
"This is a real problem and not a figment of someone's imagination or dreamt up by computer companies," said Margaret Joachim, assistant director of Task Force 2000 in London. "It's not a U.K. problem or a U.S. problem but everybody's problem."
The problem is so important that Task Force 2000 was set up a year ago by the British Department of Trade and Industry, the Confederation of British Industry and the Computer Services & Software Assn. to raise businesses' awareness. The aim of the task force is "to ensure that companies understand the Year 2000 problem and are doing something about it," Ms. Joachim said.
The financial services industry generally and insurance companies in particular were some of the first organizations to become aware of a potential crisis, said Ms. Joachim. They realized that they had elderly core mainframe systems that needed to be Year 2000 compliant, she said.
But, aside from having the problem in-house, insurers also may face significant claims under property and casualty policies should a Year 2000 bug arise. That's why some underwriters are considering excluding the coverage from policies, particularly those covering business interruption and professional liability.
"Some insurance companies have said that they won't cover the problem from the Year 2000 and some are talking about it with clients during renewals," said Ms. Joachim.
So far, only a handful of exclusions are known, such as on professional liability policies for computer services companies, London market executives said. But as this year unfolds, more exclusions may crop up.
A spokeswoman for the Assn. of British Insurers denied rumors in the London market that the ABI*has drafted a Year 2000 exclusion to be used by British underwriters, though the association is reviewing its all-risks policy wording to see if there is an exposure.
"Where the existing policy may have a Year 2000 exposure, we may exclude it at renewals but there would be a potential to buy it back," said Nick Golden, group underwriting and reinsurance manager for Royal & Sun Alliance Insurance P.L.C. in London. Although such an exclusion has not been imposed as yet, "it may during the course of the year."
New York-based law firm LeBoeuf, Lamb, Greene & MacRae also has drafted Year 2000 exclusions for treaty reinsurers in the United States, said Christopher Gooding, partner for the firm in London.
In broad terms, he said, the Year 2000 exclusion would exclude losses arising from the inability of computer hardware and software "to differentiate between years in different centuries that end with the same two digits; and other data processing problems associated with the inability to accurately process data involving dates on or after January 2000."
The exclusion would cover equipment that is owned, leased and/or licensed by a policyholder and/or the policyholder's service providers.
Year 2000 exclusions may become a bigger issue during year-end renewals, said Mr. Gooding, because both U.K. and U.S. accountants may qualify accounts of companies that are not Year 2000 compliant or have not estimated their costs to correct the problem.
Exclusions would be difficult to impose in such a soft market, however, said Peter Cottrell, Lloyd's underwriter for syndicate 1173 managed by Cottrell & Maguire.
There is a general feeling that it would be better to encourage clients to become Year 2000 compliant rather than impose an exclusion, he said. As a result, for the past month Mr. Cottrell's syndicate has been asking clients to fill out a questionnaire to identify any problems they might have. If a problem is discovered, then the underwriters contact the client to see how it can be rectified.
Some Year 2000 exclusions, though, may not stand up in court, said Rosalind Jones, partner for London law firm Elborne Mitchell.
She has seen some exclusions in the London market but has not been impressed by their drafting. "Legally, they have had a few holes," she said. "Some are good and some are bad and could be taken apart in the courts."
Any new exclusions will have to be watertight, and the definition of the Year 2000 problem very succinct or they will be dissected. If policyholders do have losses, they probably would try to claim on older policies that did not have the exclusions, she said.
But it's "highly unlikely" that existing policies would cover the Year 2000 risk, said David Molyneaux, vp of Minet Risk Services division in London, now part of Aon Group Inc. For example, the Year 2000 risk can now be seen as a foreseeable event that is excluded under most directors and officers liability policies, he said.
For some major companies, the huge losses that could accumulate from the Year 2000 risk probably are uninsurable anyway.
"If we feel that there is a risk, then I feel that there should be insurance" to cover the exposure, said Jerry Whitmarsh, millennium program director for National Westminster Bank P.L.C. But the level of coverage needed may not be worth the premium, he said.
"I doubt Nat West would find it economical to insure against" a Year 2000 loss, he said. "But if you're a small company and not as dependent on information technology as we are, then it might well be a good idea."
Later this year, Nat West will review the bank's options if it suffers losses from the millennium problem. "But you really don't want problems to happen in the first place," Mr. Whitmarsh said.
The review is part of Nat West's millennium program set up last year to make sure the bank and its suppliers were Year 2000 compliant. Altogether, the program will cost (British pounds) 90 million ($147.5 million) and take 750 man-hours to complete, he said.
The Year 2000 problem "is not particularly insurable for us," said Paul Dorey, group operational risk director for major U.K. bank Barclays P.L.C. in London. Barclays is "extremely big," so when one looks at the insurance coverage available, it probably would not be priced effectively. "If you were a small company, it might be worthwhile to insure," he said.
Barclays has been focusing on the Year 2000 problem since last year, but its home-built computer systems that were installed in the 1980s had to be made Year 2000 compliant.
Meanwhile, two insurance products have been developed to cover the Year 2000 risk.
New York-based J&H Marsh & McLennan Inc. last week launched its "2000 Secure" insurance program, which will provide both risk assessment and insurance coverage up to (British pounds) 100 million ($163.9 million). Initial computer system and legal audits would be conducted to ascertain whether a company qualifies for the program.
Audits would be repeated at regular intervals to ensure that the changing risk is understood by both policyholder and insurer. The audits would be provided by the 2000 Secure Audit Co. L.L.C., a joint venture of systems engineer Ascent Logic Corp. of San Jose, Calif.; and LeBoeuf Computing Technologies of New York, a unit of the LeBoeuf, Lamb law firm.
Depending on the size and complexity of the client's organization, the audits would cost between (British pounds) 25,000 and several hundred thousand pounds. In addition to preventing a crisis, the audits would "serve to provide a strong defense for management against subsequent allegations of failure to act with due diligence," J&H/M&M said in a statement.
Coverage for legal liability and business interruption of up to (British pounds) 100 million is being arranged by J&H/M&M. This will be subject to "a substantial self-insured retention" relevant to the magnitude of the risk and exposure concerned.
Earlier this year, the Minet Group and AIG Global Risks launched its Millennium Insurance Policy, with limits of up to $100 million (BI, April 7). The custom-made policy protects against disrupted business or third-party lawsuits relating to computer system failure.
Two clients so far have said they will sign up for the coverage, said Minet's Mr. Molyneaux.
However, "the interest level is blooming. We've had calls from lots of other brokers and from all continents," said Brian Casey, vp of Minet Risk Services in New York. "Maybe we introduced the policy before the market was really there" and the interest level rose both in the United States and worldwide.