Linda Ferro, chief financial officer at Banner Service Corp., a family-run precision grinding company in Carroll Stream, Ill., is worried. Like thousands of other execs, Ferro has just learned that her company's existing business insurance won't cover anything that happens to Banner--or its customers--if the company's computers get fouled up by the Year 2000 computer bug.
Ferro thought Banner was covered until its renewal arrived and spelled out Y2K exclusions. Now, she fears Banner could be stuck paying hundreds of thousands of dollars to defend itself in Y2K lawsuits from customers if the bug fouls up production or causes product defects. Banner could also be liable for safety problems inside the factory arising from Y2K glitches. "Initially, we thought insurance would take care of everything," Ferro says. "Now, our insurer is telling us that on Y2K, we're on our own. It could be devastating." On the advice of lawyers, Banner is sending letters to customers, spelling out its Y2K compliance measures--but offering no guarantees against problems.
KEEPING MUM. Ferro has a lot of company. Corporations, homeowners, hospitals, and schools have been getting letters from insurers telling them they won't be covered for Y2K damages. "Generally, the Year 2000 problem is not an insurable risk," Travelers Property Casualty Corp. has told 3,000 agents and brokers in memos over the past few months.
Some insurance companies are taking the opposite tack--deliberately keeping mum about Y2K coverage. Why? "For fear of provoking an outcry," says Larry McArthur, president and CEO of Ascent Logic Corp., a San Jose company that helps insurers assess major corporations' risk of Y2K failures. McArthur says some companies believe it's up to those holding policies to find out what's covered and what's not.
Companies not sure of their coverage can imagine all sorts of Y2K nightmares. Consider Los Angeles-based Oakwood Corporate Housing, which manages apartment complexes in the U.S. and Asia. Oakwood doesn't know what kind of coverage it has for Y2K, and it's worried, too. "If there's a power failure, who's liable if a tenant freezes to death or requires hospitalization?" says spokesman Bob Philips. So far, the company has not purchased special insurance, but an in-house committee is looking into insurance issues, Philips says.
It's easy to see why insurers might want to limit Y2K coverage. Every homeowner, employee, corporate director, consumer, merchant--in short, anyone with a policy--could be affected by the bug. Lloyd's of London estimated last year that global claims could top $1 trillion--far surpassing asbestos and tobacco claims combined--and could be three times higher than the $356 billion stashed in reserves by U.S. insurers for all property/casualty coverage.
To avoid that, insurers have been lobbying state insurance commissions to limit or exempt Y2K from virtually all types of policies. So far, every state has allowed at least some exemptions, and 46 now let companies exclude Y2K from commercial property, homeowners, business interruption, and professional liability policies, such as medical malpractice. Says a spokesman for the American Insurance Assn.: "People have had plenty of time to make preparations and should be responsible for making them, rather than depending on insurance to bail them out."
A RULING SOON? It's still possible for companies to get Y2K insurance--but at a painfully steep price. David Rallo, an insurance-law specialist and partner at Chicago law firm Arnstein & Lehr, says premiums can run as high as 85% of coverage. American Insurance Group's Y2K policy, no longer for sale, offered up to $100 million worth of coverage for a price of $80 million, though most of that was refundable in the event the bug didn't amount to much in losses. But even high-priced coverage is disappearing: CNA Insurance Group of Chicago, for one, plans to cut off sales of special Y2K policies in March.
Top execs and directors also may still get Y2K coverage. AIG offers "D&O Gold," a directors-and-officers policy that would protect corporate brass from shareholder claims that they failed "to achieve or properly disclose" readiness for 2000. The policy even includes $10,000 for public-relations help to "manage Y2K-related disclosure."
Industry analysts predict that the courts will ultimately settle the question of Y2K coverage. In the nation's first Y2K insurance case, Cincinnati Insurance Co. of Ohio is asking for a federal district court to rule whether the policy it sold to Source Data Systems, a maker of bug-plagued hospital-management software, requires it to cover Y2K-related failures. A Source Data customer is seeking $1.25 million in damages because its software can't recognize dates after Dec. 31, 1999.
But insurers, beware. A recent survey by Los Angeles-based DecisionQuest Inc. shows that potential jurors in Y2K cases are predisposed against insurers. Says Senior Vice-President Dave Davis: "The widespread perception is that insurers should've addressed Y2K in policies long ago rather than trying now to squeeze out of coverage." Guess they figure it never hurts to try.