As the days until the year 2000 (Y2K) tick off into double digits, the concern about the impact of the date change in data processing seems to be diminishing (unless you are taking a midnight plane to Pakistan), but another lurking concern is just beginning to blossom.
What could be a worse Y2K nightmare than programmers without a firm grip on their date digits? Lawyers! The active and creative minds of the legal community have been churning the Y2K possibilities for several years now. Even though fewer than 100 Y2K lawsuits have actually been filed across the country, the potential for Y2K litigation becoming a growth industry is serious.
A couple of recent lawsuits between major high-tech companies and their insurance carriers highlight the two major reasons why Y2K lawsuits are inevitable. First, there is the money: Companies have spent big dollars fixing their hardware and software so that business will continue uninterrupted into the new year. They understandably would like to spread the spending pain around a bit.
Second, there is the money: Lawyers representing the parties fighting over the Y2K dollars will take a big chunk for themselves. The more creative the legal theories used to justify these claims, the longer it will take for the courts to sort it out. All the while, the clock on legal fees is ticking and the costs go up.
The case of Xerox Corp. v. American Guarantee & Liability Insurance Co. was filed just one day after the case of American Guarantee & Liability Insurance Co. v. Xerox Corp. Xerox, of course, has spent more than $180 million to fix its Y2K problems. It wants the insurance company to cover some of those costs. The insurance company, in turn, does not want to share the pain for expenses it did not anticipate covering when it established the rates for premiums.
Although most large insurance companies are selling policies that specifically cover Y2K-related losses, the litigation brought by Xerox (as well as Unisys and GTE against their insurance carriers) is not based on Y2K policy claims. It is brought under a rather obscure provision of the plaintiffs’ property insurance coverage.
The concept is simple. For centuries, insurance companies have included a simple cost-reduction provision in their property insurance policies. Generically known as “Sue and Labor” clauses, these provisions require policyholders to reduce the potential damage from pending calamities by taking steps to get their property out of harm’s way or shielding their property from even greater damage.
For example, if you had property insurance coverage that would repair your roof if a big tree fell on it, and a lightning strike or flood weakened the tree and it was about to fall on your house, the “Sue and Labor” clause would require you to cut the tree down. The insurance company would then reimburse you for the expense. The clause benefits both parties, because it is cheaper to cut down a tree than fix a smashed roof, and far less inconvenient for the policyholder to have to wait until the disaster actually occurs.
In the Y2K lawsuits, the plaintiffs point to “loss or damages” provisions in their policies that cover “destruction, distortion, or corruption of computer data, coding, programs, or software.” Then they cite the “Sue and Labor” clause, which reads (somewhat arcanely, because these clauses have been around since the 17th century), “in case of actual or imminent loss or damage by a peril insured against, it shall, without prejudice to this insurance, be lawful and necessary for the Insured to sue, labor, and travel for, in and about the defense, the safeguard, and the recovery of the property or any part of the property insured.”
It will be an interesting court battle, with the insurance companies claiming that the Y2K fixes were ordinary business expenses that otherwise did not fit the “impending disaster” scenario of the “Sue and Labor” clause. Insurers will also cite the notice requirements of the clauses, and they’ll point out that public statements by the big companies (in SEC stock disclosures, for example) may contradict their claims.
It will be very tough for large, sophisticated technology companies to prevail on these claimsbut, as the lawyers say, nothing ventured…
So, what does all of this have to do with you? The legal theory of Y2K coverage under “Sue and Labor” clauses may actually be more useful to smaller and less technically sophisticated policyholders such as school districts, and even more useful to those of you who have waited too long to address Y2K problems.
In your case, the looming Y2K peril may be more real. If your district’s property insurance contains the key language on coverage of “computers and software” (many do) and the “Sue and Labor” clause (most do), and you have incurred expenses to keep from having a Y2K disaster, and there are no specific exclusions in your property insurance policy, you might want to give your legal counsel a jingle to discuss filing a claim.
If your lawyer believes you have a case, he or she might even pursue the claim on a contingent fee basis. Heynothing ventured…