AN AGENT'S GUIDE
TO THE Y2K LEGAL LANDSCAPE

Planning, knowledge and disclosure can lessen the rough terrain

By Len Brevik

No one is sure exactly what will happen on January 1, 2000. But, as insurance professionals, we must be certain that everything we do in preparing for the unknown minimizes the impact of the unforeseen.

The millennium is fast approaching--and with it myriad challenges for the independent agency system. Successful independent agency owners are now painfully aware of the multitude of computer problems associated with the Year 2000 (Y2K). The source of the Y2K crisis is technology. The solutions are business issues with social implications. The task is for every agency and each client to be ready.

Agents must take the lead in dealing with the Y2K problem within their agencies and with their customers. Many businesses are devoting substantial financial and personnel resources to identify all Y2K-vulnerable areas of their internal and external operations. Now more than ever, agents should apply the same risk assessment techniques they use with clients to determine the effectiveness of their compliance efforts in their agencies and the adequacy of overall agency Y2K planning.

Keep in mind that integrity, one of our profession's best assets, serves us well when dealing with a topic like Y2K. While a computer programmer may not be able to effectively communicate the seriousness of the issue to a board of directors, a well-informed agent can explain potential coverage gaps and the impact on future revenues, and offer loss control options that may negate any potential risk.

Educate your clients

Consumers are painfully unaware of the Y2K ramifications--many think all they need to do is buy a new version of software or hire a high-priced computer guru and any problems will be resolved. Given that 47 states have approved carrier use of ISO's Y2K exclusions form for commercial enterprises, no agent can afford to get the call on January 1, 2000, from a client asking, "Why didn't you tell me?"

How can agents convince their customers that Y2K is a real problem? Carefully crafted advisories that emphasize the seriousness and pervasiveness of Y2K issues must be sent to all clients, both personal and commercial. It wouldn't hurt to send the same notice to all major business associates--such as your bank or landlord--as well. These notices should require that the client sign a statement that (s)he has read and understands the notices.

By providing frightening, but "real life" scenarios that are tailored to a client's business, agents can offer insight into potential areas of concern for any business. Some issues may include:

* Orders that cannot be taken because inventory has expired or order dates are out of range; previous orders that are canceled because ship dates are out of range.

* Phone systems that say you are closed when you are open.

* Inability to gain entry to a building because the card system is not functional (all cards have "expired").

* Inability of the LAN administrator to log on to the LAN because all passwords have expired. LAN files that have been purged because they are all "very old." Backup tapes that have been erased as well, because they have "expired."

* Failure of the business building's HVAC. Lack of lighting in the building because it's automated and the computer thinks it's January 1, 1900, which was a Sunday. Out-of-control sprinkler systems and elevators.

* An accounting system that has reclassified all the journal entries into the wrong year. An accounts receivable system that sends out threats for lawsuits to all your best customers because it thinks their balances are 100 years old.

* A payroll system that assumes all employees have been terminated, has deleted time and billing records for the last month, and has terminated 401(k)s, which have ceased to accrue interest.

* Failure of direct deposit payroll because the bank has a glitch in its system--or the bank can't find your account at all because your Social Security number does not exist.

As we ring in the New Year next year, these same clients will be calling you to find out how their insurance program is going to respond. They will want to know details about the policies and coverages in place to reimburse them for their losses. Your prior notices to them, confirmed by written proof of coverages, will be your agency's first line of defense when the lawsuits begin.

A legal shot in the arm

The story on Y2K is constantly changing, and agents need to stay perpetually informed. The focus, initially on awareness, now has shifted to the exact scope of the problem and the need for quick fixes and legal maneuverings. There is a multitude of Y2K information in paper and electronic format--agents need only access the Web to become Y2K readiness and compliance experts within their agencies, and experienced Y2K risk managers for their clients.

A great deal of the debate about Y2K readiness in the insurance industry has taken place in an information void. A definitive assessment of the insurance industry's progress is still difficult at this juncture because so little information has been available--and that data has been carefully wordsmithed by lawyers to minimize liabilities. Many carriers and agency product vendors have held their compliance project information very close to their vests.

The source of the Y2K crisis is technology. The solutions are business issues with social implications.

In the coming months, however, a substantial increase in the amount of Y2K knowledge will bring a much more positive focus on the issue. Legislation signed into law in October 1998, has helped to create an environment where companies, agents and customers can intelligently discuss the need for further preparation. This bipartisan bill, the "Year 2000 Information and Readiness Disclosure Act," will provide some limited liability protection to companies that reveal their Y2K status to business partners and customers. Likewise, the Securities & Exchange Commission has instituted fairly strict Y2K status reporting requirements for publicly traded companies. As part of quarterly 10-Q reports, companies must provide information about the progress and cost of their Y2K projects.

Agents should be forewarned, however, that Y2K liability law is entirely unclear. Officers and directors have been advised by counsel to limit external statements that might be interpreted as warranties or assurances that could be used against the company in court. And contingency planning, prudent preparation for a complex problem, has been falsely perceived by many as evidence of Y2K weakness within an organization. Conversely, it seems that some companies are willing to talk about their contingency plans without exposing the competitive advantage they may enjoy from internal Y2K preparation.

The coming test of the legal and insurance industries' ability to handle Y2K-related claims efficiently and fairly will be as challenging and fascinating to agents as the efforts of computer scientists to fix the underlying technical problems.

Lawsuits already abound

Software that is not Y2K-compliant has already given rise to a wave of litigation. Most of the suits are for breach of warranty and violation of related consumer protection laws asserted against software companies that seek to charge for Y2K "fixes" in situations where the software vendor has (at least arguably) the legal obligation to fix the software without charge. In most cases, software vendors have acknowledged their responsibilities, either out of legal obligation or desire for good customer relations.

A recently settled first case involved a grocery store's claim against the manufacturer of the software used in its cash register system, which crashed when credit card expiration dates of 2000 were entered. Other cases have been class actions on behalf of consumer or small business purchasers of software--typically accounting or personal finance--where the vendors were charging for upgrades to achieve Year 2000 compliance, particularly to owners of older-than-current versions. These cases primarily seek a "free fix" from the vendor, and damages for owners who previously purchased an upgrade in order to achieve Y2K compliance.

In all but a few of these cases, the vendors announced availability of free fixes, even for older-version software, immediately after suits were filed. In one case involving popular personal finance software, however, the vendor has continued to fight the claims, asserting that it has plans to announce, but has not yet, its "free-fix" offer. It remains to be seen how this issue will be resolved in light of the recent disclosure ruling.

Future litigation, unlike the present software-related class action suits, will likely involve claims for substantial consequential economic damages and system fixes. Important warranty, product liability, and insurance issues will be further implicated. Agents should be aware that many more claims inevitably will emerge as the approach of the millennium causes system failures and business interruptions. Informed agents will be prepared to face them. *

For more information about the Year 2000, you can attend "Year 2000 and the Approaching Claims Debate," just one of 37 workshops at ACORD Technology Conference '99.

The author Len Brevik is IIAA's chief information officer and senior vice president of industry affairs.