NEW YORK -- The Insurance Services Office Inc. plans to introduce a series of exclusions and endorsements by April 1 that will address coverage of Year 2000 losses in standard property and liability insurance policies.

Primary insurers will be able to offer corporate buyers coverage specifically for their Year 2000-related exposures. However, among the new wordings are also total exclusions for the risk under general liability and property policies.

The wordings already have been filed with state regulators; 18 states so far have either approved them or responded according to state law.

The exclusions are a disservice to policyholders, said Scott K. Lange, director of risk management at Microsoft Corp. in Redmond, Wash.

"You buy insurance to reduce uncertainty. You want to respond to a problem that your organization faces, and if the insurance industry takes the position that every time they can see something that falls into that category they eliminate it, they really haven't done much for their customers," Mr. Lange said.

The Year 2000 problem may be regarded as a product defect and should be covered, he said. Instead, however, many insurers will likely adopt the exclusion in the same way that they adopted environmental coverage exclusions in the 1980s, he predicted.

The availability of the ISO exclusions will give insurance companies the flexibility to offer or exclude the Year 2000 coverage as they wish, said Eric Goldberg, counsel at the American Insurance Assn. in Washington.

Policyholders that wish to be covered for the Year 2000 problem will be able to choose from a range of wordings offered by insurers or the specific Year 2000 insurance products that some insurers have launched over the past year, he said.

"There are hundreds of different insurers selling general liability coverage, so policyholders should be able to shop around for the product they want to buy," Mr. Goldberg said.

Most reinsurers have not yet said whether they will cover this exposure for insurance companies. Several reinsurance executives say they likely will follow the coverage terms that primary insurers provide.

The Year 2000 exposure arises from the practice of programming computers with only two digits to indicate the year. Computer experts say that unless many computers are reprogrammed, internal clocks will treat the year 2000 as the year 1900, which could wreak havoc in many systems the computers are designed to control (BI, Oct. 20).

Risk managers and insurers fear the chaos could lead to significant liability or property losses. Automated fire suppression or alarm systems, for example, could fail to operate, resulting in bodily injury and property damage claims.

As a result of insurers' concerns about their potential exposure, ISO has issued five new wordings addressing the coverage. The wordings would apply to any new or renewed policy that contains the language.

General liability insurers will have four options under the new ISO wordings:

Total exclusion of computer-system related losses "due to the inability to correctly recognize, process, distinguish, interpret or accept the year 2000 and beyond."

Exclusion of losses from products and completed operations but coverage for premises risks.

Exclusion of coverage except for specific sites.

Maintenance of the existing general liability wordings, which are regarded as broadly covering Year 2000 losses.

Most insurers maintain that the existing property policies do not cover Year 2000 exposures. Nevertheless, ISO plans to introduce a specific exclusion as well as an endorsement that will provide limited business interruption coverage of up to $25,000 for losses caused by Year 2000 problems.

The property exclusion is broader than the general liability exclusion and excludes coverage for losses "due to the inability to correctly recognize, process, distinguish, interpret or accept one or more dates or times. An example is the inability of computer software to recognize the year 2000."

The Independent Insurance Agents of America Inc. is concerned that the exclusions are too broad and will deny coverage to policyholders that have reprogrammed their systems to avoid the problem but nevertheless suffer a loss, said Todd Muller, assistant vp of consumer and technical advocacy. The IIAA plans to meet soon with ISO to discuss the issue, Mr. Muller said.

The exclusions will limit the coverage provided, said Eugene Anderson, senior partner at Anderson, Kill & Olick P.C., a policyholder law firm in New York.

"It seems to me incongruous that takers of risk would greet a new problem by excluding it," he said.

Policyholders likely will not be able to make claims under policies in place when their computer systems were installed, he said.

"The standard liability policies are triggered by the damage, so it would be the policies in effect in December 1999 and January 2000 that are affected," Mr. Anderson said.

However, depending on the wordings insurers include in directors and officers liability and errors and omissions policies, policyholders may be able to make Year 2000-related claims under those policies, he said.

The ISO exclusions are the first widely circulated Year 2000 exclusions for primary policies in the United States.

The Assn. of British Insurers last month issued draft exclusions for Year 2000-related losses in product liability and professional liability policies (BI, Nov. 17).

Reinsurers as a group generally have taken a more disjointed approach to the exposure.

Reinsurers likely will welcome the clarity that the ISO wordings will bring, said Tom Greene, senior vp in the specialty division of Chartwell Reinsurance Co. in Stamford, Conn.

"I think that everybody is very nervous about the problem, and I think that ISO's attempt to address it is good news from an industry viewpoint," he said.

In the competitive market, reinsurers likely would not risk losing a primary company's business by trying to exclude Year 2000 coverage included in any primary policies, Mr. Greene said.

Constitution Reinsurance Corp. likely would follow any coverage provided under primary policies, said Bard E. Bunaes, chairman and chief executive officer of the New York-based reinsurer.

"If one of our reinsureds tells us that they are covering the problem, I would think that we would go along with that, depending on the overall relationship," he said.