AT YOUR OWN RISK
6:00 AM Monday, January 3rd. The year 2000 (Y2K). Time to make the donuts.
So much uncertainty. Will your telephone, wireless, and computer systems function? Will automatic doors, elevators, heating systems, and gas pumps operate normally? Will customers blame you when their equipment that you shipped the other day doesn’t work? Have your dispatchers and drivers recovered from the weekend millennium party? Hey, is the world about to end?!
I can’t answer that last one. In fact, I cannot predict any of the outcomes. What I can do is alert you to insurance industry’s likely response when you attempt to put in a claim for Y2K - related loss: "Don’t look at us!" they will cry. "Our policies don’t cover that!"
Some of you are rolling your eyes already. After all, that is what the insurance industry does all the time, right? Others are sporting wrinkled brows, as if to say, "Why wouldn’t my policies cover damaged property or liabilities stemming from Y2K?"
This article’s purpose is to put you on notice about the likely resistance of insurance companies to paying Y2K claims and to educate you as to their reasons and rationale. In this instance, the insurance industry is not acting simply out of spite or greed or negative reflex. Insurers sincerely view Y2K as a problem not suited to insurance. They generally are not charging extra premiums and do not intend to pay claims.
As an educated consumer you can make better choices about how to plan for and respond to any Y2K-related problems. And who knows? If the worst should occur, maybe a tip or two from this page will help put your attorney on the right track!
What’s the Risk?
The Year 2000 (Y2K) and Millennium Bug are popular names applied to the host of problems and losses caused by having two-digit date fields in computer code and embedded chips in devices, programs, and applications used over the past 30 years. With only two digits the year 2000 -- 00 -- looks just like 1900. Systems may not know what to do after 99 and may freeze, or they may roll over to 00 and create errors in all sorts of calculations and instructions.
Our society relies on millions of computers containing billions of program instructions, all of which must in theory be examined and updated with proper synchronization with other interrelated computers and systems. Despite recent soothing comments from sources like the Federal Reserve, the potential for mayhem is real. Widespread disruptions of lesser magnitude must be anticipated. The full cost could rival that of asbestos, lead paint, or environmental contamination.
A key difference between Y2K and these other social calamities -- where the insurance industry has paid out many billions (kicking and screaming) -- is that this time insurers are prepared.
But prepared for what? Y2K threatens the courier industry in several ways. First, your equipment could be rendered useless creating a sizable property loss. While coping with the situation, you would also incur substantial extra expenses and you might lose income.
Your equipment suppliers may be at fault, but can you recover your costs from them? It depends on their liability insurance -- will it provide coverage? On the other hand, if you provide logistics, warehousing, or other specialized services that are affected by Y2K problems, could you be held liable for damage to your customers’ property or interests? Would your liability insurance cover you?
And what about your cargo? Some unlucky couriers will certainly be blamed for equipment that is delivered in non-functioning condition, even though the real problem is Y2K-related.
Without getting too technical, this article will briefly address the probable lines of argument that insurance companies will use to deny claims, tips on how to fight back, and loss control strategies to avoid or mitigate certain risks before they explode.
Y2K Loss To Property
The insurance industry believes that Y2K is a business problem, not an insurance problem. The industry has many reasons for thinking so, and is prepared to deny many if not most claims.
Known Loss. Insurance is supposed to protect against unforeseen, chance occurrences. One cannot buy insurance for a loss that is already known to you or expected to occur with certainty. Given the widespread publicity surrounding Y2K, all businesses should have known to upgrade or replace their systems.
No Breakdown. Computer equipment that suffers a Y2K loss will not function properly if at all. Yet it will be performing exactly the way it was programmed to do. The equipment was in essence programmed to fail, and property insurance does not cover "defective design or workmanship." In fact, almost all policies contain a specific exclusion for this. Insurance is not a guarantee or warranty of products.
"Physical" Loss. Insurance policies cover "physical" loss to property, but many Y2K losses will involve only corruption of data or lack of access to data. Normally only tangible property can be said to suffer a physical loss. Where hardware is also damaged due to a resulting electrical shock or fire, policies will almost certainly cover that part of the loss.
Latent Defect / Inherent Vice. Just as insurance will not cover metal items that rust or wood that rots, policies contain an exclusion for conditions within property that predictably cause loss without any further external cause.
Error or Omission in Programming. Some commercial property policies contain this exclusion, which addresses the situation more directly and could therefore be more difficult to counter.
Y2K Exclusion. All of these arguments make insurers unwilling to cover Y2K-related losses and provide them with grounds to deny claims. Yet many have learned the hard way that the courts will disallow many exclusions if they are not airtight. Therefore, many have resorted to explicit Y2K exclusions that restrict coverage for virtually any conceivable computer-related malfunction or failure "due to the inability to correctly recognize, process, distinguish, interpret, or accept the year 2000 and beyond."
Other Types of Y2K Losses
On the liability side of the table, the insurance industry’s position is much the same. Many if not most Commercial General Liability policies (Auto and Umbrella liability policies too) issued during the past 12 months contain specific Y2K exclusions.
A courier’s principal liability will be for your customers’ property and General Liability would not provide coverage in any event since it excludes loss to property of others "in your care, custody, or control." Y2K is just icing on the cake. Indeed, this exclusion is why couriers need cargo insurance to begin with.
Special operations could expose you to Liability loss -- you may wish to consult your broker or attorney. In this case you should certainly check your General Liability policy as thoroughly as your Property insurance.
The main liability insurance lesson is that your vendors, who have supplied you with mission-critical equipment susceptible to Y2K bugs, are likely not covered for Y2K-related liabilities. This could be very serious in the event that you (and other customers) wish to present claims for damages. If the vendor goes under or is otherwise ‘judgment-proof,’ you may be out of luck. This issue should be discussed with key vendors. A mere certificate of insurance does not tell you anything.
Cargo Insurance, since it covers property, contains many of the same limitations and exclusions found on property insurance policies and discussed previously. While it is hard to conceive that you would be held liable for property in-transit rendered unusable by Y2K problems, those customers that do press claims probably will not admit the true nature of the loss, as in, "It was fine when we gave it to you and now it won’t function..."
Stymied by their own insurance policies, they may see a claim against you as a way to recoup a part of their loss. Since the nature of the loss will probably be obscured, your insurance company may well defend you and may even pay the claim. In this case, however, you may not want your insurance record to be marred by fraud!
A Word -- or Two -- of Advice
None of the arguments used by the insurance industry is so clear-cut that it cannot be challenged. For example, many who represent policyholders argue that data can and should be treated as property. Others contend that the "Known Loss" argument does not apply if you conducted reasonable Y2K reviews and believed your systems to be compliant.
Even the use of Y2K exclusions can be seen as a positive for some. Some say that any policy without such an exclusion must provide coverage since the insurer "should have known" how to properly exclude coverage but did not. This sounds like the insurance companies’ reasoning turned back on them!.
However comforting it is to know that insurer’s decisions can be challenged, the cost will be high and by then the damage will be done. Only the attorneys will come out winners. There is still time to avoid most Y2K problems and couriers should avail themselves of every possible means to do.
Of course, not everything is within your control. Telecommunications networks could go down and buildings could be closed due to problems. Take this opportunity to work out some Disaster Plans -- after Y2K these same plans will serve you well in the event of a fire or theft or other problem.
Finally, notify your customers that you will only accept responsibility for damaged equipment if there are "outward, visible signs of damage." Mere failure to function will not suffice. Consider making your insurance company into the bad guy -- get a letter from your broker that you can use to "inform" your customers what to expect if they try to make a claim. Once warned, most of those who would consider lodging a claim will look for easier targets.
Good luck in the new millennium. As this review of issues between insurance companies and policyholders shows, at least some things are not likely to change!
Peter Schlactus, a Certified Insurance Counselor and Accredited Advisor in Insurance, is Co-President of KBS International Corp., which provides specialized insurance programs, benefits, and risk management services to courier companies and executives nationwide. Mr. Schlactus is available to answer inquiries at 1-888-KBS-4321 or via e-mail at email@example.com.
MESSENGER COURIER WORLD - Fall 1999 [ Back To Table of Contents ]
(c) copyright, 1999 by KBS International Corp. All Rights Reserved.