By Diana Kowatch, CPCU, AU, AAM, CPIW
Over the last few months, we have been looking at potential loss scenarios involving the Y2K/millennium bug problem. We have emphasized what is and what is not currently available in most standard property and casualty insurance coverage forms, commercial or personal.
This month we will look at some of the developments that have been occurring in the coverage area, such as changes to existing policy programs and new coverages that now are or soon will be available.
We will also look at some of the risk management and loss control services that are now available for assessing, correcting and controlling the Y2K exposure.
CHANGES TO CURRENT POLICY PROGRAMS
AAIS
As we pointed out in our previous articles, there is very little standard physical damage property, business interruption (contingent or direct), or third-party liability coverage for the Y2K problem in most commercial property, liability, EDP, or personal policies.
In order to clarify the internal policy exclusions already in these policies, American Association of Insurance Services (AAIS) has announced that it has filed additional language for its filed lines of insurance, which it hopes will solidify the pre-existing exclusions and make clear to the insured that coverage does not exist for the Y2K exposure, as well as any other claims that are related to the failure of a computer system to properly register and handle date recognition.
By restating the exclusions so that they are clear and unambiguous with regard to the Y2K problem, AAIS hopes to help its member insurers avoid potential legal situations that otherwise might have developed since the existing exclusions did not specifically state Y2K situations. Further, because the Y2K exclusions now are more obvious, the situation has been made clear to the insureds and may assist in alerting those insureds to the potential urgency and severity of the problem.
What follows are two sample AAIS exclusions. The first is for property losses.
"Calendar Date or Time Failure-- 'We' do not pay for loss or damage resulting from the failure of any electronic data processing equipment, computer program, software, media, or data to correctly recognize, interpret, or process any encoded, abbreviated, or encrypted date or time."
The next is the sample liability exclusion.
"Calendar Date or Time Failure--'We' do not pay for 'property damage,' 'personal injury,' or 'advertising injury' resulting from the failure of any electronic data processing equipment, computer program, software, media, or data to correctly recognize, interpret, or process any encoded, abbreviated, or encrypted date or time."
These exclusions have been filed as applicable to filed lines or classes of business such as commercial property, filed commercial inland marine, commercial liability, and personal lines policies.
A separate exclusion was designed for the non-filed electronic data processing (EDP) inland marine coverage. Titled "The Year 2000 Exclusion Endorsement," this exclusion is used to eliminate coverage for losses or claims that result only from the "two-digit coding of four-digit calendar year dates" problem. This approach provides a practical solution to the situation by tailoring the exclusion specifically to the Y2K situation only. It does not eliminate or address any other type of potential computer system problems or glitches regarding dates.
In terms of positive news, AAIS has recognized the need to draft an EDP endorsement that will offer some protection to those insureds that have identified the problem and have taken corrective steps to resolve the issue. Look in the section to follow, under New Coverages Or Services Available.
For more information on the AAIS exclusions, you may contact the following:
Filed exclusions: Brent Hathaway, Senior Product Development Specialist
Non-filed exclusions: Robert Guevara, Assistant Vice President, Inland Marine
General: Joseph S. Harrington, ARP, Manager of Communications
All may be reached by phone at (800) 564-AAIS.
ISO
Two commercial general liability exclusion endorsements have been developed and filed on a multi-state basis by ISO. The first, CG 21 60--Exclusion--Year 2000 Computer-Related And Other Electronic Problems, has been filed to use with the Commercial General Liability coverage part; and its complement, CG 21 61--Exclusion--Year 2000 Computer-Related And Other Electronic Problems--Products/Completed Operations, has been filed to use with the Products/Completed Operations Liability coverage parts.
Both of these endorsements have been designed to add an additional exclusion to the list of exclusions that apply to coverage for bodily injury and property damage liability. CG 21 60 also applies to personal and advertising injury liability.
Excluded are bodily injury, property damage, personal injury, and advertising injury liability "arising directly or indirectly out of:
a. Any actual or alleged failure, malfunction or inadequacy of:
(1) Any of the following, whether belonging to any insured or to others: (a) Computer hardware, including microprocessors; (b) Computer application software; (c) Computer operating systems and related software; (d) Computer networks; (e) Microprocessors (computer chips) not part of any computer system; or (f) Any other computerized or electronic equipment or components; or
(2) Any other products, and any services, data or functions that directly or indirectly use or rely upon, in any manner, any of the items listed in Paragraph 2.1. (1) of this endorsement due to the inability to correctly recognize, process, distinguish, interpret or accept the year 2000 and beyond.
b. Any advice, consultation, design, evaluation, inspection, installation, maintenance, repair, replacement or supervision provided or done by you or for you to determine, rectify or test for, any potential or actual problems described in Paragraph 2. a. of this endorsement."
As we can see, this fairly comprehensive liability exclusion serves to eliminate the preponderance of possible Y2K liability exposures. ISO has suggested that it is a total exclusion.
Use of either of these endorsements should be reviewed and treated as a reduction in coverage in almost all cases.
In addition to the commercial general liability exclusions, two other exclusions have been developed and filed to go along with the newly revised ISO Simplified Professional Liability Program. These two endorsements are: PR 21 04--Exclusion--Year 2000 Computer-Related And Other Electronic Problems, which is to be used with Blood Banks, Diagnostic Testing Laboratories And Hospital Professional Liability coverage parts; and PR 21 05--Exclusion--Year 2000 Computer-Related And Other Electronic Problems, to be used with Allied Health Care Providers, Optometrists, Physicians, Surgeons and Dentists and Hospital Professional Liability coverage parts. The wording in these two endorsements is very similar to that found in the two general liability endorsements.
What about commercial property, commercial crime, commercial inland marine and boiler and machinery? They have not been left out. ISO has also filed an exclusion for these lines of business. It is IL 09 35. The new exclusion states:
"A. We will not pay for loss ('loss') or damage caused directly or indirectly by the following. Such loss ('loss') or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss (loss') or damage.
1. The failure, malfunction or inadequacy of:
a. Any of the following, whether belonging to any insured or to others:
(1) Computer hardware, including microprocessors;
(2) Computer application software;
(3) Computer operating systems and related software;
(4) Computer networks;
(5) Microprocessors (computer chips) not part of any computer system; or
(6) Any other computerized or electronic equipment or components; or
b. Any other products, and any services, data or functions that directly or indirectly use or rely upon, in any manner, any of the items listed in Paragraph A.1.a. of this endorsement;
due to the inability to correctly recognize, process, distinguish, interpret or accept one or more dates or times. An example is the inability of computer software to recognize the year 2000.
2. Any advice, consultation, design, evaluation, inspection, installation, maintenance, repair, replacement or supervision provided or done by you or for you to determine, rectify or test for, any potential or actual problems described in Paragraph A.1. of this endorsement.
B. If an excluded Cause of Loss as described in Paragraph A. of this endorsement results:
1. In a Covered Cause of Loss under the Boiler And Machinery Coverage Part, the Commercial Crime Coverage Part, the Commercial Inland Marine Coverage Part or the Standard, Property Policy; or
2. Under the Commercial Property Coverage Part:
a. In a 'Specified Cause of Loss' under the Causes of Loss--Special Form; or
b. In a Covered Cause of Loss under the Causes of Loss--Basic Form or the Causes of Loss--Broad Form;
we will pay only for the loss ('loss') or damage caused by such 'Specified Cause of Loss' or Covered Cause of Loss.
C. We will not pay for repair, replacement or modification of any items in Paragraphs A.1.a. and A.1.b. of this endorsement to correct any deficiencies or change any features."
It is the opinion of ISO that the use of this endorsement does not eliminate or reduce coverage because none existed. This endorsement is merely a restatement or clarification of what has already been excluded by existing policy language. Unlike the liability endorsement which is optional, the commercial property/crime/inland marine/boiler and machinery endorsement has been filed as mandatory for all policies.
There is some good news on the ISO front for those insurers willing to provide some buy-back of the Y2K exclusion. Look in the section to follow, under New Coverages Or Services Available.
For more information on ISO and its services, contact ISO Customer Service Division at (800) 888-4476.
NEW COVERAGES OR SERVICES AVAILABLE
AAIS
Year 2000 Coverage Endorsement
AAIS has announced an inland marine coverage that has been developed as an endorsement to its EDP program, providing limited extra expense coverage for Y2K disturbances, which may interrupt or disrupt an insured's data processing operation.
This is very good news for the insurance industry and business as a whole because this coverage endorsement has been developed for small to mid-sized EDP operations. Most of the other coverages that have been brought to our attention to date were designed for large insureds.
Although the coverage form itself carries no such special provision, in the provided risk selection section of its inland marine guide, AAIS does instruct the insurer that prior to offering coverage, the insurer should audit or otherwise verify that the insured has implemented a year or time date review, evaluation, and correction procedure. This coverage was designed only for those losses that result from programs or processes that somehow slipped through the cracks in the insured's overall procedure. This endorsement should not be used to replace sound risk management and proactive strategies to reduce or eliminate the problem ahead of time.
Coverage limits are available between $10,000 and $250,000. A credit is available if the insured has used an outside consultant for the process identification, evaluation, and correction of the Y2K problem.
For more information on the AAIS coverage, contact Robert Guevara, Assistant Vice President, Inland Marine at (800) 564-AAIS.
AIG
Millennium Insurance
AIG recently announced the availability of "a policy that provides business interruption and legal liability coverage in the event that Year 2000 information technology system solution/conversion efforts by the insured or a third-party fail." The Millennium Insurance policy is comprised of three coverages: direct business interruption, contingent business interruption and third-party liability. The direct business interruption coverage covers loss of profits for business interruption resulting from unsuccessful conversion by the insured of its own systems. The contingent business interruption coverage covers loss of profits and extra expense for business interruption of the insured due to an unsuccessful or incompatible conversion by a third party that results in the failure or interruption of a third-party system or data transmission capability. The third-party liability coverage includes errors and omissions (E&O) and directors and officers (D&O) insurance and covers an insured's legal liability resulting from its own or a third party's conversion efforts.
Millennium Insurance is available with limits of liability of up to $100 million. The policy term runs from inception until January 1, 2001. Underwriting is subject to an audit of the applicant's Year 2000 conversion plans.
This information was obtained directly from a press release dated 3-12-97 at the AIG Web site (www.AIG.com). For more information on Millennium Insurance, contact Susan Treskolasky, Senior Vice President, AIG Risk Finance, at (212) 770-7253.
Aon Risk Services Companies, Inc. (Aon Group, Inc.)
ARM2000
On August 28, 1997, a new and "unique millennium risk management service" was introduced. The new product, named ARM2000, was developed by Aon in cooperation with and to be underwritten by AM-Re Managers, Inc. The program will be supported by Aon's specialized risk management services.
The new program is not an insurance policy but, rather, is a risk transfer program for those operations that may face significant business interruption losses that have been predicted for the January 1, 2000 year date. These losses will occur as a result of computing system failures and crashes.
To quote Dick Riley, chairman and CEO of Aon Risk Services, from an ARS news release, "ARM2000 represents our continued commitment to be an industry leader in providing clients with sophisticated solutions to their technology-related issues. This comprehensive program is designed to analyze, validate and insure Year 2000 compliance risk."
The new program is a combination of risk analyses and management tools which include processes such as "business economic impact analysis; system-wide integration testing; a validation plan on independent, compatible platforms; and standby facilities for clients' contingency needs."
Contact: Aon Risk Services; Philip Lian, ARM2000 Project Manager; phone: (212) 441-2652, fax: (212) 432-0898, e-mail: philip-lian@ars.aon.com
ISO
Year 2000 Computer-Related and Other Electronic Problems--Limited Coverage Options
Two new endorsements have been developed and filed on a multi-state basis which will allow ISO-based insurers to offer limited Y2K liability coverage. The two endorsements are: CG 04 31--Year 2000 Computer Related And Other Electronic Problems--Limited Coverage Options, to be used with the Commercial General Liability coverage part, and CG 04 32--Year 2000 Computer Related And Other Electronic Problems--Limited Coverage Options, to be used with the Products/
Completed Operations Liability coverage part.
Both of these endorsements restate the new Y2K liability exclusion previously discussed, so both the exclusion and the coverage should not be used; however, the exclusion does not apply to any coverage or description of products or completed operation that is scheduled.
The limited coverage may apply to the coverages of bodily injury or property damage or both.
The schedule must contain a description of the product(s) or completed operations that will be covered.
A section has been provided for the insertion of a premium charge for this coverage; however, ISO has not developed any rating for use of these endorsements since no credible statistics are available. Thus, all charges will be at the discretion of the insurer giving coverage.
The ISO filing does not make coverage contingent on nor does it require the insured to warrant any type of loss control, Y2K evaluation process, or any corrective action. This will also be up to the discretion of the insurer.
Two very similar types of endorsements were filed for the newly revised ISO Simplified Professional Liability Program. The two endorsements are: PR 04 07--Year 2000 Computer-Related And Other Electronic Problems--Limited Coverage Options, which is available for use with Blood Banks, Diagnostic Testing Laboratories And Hospital Professional Liability coverage parts; and PR 04 08--Year 2000 Computer-Related And Other Electronic Problems--Limited Coverage Options, to be used with Allied Health Care Providers, Optometrists, Physicians, Surgeons and Dentists and Hospital Professional Liability coverage parts.
On the commercial property side, a new optional endorsement, CP1557--Business Income and/or Extra Expense Coverage For Year 2000 Computer-Related And Other Electronic Problems, has been developed and filed. This endorsement is very different in two important ways from other business income and extra expense coverage. First, business operations do not necessarily have to be suspended for coverage to be triggered. Second, direct physical damage coverage is not required either. The amount of coverage is limited to an annual aggregate of $25,000.
For more information on ISO and its services, contact ISO Customer Service Division at (800) 888-4476.
J&H Marsh & McLennan, Inc.
2000 SECURE
This protection combines both first-party business and EDP interruption coverage with third-party liability insurance. A limit of up to $200 million is available and will be underwritten by an international collection of American and London insurers.
J&H Marsh & McLennan, Inc., describes its insurance as a "true risk transfer." The product's coverage is for "a company's own loss of profits due to a work stoppage resulting from its computer system crashing (business interruption); extra expenses related to inadequate updating and/or replacement of its systems (contingent business interruption); and third-party liability, i.e., losses to an outside party caused, directly or indirectly, by a company's failure to adequately address the Y2K changeover."
Details of the program and further information may be obtained by contacting a local J&H Marsh & McLennan office. The J&H Marsh & McLennan, Inc., Web site is located at: http://www.marshmc.com/
The 2000 SECURE contact is Bill Malloy, New York; phone: (212) 345-5969; e-mail: William.A.Malloy@marshmc.com
Risk Solutions, Inc.
Y2K Process Control Service (for Industrial Risks)
While many corporations and their IT service providers are well underway with programs to deal with Y2K compliance for their business computer systems, it appears that insufficient effort is being expended in regard to the possibility that this problem might also affect industrial plant process control and safety systems, automation and embedded systems. There is a general lack of appreciation of the fact that failure to address this issue may compromise plants' safety and their local environment, and may result in possible lost production and, therefore, revenue.
Risk Solutions is currently offering a Y2K Process Control Service to assist industrial clients in verifying that their critical process controls and safety systems are being addressed to ensure Year 2000 compliance. Risk Solutions uses techniques that have been developed through extensive experience in industrial risk assessment.
The types of risks that are serviced by Risk Solutions include: insurance brokers/underwriters, food processing, offshore and onshore oil and gas, chemical/petro-chemical, power generation, mass transit and construction.
Norman Ritchie explains: "Rational and systematic analysis of the risks and consequences of system failure is the foundation of a sound Year 2000 strategy. Only by fully understanding the relationships between potential losses and expenditure on remediation can your business avoid wasting valuable resources working on the less important systems, not all of which are obviously so."
Details of the service and further information may be obtained by contacting:
Norman Ritchie; Risk Solutions, Inc.; Suite 300, Destec Tower, 2500 City West Boulevard, Houston, TX 77042; phone: (713) 267-2296, fax: (713) 267-2267, e-mail: normanritchie@compuserve.com *
The Rough Notes Company home page includes a "discussion group" for Y2K issues. Visitors to the site can comment on Y2K issues, pose questions and stay up to date on these issues. The Web site is located at http://www.roughnotes.com.
The Technical and Educational Products Division of The Rough Notes Company has developed a packet of information on the Y2K topic which we are making available for a nominal fee. The packet contains the collection of all the articles in the series "The Millennium Bug," one copy of an agency questionnaire and 10 copies of the customer questionnaire from our Commercial Risk Management Survey. Please contact our Sales Department at 1-800-428-4384 for information or to place an order.
©COPYRIGHT: The Rough Notes Magazine, 1998