Prior to the end of 1999, most of our insurers introduced changes to their commercial lines policies to reduce their exposure to Y2K risks, using a new "misinterpretation of dates" (MoD) exclusion along the lines suggested by the Insurance Council of Canada (ICC).
Leading up to the millennium, businesses spent billions on preparations, including hardware and software upgrades and back-up systems such as emergency power generators.
In the event, the worldwide millennium computer scare failed spectacularly to materialize. Even in the third world, where computer systems and connectivity are much less advanced, and resources for Y2K preparedness were scarce, computers weren't thrown into chaos.
When the MoD exclusion was introduced, the millennium bug scare was uppermost in the minds of our insurers. But they also recognized other future dates that might cause similar mass computer failures.
The remedial work that went into fixing the millennium bug suggests that it is unlikely that a future date error will cause system-wide failures on the scale forecast for the turn of the century.
Other emerging IT risks now appear to present a more serious risk to our wired world. The Melissa e-mail virus and recent assaults on Microsoft, Amazon and other e-tailers illustrate the risk of deliberate system damage by hackers, whether for extortion, fraud or just mischief. These risks seem every bit as serious as the millennium bug that so preoccupied us this time last year.
The MoD exclusion affects our customers in different ways: - Some of our clients have little or no risk that a date error might directly affect a customer, although the client might have incurred considerable internal expense to fix the problem and keep the business running. The Commercial General Liability (CGL) policy provides no cover for fixing or maintaining date-error problems.
- For other clients, a date-error failure might mean that a customer would incur losses of a financial nature, such as travel delays. The CGL policy covers actual bodily injury (BI) or property damage (PD) but not financial loss.
- For other clients, a date-error failure might mean that a customer incurred an actual BI or PD loss covered by a CGL policy, or that actual BI or PD was aggravated by our client's system failure. For these clients, the MoD exclusion represents a material reduction in coverage.
These sorts of expenses, or perhaps combinations of the three, were possible.
The MoD exclusion was the first important change to the CGL policy since the mid-1980s, when insurers introduced the absolute pollution exclusion as a response to rising asbestos and environmental litigation.
Although the threat of a worldwide computer system failure has clearly passed, insurers do have a few remaining worries. These include some legal cases, mainly by U.S. policyholders who argue that the "sue and labour" provisions of property policies provide indemnity for some of their millennium bug expenses. Of course, the stakes in these cases are huge. We are aware of no "sue and labour" lawsuits in Canada, but most insurers remain daunted by the prospect of defending this sort of litigation.
Right now, there is no movement to remove the MoD exclusion from commercial policies. Nor, to our knowledge, has a specialty market emerged to permit clients to buy back cover for this risk. We do not believe that the ICC is currently considering the repeal of their recommended MoD exclusion. We expect the market to harden in 2001, and this exclusion is unlikely to be revisited by insurers while the market hardening continues.
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The millennium bug crisis appears to have passed. Why haven't insurers removed the "misinterpretation of dates" exclusion from commercial property and liability policies?