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SAN FRANCISCO -- Year 2000 coverage disputes brought by policyholders likely will trigger increased arbitration between insurers and their reinsurers, a reinsurance expert predicts.

Some insurers, for example, may try to treat all of their Year 2000 claims as a single event, so they incur only one retention before their reinsurance coverage is triggers, but reinsurers will probably fight this approach if the claims are not related, predicts Adrienne Reid, senior vp and chief treaty underwriting officer at Zurich Reinsurance in New York.

"We hope that many disputes do not occur. But if they do, we see a possibility of increased arbitration," she said.

In order to prevent disagreement over coverage triggers, "I think there has to be clarification in policy wording now as we enter the Jan. 1, 1999, renewal season," she suggested. "We don't believe that one occurrence, such as Y2K, can be seen as one event."

Reinsurers will be especially concerned about how insurers handle their Year 2000 claims, Ms. Reid said.

Regardless of what Year 2000 claims insurers decide to cover, they always will have a duty to defend any suits against policyholders, she pointed out.

She was speaking to an audience of mostly surplus lines marketers and underwriters attending the annual convention of the National Assn. of Surplus Lines Offices, held Sept. 9-13 in San Francisco.

"The highest exposure right now is technology software and hardware companies," she said, adding that according to The Gartner Group, a Year 2000 consultant, so far approximately 200 coverage disputes have been filed over Year 2000 issues.

Insurers also will likely incur significant expenses in seeking declaratory judgments over coverage issues, Ms. Reid added.

In coverage litigation, "there will probably be arguments about when the occurrence happened," she said.

Most insurers will likely argue that the policy in force when the damages actually occurred should respond, she said.

Eventually, however, the same trigger used in asbestos and pollution coverage cases -- the manifestation and exposure triggers -- likely will be applied to coverage for Year 2000 losses, she predicts.

Commercial general liability insurers also will likely be divided over whether data -- currently considered intangible -- is tangible property that can be damaged.

"As we know, property damage is defined as physical injury to tangible property including that resulting in loss of use of the property," she said.

Some courts have ruled that tangible property can be "property that is on magnetic tape that has not yet been printed out in hard copy," she said. "But there's also been case law that data that's in circuits, that's in wires, is not tangible, that it's not yet tangible." Because of these differing opinions, Ms. Reid predicts "this particular item will be discussed in the courts over and over again."

Business interruption is another coverage likely to be heavily litigated, according to Ms. Reid. "It will not cover unless there is a covered peril," such as fire, she explained.

So if the volume of work that normally flows through a system is diminished as a result of a Year 2000 problem, "that's not covered. There has to be total interruption or suspension of business," she said.

As a result of all of the coverage issues likely to be litigated, "it is quite possible" that insurers' legal costs will exceed indemnity, Ms. Reid warned.

"That is the biggest issue in the industry right now. Allocated loss adjustment expense will be quite expensive," she said.

For example, The Gartner Group estimates that as much as $1 trillion will be spent on litigation over Year 2000 problems, she said.