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Costs cited in dropping suits

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While insurer attorneys maintain they are winning the war over coverage for Y2K remediation costs, policyholders say it's only the economic downturn that's forcing them to retreat, not a belief that they cannot prevail.

When Unisys Corp. announced last week that it was dropping its Y2K coverage suit against Royal & SunAlliance USA, the insurer's attorneys issued a press release claiming that the policyholder's actions "should be a clear signal to other attorneys and policyholders pursuing these claims that they have little merit."

But a spokeswoman for the Blue Bell, Pa.-based technology company said it decided to abandon the coverage litigation "for business reasons related to cost."

"It's an expensive suit," she said, adding that Unisys "firmly believes in the merit of the arguments."

A risk manager for a major financial services firm who asked not to be identified said his company also decided not to pursue a claim for Y2K remediation costs, but for a different economic reason. "We did not want to disturb our relationship with our property insurers knowing that the market was bound to turn," he said.

"It's a sign of the economic times," said Robert Carter, a policyholder attorney with McKenna & Cuneo in Washington.

"Businesses focus on their bottom lines from quarter to quarter. Until there's a payment from their insurers," they can't justify spending large sums of money pursuing coverage litigation, said Mr. Carter. He added that he believes "the insurance industry is fighting a very aggressive war" to avoid a repeat of the drawn-out battles over asbestos and other environmental liabilities.

Other Y2K cases that policyholders have decided not to pursue further include:

* Port of Seattle vs. Lexington Insurance Co., dismissed in December 2000.

* Stanford University vs. Factory Mutual Insurance Co., dismissed in January 2001.

* ITT Industries vs. Factory Mutual Insurance Co., dismissed in January 2001.

* Nike Inc. vs. American Home Assurance Co. et al., dropped in February 2001.

* Mandalay Resorts vs. Factory Mutual Insurance Co., dropped in March 2001.

* Baptist Hospital & Health Systems Inc. vs. Factory Mutual Insurance Co., dropped in June 2001.

These suits all cited the sue-and-labor clause of the policyholders' property insurance policies.

This leaves only a handful of Y2K remediation coverage cases wending their way through the courts nationwide.

Insurer attorneys say that policyholders "have lost their enthusiasm" for pursuing Y2K coverage claims in court because so far most of the decisions have been unfavorable to them.

"The bloom is off the rose," said Tom Brunner, a partner at Wiley, Rein & Fielding in Washington who represents the Y2K Roundtable, which is a group of 33 U.S. insurers and reinsurers. "I can't remember the last time major coverage cases were abandoned like this."

In fact, because no new Y2K coverage suits have been filed in recent months, the Y2K Roundtable has dismantled its Web site and is broadening its scope to encompass coverage litigation over all types of technology risks, Mr. Brunner said.

But while fewer policyholders may be taking their insurers to court over Y2K remediation coverage, "there are a whole cadre of cases still going through the claims adjustment process," said Mr. Carter.

He said that McKenna & Cuneo, which has served as of counsel on numerous Y2K coverage suits, receives calls every week from other policyholder attorneys contemplating litigation against insurers.

It may take a favorable decision at an appellate court level to encourage more policyholders to file suit, Mr. Carter said.

Murray Sacks, another partner at McKenna & Cuneo in Washington, said that policyholders may be heartened by a June 15 decision by a U.S. District Court in Michigan denying the insurer's motion for partial summary judgment dismissing the case.

Mr. Sacks, however, said he won't know whether that ruling in Kmart Corp. vs. Lexington Insurance Co. is good news for policyholders until after he reviews transcripts of the case, which the court has not yet sent to him.

Another case in Michigan-the School District of the City of Royal Oak vs. MASB-SEG Property/Casualty Pool Inc.-also may eventually prove favorable to policyholders, said Philip J. Goodman, a policyholder attorney in Birmingham, Mich.

"Our case is rather unique because of the fact that the insurance company sent out Y2K exclusions after the policy was issued and with no offer to reduce the premium," he said. The school district sued its insurer under its property policy, which provided coverage for software defects.

The school district has appealed a lower court's dismissal of its suit, which, in addition to coverage for Y2K remediation costs, also sought class-action certification.

Besides Kmart and the School District of Royal Oak, other major cases are still being pursued, including those filed by GTE Corp., which is now part of Verizon Communications Inc., and Owens Corning, said McKenna & Cuneo's Mr. Carter.

"Until decisions have the opportunity to work their way through the appellate process, we don't have a definitive answer" concerning coverage for Y2K remediation costs, he said.

"It's unfortunate there's not a quicker way," Mr. Carter said, "but the wheels of justice turn slowly."