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D&O SILENCE ON Y2K CRITICIZED

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NEW YORK -- A white paper commissioned and circulated by a unit of American International Group Inc. states that a standard directors and officers liability policy may not cover Year 2000-related claims.

An executive summary of the white paper was sent to AIG policyholders late last month and states that D&O policies "that are silent on the issue will rarely (and poorly) serve the best interests of the board of directors."

The communication appears to buck a trend set by some other insurers that have written to policyholders indicating that Year 2000-related claims alleging mismanagement will be viewed as any other D&O claim.

The executive summary was accompanied by a letter from Kristian P. Moor, senior vp of the domestic brokerage group at AIG in New York.

Mr. Moor says in the letter that the white paper "explores (the Year 2000) issue and offers practical suggestions for protecting your organization and its management."

However, AIG only commissioned the white paper and does not necessarily endorse its findings, said Ty Sagalow, chief underwriting officer at National Union Fire Insurance Co. of Pittsburgh, Pa., the AIG unit that commissioned the study and a leading D&O underwriter.

"We commissioned the white paper because we believe that education is an essential part of the management of the Year 2000 problem. The paper was written by independent experts across many fields. The paper specifically states that the views expressed are those of the authors and do not necessarily represent those of National Union," he said in a statement.

The white paper was written by: Milbank, Tweed, Hadley & McCloy; Coopers & Lybrand L.L.P.; Arter & Hadden L.L.P.; and John V. Guttag, professor of computer science and engineering at the Massachusetts Institute of Technology.

The executive summary gives an overview of Year 2000 problem, which could affect computers and the devices they control if they only record the year in a date with two digits. It goes on to advise policyholders that they must ensure they make all legal disclosures regarding the problem and assemble a team to deal with the problem.

Insurance issues are addressed in the final part of the letter, which says policyholders should discuss the problem with their insurers and that most corporate insurance policies will "probably afford little protection against Year 2000 losses."

It then states that D&O liability insurance policies that do not specifically address the issue are not in the best interests of the policyholders.

The summary contrasts with letters sent by Chubb Corp. and Reliance National Insurance Co. earlier this year that stated the insurers would treat Year 2000 D&O claims like any other claims.

AIG had sent an earlier letter to policyholders on the Year 2000 issue that said little about insurance coverage, but some observers said it could signal AIG's intention to deny Year 2000-related claims made on commercial liability policies (BI, June 29).

"This goes much further than the last communication," said William Kelly, managing director of risk management at J.P. Morgan & Co. Inc. in New York.

It seems to suggest that any D&O policy that is silent on the issue of the Year 2000 is unlikely to cover losses arising from the problem, he said.

AIG seems "to be getting back to the idea of a need for express coverage," Mr. Kelly said.

However, express coverage not only would cost additional premiums, but it also could lead to claims disputes, as insurers and policyholders will likely argue over definitions in the policy, he said.

Risk managers would be better served by the broad coverage that their existing D&O policies give, Mr. Kelly said.

"A life insurance policy doesn't expressly cover an airline crash, but why would you want to buy a policy that does expressly cover a crash when you think that the coverage that you already have is so broad that it covers that?" he asked.

AIG may hope that the summary could encourage policyholders to buy National Union's recently launched D&O Gold policy (BI, May 25), which offers express coverage for Year 2000 liabilities, said Carolyn Rosenberg, a partner at Sachnoff & Weaver Ltd. in Chicago.

"It serves the interests of insurance companies that want to sell insurance geared specifically toward the Year 2000 problem and that coverage will obviously be more expensive than traditional D&O coverage," she said.

The summary should also encourage AIG policyholders to seek further clarification on D&O coverage issues from the insurer, said Joshua Gold, a partner at Anderson, Kill & Olick P.C. in New York.

"People want to get the bottom line on coverage, and this is an ambiguous statement. . .it will add to the confusion," he said.