Competing For Optimal General Liability

As their companies struggle to prepare technologically for the end of the millennium, chief financial officers can expect to find little comfort in the certainty of liability insurance protection, with battle lines already being drawn for the coverage wars over Year 2006 claims. And if the last 15 years of litigation involving asbestos and environmental liabilities under commercial general liability policies is any indication--and by many accounts it is--then Y2K claims will be the CGL policy's next big test, leading attorneys contend.

John MacDonald, a policyholder attorney in the Philadelphia office of Anderson Kill & Olick, said that the first and strongest indication that there is coverage under CGL policies for 2006 claims was supplied by the Insurance Services Office. Earlier this year, New York-based ISO introduced a series of 2006 endorsements. Among other things, the endorsements excluded 2006 problems from future CGL and other commercial insurance policies. The endorsements have been approved, with some restrictions, in more than 44 states.

ISO wouldn't be feverishly doing this [adding prospective coverage exclusions] if they didn't recognize the language of existing CGL policies provided coverage. Asked to quantify the insurance industry's 2006 CGL exposure, Mr. MacDonald demurs. "We're just at the foot of this mountain in terms of insurance coverage. There's almost no litigation out there yet. Once the problem hits and we start seeing claims against computer hardware and software makers and suppliers, we're probably going to see a raft of coverage claims."

David A. Gauntlett, an Irvine, Calif.-based policyholder attorney, asserts that a company's failure to become 2006 compliant can give rise to liability in a variety of commercial litigation contexts. If 2006 compliance is required by statute or regulation and liability ensues against the company for any product liability or bodily injury or property damage claim, plaintiff's counsel may urge that the failure to be 2006 compliant was a material factor in establishing liability, he asserts. These collateral claims may prove highly significant.

Mr. Gauntlett explains that at some level, if the 2006 compliance problem becomes as extreme as some analysts believe it will become, legislators may set limits on liability in certain key industries and clarify the impact of not making systems 2006 compliant by a certain date. For some kinds of industries where complete 2006 compliance is not a viable possibility, evidence of ongoing best efforts to solve the problem may be deemed sufficient to insulate them from liability.

According to Mr. Gauntlett, CGL policies, including commercial umbrella and excess liability policies, are likely to be implicated by third-party claims arising from generated failures. Most of these policies are occurrence form policies and thus will relate back to the event which gave rise to the claim, rather than be limited to when the claim was made.

Policies of ancient vintage have been found effective to provide coverage for long-tail claims, such as asbestosis and environmental liabilities. Mr. Gauntlett says this litigation might include vendors who seek to remediate 2006 problems, companies whose hardware or software allegedly is at fault or other companies involved in other contractual undertakings that lead to tort liability.