Some clients may have little or no risk that a Y2K system failure will directly affect a customer, although it might mean that our client incurs considerable internal expense to fix the problem and keep the business running. The CGL policy provides no cover for fixing or maintaining Y2K compliance.

For other clients, a system failure might mean that customer will incur losses of a financial nature, such as travel delays. The CGL policy covers actual BI or PD but not financial loss.

For other clients, a system failure might mean that a customer incurs an actual BI or PD loss which is presently covered by a CGL policy, or that actual BI or PD is aggravated by our clients system failure. For these clients, the new exclusion will mean a reduction in coverage.

These sorts of expense or more likely, combinations of all three are possible. Insurers expect a pronounced increase in business litigation as a result of Y2K system failures. Even if our clients systems are fully compliant, they could be drawn into costly litigation because of a failure of an independent supplier or sub-contractor.

Insurers are daunted by the prospect of defending this litigation. We haven't seen this sort of fundamental change to the CGL policy since the mid-1980's when insurers introduced the absolute pollution exclusion as a response to rising asbestos and environmental litigation.

At the time of writing this article, there is no real consensus among insurers on this subject, but we suspect that by year-end, all insurers will treat this exposure in the same way. It remains to be seen if a specialty market emerge during to permit clients to buy-back cover for this risk.

In the meantime, we urge our clients to complete an assessment of their system and the systems of their business partners to ensure that they are fully Y2K compliant by the end of next year.