Fortuity, reinsurers and year 2000 problem: will these theories carry the day?

• Author: Antognini, Richard L.

Some reinsurers believe that the fortuity or known loss doctrine will protect them from Y2K bug problems, but that may not be so

BY NOW, almost everyone is aware of the Year 2000 or Y2K problem--the inability of some computer operating systems and computer chips to recognize dates beyond December 31, 1999. The response of the worldwide insurance industry to claims arising from this crisis will be the product of many factors,(1) but the positions of reinsurers will be crucial. Several reinsurers have signaled that they will question whether such losses are fortuitous.

The fortuity issue, however, may not be so easy to apply. There is no universal definition of fortuity. Some states interpret the concept broadly and some narrowly. Even under broad definitions, most courts require that an insured have actual knowledge that it has caused a loss or that its actions will lead to a certain loss. In the context of Year 2000 claims, this test applies only to the most egregious of circumstances.

An insured will not lose coverage merely because it knows that the Year 2000 problem exists generally. It must know that the problem exists in its own computers, databases or other equipment, and that its computer operations are sure to fail on January 1, 2000. In some states, even that knowledge is not enough. The insured must be aware of an actual claim or loss.

FORTUITY AND Y2K

All insurance rests on the idea that a loss must be fortuitous--that it cannot be certain or known.(2) Yet, few things are more certain than that when the new century comes, computers with older programs may have problems.

For at least 10 years, the news media have reported on the "millennium bug." In 1988, for example, the New York Times quoted one federal government official: "Those who don't take the problem seriously are going to be faced with a real problem in the 1990s." The same story continued: "It could be an absolute horror show for anyone with mainframe computers."(3) The Internet is filled with web sites devoted to the Year 2000 bug, such as www.Year2000.com. Even Business Insurance has a site on its web page for Year 2000 articles--www.businessinsurance. com.

How can a problem so certain to occur still cause fortuitous losses? Some reinsurers question whether fortuity is possible. Swiss Re America has told clients that the "majority of [Year 2000] claims should fail based on the doctrine of fortuity; moreover, courts should be expected to uphold such denials of coverage." It goes on to comment:

While the picture of potential Millennium Bug liability is a threatening one, there is, in fact, sound reason to believe that many claims will not trigger coverage. With the exception of certain directors & officers, professional liability and surety claims, most standard coverages do not apply because Millennium Bug claims are not fortuitous. This is especially so with claims made against general liability policies. The lack of fortuity of computer failure caused by the Millennium Bug is the first line of defense against general liability claims, even before...