The insurance industry will be devastated if courts hold the industry mainly responsible for y2k. One industry insider calls it "armgeddon."
But most insurance companies are not writing in y2k exclusions. The competition for premium money is too fierce.
So, they want it both ways: our money up front and an inplied escape clause on the back end. This comes as no surprise.
All this assumes that the industry will still exist in 2000. But when the computers go down, why will insurance companies still be standing? When the bank runs begin in 1999, why should insurance companies expect premium money to keep flowing in? Those that sold cash value life insurance that can be borrowed at a low interest rate will experience mini-bank runs.
This is from BUSINESS TODAY (May 17).
* * * * * * *
Year 2000 for insurance companies: Armageddon or no big deal?
Beneath the hubbub over whether the world's computer systems will be ready for the new millennium lies a much scarier question for the insurance industry: Who will pay for the damages if they aren't? Just as predictions for the impact of the millennium bug range from doomsday scenarios to "What, me worry?," insurance forecasts also diverge widely. . . .
Policyholders should be responsible for at least trying to fix their systems, insurers believe. "It's not sufficient to do nothing and turn it back into an insurance claim," said Dale Miller, a partner with Chicago law firm Lord, Bissell & Brook. "When your house is burning, you call the fire department; you don't let it burn and then file an insurance claim," he said.
"We don't believe it's an insurance problem," said Steven Goldstein, a spokesman for the Insurance Information Institute, a trade group. "As insurers, we are working with our clients to help them become year-2000 compliant. But they have to put forth a good faith effort." . . .
Nancy James, principal of the N.P. James Insurance Agency in Concord, Mass., believes it's clear that "insurance was never intended to give Year 2000 coverage. No premiums were ever collected for it."
But that doesn't mean there won't be attempts to recover damages from insurers, James warned. "What if the government determines Y2K is a (computer) virus?" Those are generally covered under commercial insurance policies. Or what, she asked, if the government declares the Year 2000 fallout a natural disaster, to allow small businesses to qualify for loans to clear up the mess. "That could trigger coverage we otherwise hadn't anticipated," she said.
James and others believe insurers haven't yet done enough to limit their potential liability, however, while the trial lawyers are already planning their attacks.
"The most prepared element of society is the legal profession," said Brian O'Hara, president and chief executive of Exel Ltd. (XL) a Bermuda-based reinsurer. "They are massing the forces at the border."
Insurers have been reluctant to exclude Year 2000-related coverage from policies because of the soft commercial insurance market. Premium growth for commercial insurers is so hard to come by that few are willing to lose business because of a nebulous liability that might not come to pass. . . .
Jay Cohen, an analyst at Merrill Lynch & Co., said companies are addressing it with boilerplate language, saying they are "unable to determine" at the present time whether Year 2000 liability would have a material effect on them.
Attorneys for policyholders and potential plaintiffs, however, like to equate the issue with the liability insurers faced from asbestos and environmental claims stemming from policies they wrote in the 1950s.
That scares insurers. They thought policy exclusions limited their liabilities on asbestos and environmental cleanups, but courts ruled against them. At the end of 1997, paid and unpaid claims for asbestos and environmental pollution totaled an estimated $58 billion. . . .
But time is running out. "Policy renewal periods and other considerations leave little time for further loss mitigation and few firms have taken aggressive steps to manage the exposure," Moody's Investors Service wrote in an upcoming report. . . .
Beyond that, insurers could face claims under business interruption policies. And companies that write liability coverage for company officers and directors could encounter claims from shareholders seeking compensation for a drop in the price of a stock if a computer breakdown interrupts business. . . .
Insurers could help their cause by communicating better with policyholders, according to Miller of Tillinghast Towers-Perrin. "Policy disputes come up because there's confusion," he said. Policyholders who "understand the ground rules" are less likely to contest a denial of claims, he said.
Others believe that might be wishful thinking. According to James of the N.P. James Agency, the American Bar Association's committee on insurance coverage litigation has prepared 51 pages of instructions telling attorneys how to win fights over claims.
Sheffield, of A.M. Best, sees no reason to panic, yet. "I like to think the expense is going to be borne by businesses that did or didn't address the problem," he said. "I hope the industry isn't going to bear the cost. If the courts end up doing that, it could create Armageddon for the industry."