The year 2000 problem : Issues for insurers. An english law perpesctive

Anthony Hobkinson

Maxine Cupitt

Introduction

The purpose of this paper is to provide an overview, from an English Law perspective, on the following issues in relation to various classes of insurance risks upon which the Year 2000 problem will potentially impact.

Current position:

• nature of year 2000 problem
• what constitutes an insurable event?
• classes of insurance potentially affected
• existing exclusions

Looking to the future:

• review of current business
• consideration of options
• assistance provided by the law
• solutions

CURRENT POSITION
1.Nature of the Year 2000 problem
The nature of the Year 2000 problem itself has been considered in numerous papers and in the press. This paper confines itself to making observations on the legal issues which it is considered are particularly relevant so far as Insurers are concerned:
1.1In contrast with other problems which have faced the insurance industry, such as the losses arising from asbestosis, the nature of the Year 2000 problem, if not the degree, is not only foreseeable but has been known about, particularly within the IT industry, for several years.
1.2In many cases it will be within the power of businesses either to prevent the impact of the Year 2000 problem on them entirely or, at the least, to minimise that impact. Whether, of course, the cost of doing so is prohibitive is a separate matter.
1.3The Year 2000 problem should not be seen as an information technology industry problem only but one that impacts upon computer users generally.
1.4It is an obvious but necessary statement to make that almost all businesses are heavily reliant upon computer use or use products which contain embedded processors.
1.5Even businesses not reliant upon computer systems themselves may rely upon suppliers or subcontractors who are, with the effect that the Year 2000 problem impacts upon them via those suppliers or subcontractors.
1.6The upshot of this is that the ramifications of the Year 2000 problem potentially impact upon a wide range of classes of insurance business (as to which see 3 below).

The question arises, in light of 1.1 and 1.2 above, whether losses resulting from the Year 2000 problem being, first, apparently foreseeable and, second, potentially preventable, are losses to which insurance contracts will respond at all.

In considering these issues, it is necessary to revisit the fundamental nature of insurable risks.

2.What Constitutes an Insurable Event
The broad rule is that insurance responds to risks not certainties.

There has been a great deal of case law over the years as to what this means and this paper considers, in brief, just three of those cases.

The first is the early authority of Prudential Insurance v Inland Revenue Commissioners 1904 2KB 658. In this case the Judge endeavoured to define a contract of insurance which he identified as "one where one party promises in return for a monetary consideration to pay to the other party a sum of money or provide him with some corresponding benefits, upon the occurrence of one or more specified event".

The Judge went on to state:

"There must be either uncertainty whether the event will happen or not, or, if the event is one which must happen at some time, there must be uncertainty as to the time at which it will happen".

In 1982 the law was further developed in the Court of Appeal case of Soya GmbH v White. The issue for consideration here was whether loss could be accidental although it was inevitably going to occur during the period of the policy. The Judge in that case thought that the defence of certainty of loss was subject to the qualification that it must be a certainty which was, or should be, known at least to the Insured. This was a Court of Appeal case which was appealed to the House of Lords where, however, the issue was left open.

A further Court of Appeal case, the Miss Jay Jay (1987) 1 Lloyds Law Reports 32 established that "even if the occurrence of a particular unwanted event, which may or may not occur, is a readily foreseeable risk, the event may still be properly regarded as accidental when it does in fact occur".

When this line of case law is considered in the context of the Year 2000 problem, the view of the authors is that there is a potential for numerous circumstances in which the Year 2000 losses will be found to be fortuitous and thus insurable and that to rely upon lack of fortuity on the basis that the Year 2000 problem, as a whole, is broadly foreseeable, is unsafe.

Conduct of the Insured

Case law also dictates that a loss will not be fortuitous if it was caused by the wilful misconduct of the Insured occurring at any time during the insurance period: British & Foreign Marine Ind. Co Ltd v Gaunt (1920) 1KB 903. At law there will be wilful misconduct if an Insured's conduct increases the risk of loss and the Insured is aware of this. In contrast with the test for inevitability which is viewed at the time the insurance contract is entered into, wilful misconduct may be found to have occurred at any time during the insurance period.

Cover may also be unavailable where loss is brought upon an Insured by his own gross negligence or recklessness, even where the loss was not intended by the Insured. Gross negligence or recklessness should of course be contrasted with negligence, to which covers will generally respond, see Port-Rose -v- Phoenix Assurance Plc (1986) 136 NL J333 and Devco Holder Ltd -v- Legal & General Assurance Sy Ltd (1993) 2 Lloyd's Rep 567.

Relevance of the above in the context of the Year 2000 problem:

Where a computer system is not compliant, the Year 2000 problem is bound to strike in one way or another on 1st January 2000. It may, however, strike sooner depending on the use to which the software is put (for example where the software is used for determining sell-by dates). Thus it is a virtual certainty that a problem will occur in non-compliant systems if the policy period covers 1 January 2000; it may not be a certainty where the period of cover expires before then. In either case, however, the nature of the damage may, or may not, be inevitable.

If the only and logical consequence is corruption of data in the computer, then that may be inevitable. But if the result is damage to other property - for instance to process plant controlled by the computer or to material being handled - it is unlikely that the actual damage which occurs will have been inevitable and so such loss or damage will be accidental.

In the case of non-compliant systems insured on 1 January 2000 liability under the policy for damage to the data in the computer may well depend on whether (a) the type of damage which occurred was inevitable and, if so, (b) the Insured knew or should have known that he had a non-compliant system to which such damage was likely to happen.

3.Classes of Insurance Potentially Affected
A review of the insuring clauses commonly found within a wide range of classes of London Market insurance wordings reveals the potential for these classes, prima facie, to afford cover for Year 2000 losses. Since a number of issues of particular interest in this context arise in relation to so-called All Risks Cover, this paper addresses this class of business by way of detailed example, and other classes of business in outline, flagging specific issues which it is considered may arise.

3.1Policies providing for damage to property (and bodily injury)
In a typical All Risks policy, the insuring clause may provide for:
Accidental loss, destruction of or damage to insured property as described in the Schedule to the property
This gives rise to the following issues:
3.1.1Do computer hardware and software constitute property within the
meaning of such policies?

'Property' may or may not be defined within the wording. If it is not its scope will be governed by the details provided by the Insured in the Schedule to the policy. All tangible property falling within the ambit of those details will, prima facie, be insured. Thus property will include hardware, disks and computer chips.
3.1.2Can damage to computer equipment or software constitute damage in this context?
Where 'damage' is not defined within the policy, the following case law provides some assistance:
Damage to property at common law means a physical change to tangible property which renders it less useful or less valuable Hunter v LDDC (1996) 2 WLR 348. Here the damage considered was excessive quantities of dust. The same approach has been followed in claims under the Nuclear installations Act 1965, see Blue Circle v MOD (1996).
The blocking of fumigation pipes to a grain silo with grain, necessitating the removal of the grain to rectify the defect did not amount to damage Transfield Constructions Pty Limited v Gio Australia Holdings Pty Ltd (1996) Court of Appeal of New South Wales.
The case of Regina v Whiteley (1993) FSR/L168 treated damage to software as damage to the disk on which the software was written.
The Law Commission, in making recommendations prior to the implementation of the Computer Misuse Act 1990, considered the making of an extension to the definition of 'property' in the Criminal Damage Act expressly to include 'data' and 'computer programs'. This was because it was considered that difficulties might arise where the data under consideration was held on unidentifiable tangible property. This amendment was not, in the event, made but illustrates the uncertainty which exists as to whether computer programs will constitute property where they are not stored on identifiable tangible property
3.1.3Consequential damage
There is a tendency when considering such policies to focus upon the IT element, that is damage to computer systems alone. While the issue of what constitutes damage to computer systems under the policy, rather than what constitutes damage to other property, is a complex issue (see by way of example 3.1.2 above) the damage resulting from the consequences of computer failure may be far greater. Consider the case of a piece of machinery used to mix paint which is computer driven. If the computer fails, or delivers incorrect messages, the consequences may be that the piece of machinery fails, leading to solidification of the paint mix and thus to destruction of the mixing vessel or, for example, to overflow of the mix with consequent damage. The resulting physical damage in this example and any consequential financial loss would prima facie fall to be covered under a typical All Risks policy.
3.1.4Financial loss consequent upon material damage.
Subject to the issues of fortuity discussed above, All Risks (Business Interruption) cover is therefore likely to respond to millennium related losses provided that the business interruption is consequent upon the material damage.
Examples of other classes of business which may be affected, together with instances of particular problems which may arise in the context of the millennium problem, are as follows:

3.2Employers' Liability, Public Liability and Product Liability
It is conceivable that computer failure leading, for example, to damage to such facilities as lifts or escalators could lead to bodily injury or damage to property of a third party, for which an employer or occupier of premises would be found liable.
Where the Insured supplies a computer controlled device, for example a piece of machinery, to another party and where that device is affected by the Year 2000 problem and causes injury or property damage, a product liability claim may lie against the Insured and, thus, against his insurance.
Liability policies frequently include a restriction that cover for public liability and product liability will not cover deliberate acts or omissions of the Insured which could reasonably have been expected by the Insured to have resulted in liability. Where this is the case, the Insured will effectively be covered for non-deliberate or accidental loss only. Dependent upon the particular facts leading to a claim, such losses may be covered (see general observations as to conduct of Insured at 2 above). A careful review of the policy wording is an absolute necessity.

3.3Professional Indemnity Insurance
Professional indemnity policies customarily provide cover for breach of professional duty arising from neglect, error or omission by the Insured.

The case of Wimpey v Poole (1984), which examined the scope of the words 'neglect, error or omission' found that those words, which are similar to the above, encompassed negligence but additionally some omissions and errors occurring in the absence of negligence, in particular breach of contract.
It would seem likely that professional indemnity claims may well be made, in the context of the Year 2000 problem, against the following:
3.3.1Computer Consultants
Computer consultants who have written, or advised clients in relation to the choice of, software may well be vulnerable to claims both in negligence and breach of contract. Negligence claims would usually fall within the scope of cover offered by a standard professional indemnity policy. Additionally, although some London Market wordings are not wholly clear on this point, it is generally accepted that a claim in contract would also be covered where it is a claim for breach of an implied term of duty to exercise skill and care.
In addition to the issues arising in relation to the scope of cover available for computer professionals, further complexities arise by virtue of the fact that the application of the law in the area of computers is in a state of evolution. By way of illustration, an issue of particular relevance when considering the position of a computer professional is whether the supply of software is subject to the implied terms and strict liabilities arising from the Sale of Goods Act 1979 or the Supply of Goods and Services Act 1982. This issue was addressed by Glidewell LJ in the case of St Albans DC v ICL CA (1996) 4A 481 where he concluded that while a computer program was not itself goods' within the statutory definition, where a disk was sold or hired by a computer manufacturer but the program was defective, there would prima facie be a breach of the terms as to quality and fitness for purpose implied by the Acts. Where a program was transferred by an employee of the computer company who then removed the disk on which it was stored, Glidewell LJ considered that the program itself did not constitute goods within the statutory definition with the effect that there was no statutory implication of terms as to quality or fitness for purpose. However, he considered that there would be common law implication of such terms under the contract in question in the action. The net result is that under English law there may now be strict liability in relation to defects in supplied software.
A further issue which will clearly be of great relevance in claims brought in negligence against this class of Insured will be the date on which computer consultants became aware, or should have been aware, of the Year 2000 problem.

3.3.2Other Professionals
Further claims may arise where there has been failure of an Insured's own systems to function correctly. An example of this would be the failure by an Insurance broker to send out renewal papers to a client, or the failure of a solicitor to comply with an important procedural date, as the result of his computer's failure to recognise and respond to the relevant diary entry.
It is considered that lawyers and accountants may also have an exposure where they have drafted or advised upon such documents as software contracts and where they have advised on such issues as mergers and acquisitions without drawing to the attention of their clients the affect of the potential of the Year 2000 problem to impact upon, for example, the value of the subject company concerned.

3.4Directors and Officers Liability
A typical insuring clause to be found in a London Market Directors and Officers Liability Insurance policy will provide cover for 'wrongful acts' of the Directors and Officers.

'Wrongful Act' will be defined within the policy wording, but will frequently include wording such as 'breach of duty, neglect, error or omission; encompassing both breach of contract and negligence (see 3.3 above).

An example of the obligations of the directors of companies, breach of which may lead to claims to which such a policy is likely to respond, is the fiduciary duty of directors to shareholders to protect their investments. This duty may be breached if the company suffers financial loss caused by a failure of its own computer systems resulting from the Year 2000 problem. A property company might, for example, fail to collect rent as a result of incorrect treatment of dates by its computers. Companies providing financial services could, as a result of the Year 2000 problem, be liable to investors for errors in pricing of funds. Where these problems arose from negligent mismanagement, a claim might lie against the relevant directors personally.

A Private Member's Bill, the Companies (Millennium Computer Compliance) Bill currently being proposed by David Atkinson MP, seeks to impose a statutory obligation on companies, via their directors, to carry out a Year 2000 computer audit of their companies, failure to do which would be a fineable offence under the Companies Acts. Whether this Bill would significantly alter the legal obligations of a director is questionable. Although it is unlikely to become law, however, the Bill will inevitably have the effect of emphasising, to potential claimants, responsibilities of directors in this context.

4.Existing Exclusions
In considering whether various classes of insurance will respond to claims arising from the Year 2000 problem, it is clearly important, where it is concluded that the insuring clause gives the potential for the insurance to respond, that a review is then carried out of exclusion clauses contained within the contract.
It should be recognised, however, that since, in many cases, the insurance contract will have been written before either party was aware of the Year 2000 problem, whether existing exclusion clauses will serve to exclude losses arising from the Year 2000 problem will therefore largely be a matter of chance. By way of illustration of this issue, All Risks policy wordings may, for example, have existing exclusions dealing with loss consisting of damage to data held on computer systems. While such an exclusion might in part respond to the Year 2000 problem, it would clearly not exclude losses consequent upon such damage.
As considered at 8 below, where there is any ambiguity in the wording of an exclusion clause, it will be construed contra proferentem.
5.Summary of Current Position
the Year 2000 problem raises a number of unique issues for the insurance industry;
a significant proportion of losses may be uninsured in any event on the grounds that they are not fortuitous;
all Insureds therefore have a vested interest in taking active steps to prevent losses occurring;
certain losses arising from the Year 2000 problem will, however, fall to be covered
the problem is one which may impact on a considerable number of classes of insurance business;
those losses may not be excluded by existing wordings

LOOKING TO THE FUTURE
6.What Steps do Insurers Need to Take?
There is a temptation to treat the Year 2000 problem as an 'all or nothing problem' and for the issue, so far as insurance is concerned, to be seen as a stark question of whether Insurers should accept the risks presented by the Year 2000 problem or exclude them. This choice is made even starker by the press reports suggesting computer Armageddon at midnight on 31st December 1999. As a personal view, the authors of this paper question whether this is in fact the choice to be made.

The response of some Insurers to the Year 2000 problem is currently driven by the lack of certainty as to the extent of their exposure. A lack of knowledge and frightening press reports tend to militate towards exclusions. This, however, ignores the fact that each class of insurance and the risk posed by individual Insureds within those classes will represent a different exposure to Insurers. Although Insurers clearly need to understand the problem in generic terms to begin with, they can only begin to assess their exposure, and thus decide upon their reaction to it, based upon the nature of their Insured's businesses and the steps those Insureds are taking in an effort to ensure Year 2000 compliance. It follows that Insureds have a significant role to play in demonstrating to Insurers the steps which they are taking to limit the risks to their businesses.

While, bearing in mind forthcoming renewal dates and the proximity of 1st January 2000 a number of Insurers have formulated a plan in response to the Year 2000 problem, other Insurers have yet to reach a view how to contain and respond to the problem.

There follows considerations of various steps which Insurers can take in addressing what is fully conceded to be a complex risk assessment project.

7.1Review to assess exposure in relation to:
individual wordings

book of business.

Insurers faced with assessing their exposure to the Year 2000 problem will need to review individual wordings by which they are writing risks, to assess:

whether the insuring clauses within those wordings, prima facie, offer cover encompassing the Year 2000 problem. As part of their analysis, Insurers will need to identify the legal liabilities which that category of Insured will face.

whether, if cover is provided, existing exclusion clauses within those wordings exclude the risks represented by the Year 2000 problem.

Bearing in mind the issues highlighted at 2 above, it will be recognised that there are no safe shortcuts and that this exercise will not only require legal skill but will also need to be carried out in the context of a full understanding of the technical issues involved.

Having carried out an assessment of their exposure in relation to specific wordings, Insurers should be in a position to reach some conclusions, if only by way of guidance in broad terms, as to exposure across their book of business. It is important to appreciate, however, that while the extent of the risk in relation to individual policies will be contained by the relevant limits of indemnity, the risk to the Insurer will by no means necessarily correspond to the size of the Insured; indeed, larger and more organised Insureds may well represent a lower risk in the context of the Year 2000 problem than smaller more informally organised Insureds since they may, although this will by no means always be the case, be more likely to have instituted an organised Year 2000 compliance plan and imposed compliance on their main suppliers.

7.2Consider Response
Having assessed, as far as possible, the risks potentially posed to them by the Year 2000 problem, Insurers then need to decide quickly upon a course of action and, in particular, whether they wish to draw a distinction in their treatment of different Insureds in light of the efforts by those Insureds to ensure Year 2000 compliance.

Where Insurers have decided to assess the risk and to distinguish between Insureds, so far as new business or business for renewal is concerned, one of their priorities will be to gather information to allow such an assessment. In this respect the Insured's duty of utmost good faith provides some degree of assistance.

7.2.1Disclosure: The Insured's Obligations at Law
One of the implications of the fact that insurance contracts are contracts of utmost good faith is, of course, that the parties must not only ensure that they do not mislead one another but must go so far as to disclose all material facts which are, or ought to be, known to them and which are material to the formation of the contract. In real terms this, of course, places a heavy burden on the Insured, who will be in possession of information relevant to assessment of the risk, to which the Insurer will not generally have access. This duty revives whenever the Insured has an obligation to supply information to allow Insurers to make a decision, for example, in relation to policy endorsements. Breach of the obligation of disclosure to the Insured renders the reinsurance contract voidable.
As all those working in the field of insurance which is governed by English law will doubtless be aware, the question of what constitutes a material fact has been given a considerable amount of attention in fairly recent case law, including CTI -v- Oceanus 1984 Court of Appeal, Pan Atlantic -v- Top 1994 House of Lords, St. Paul's Fire & Marine -v- McConnell Dowell 1995 Court of Appeal and Glencore International AG -v- Portman 1996 Court of Appeal.
The position of Insurers following the above rulings can be briefly summarised as follows:
A material fact is one which would, on the balance of probabilities, be found to have influenced the judgment of the actual underwriter concerned in deciding whether to enter into the insurance contract or how to rate the risk. There may in certain circumstances be a presumption of inducement; that is where the fact can be shown to be material it will be assumed that it would have affected the judgment of the actual underwriter in considering the risk.
It is not the case that an underwriter writing a particular class of business will be held to be conversant with losses affecting that type of risk. The underwriter is only presumed to know what, in the ordinary course of his business as an underwriter, he ought to know.
An underwriter cannot be found to have waived his rights in relation to information he does not know exist. Waiver of rights can only arise where there has been a fair presentation of the risk and the presentation cannot be described as fair where there is silence as to material issues.
The Insured's potential exposure to the effects of the Year 2000 problem will, in many instances, be material in the context of the insurance contract. The considerable press coverage of the problem will make it hard for an Insured to deny any knowledge of the problem whatsoever. The extent to which the Insured does or should appreciate the nature of its own exposure to the problem may, however, vary considerably from business to business. A factory owner entering into an All Risks policy, for example, is likely to be expected to know less of the ramifications of the Year 2000 problem than a computer consultant advising daily on the choice of software.

Subject to the above, Insureds entering into new contracts of insurance or renewing such contracts should, in light of current case law, disclose known exposure to the Year 2000 problem without the need for specific queries as to Year 2000 readiness being raised. Insureds with current insurance who have learned of their exposure during the currency of their insurance are, however, probably under no additional duty to disclose that fact until the next renewal, unless the contract is varied before that date or unless the policy wording requires notice of change to be provided.

In practical terms, however, it is likely that the obtaining of information which is specific enough for assessment of the risk, will need to be Insurer driven because general references made by Insureds to Year 2000 non-compliant systems will be of no practical value to Insurers. The best available tool provided for this purpose by English insurance law is likely to be the creation of warranties.

7.2.2Warranties: Information provided in the proposal form
Where Insurers are considering whether to write new business (and in some cases upon renewal of existing business) their primary means of obtaining information from the Insured in order to assess the risk to be assumed, is by means of the answers provided to questions raised in the proposal form.
The wording of the proposal form can be designed to ensure that important statements made by the Insured are expressly incorporated into the insurance contract as warranties.
By way of reminder a warranty is, in simple terms, a pre-contractual promise by the Insured to the Insurer, breach of which discharges the Insurer from all liabilities under the insurance contract after the date of the breach. Where a term constitutes a warranty, it must be complied with strictly and where a breach occurs it will not be necessary for the Insurer to demonstrate that the warranty was material to the risk or, indeed, to the loss.
Since this remedy is one which clearly has far-reaching consequences for the Insured, the Courts require that it be demonstrated that it was quite clear to the parties that the relevant term of the contract was, indeed, intended to constitute a warranty. A warranty, in common with the other elements of the insurance contract will be construed 'contra proferentem'; that is to say that where there is any ambiguity, the meaning of the relevant provision of the contract will be construed against the drafter, here the Insurer.
Where an Insurer endeavours to give all statements in the proposal form the status of warranties, irrespective of their importance, the Courts will be reluctant to give effect to this intention. It is therefore important that the Insurer identifies which statements within the proposal form it wishes to give the status of warranties and exposes its intentions in relation to those statements very clearly.
Insurers should also be aware that warranties provided in proposal forms will generally be warranties as to present facts. Thus, if the Insured provides information which was true at the time the statement was made but which subsequently becomes untrue, the Insured is unlikely to be obliged to correct this information. So far as assessment of risks arising from policies in mid-term is concerned, therefore, it should be borne in mind that even where relevant information was sought at the beginning of the policy term or on renewal, that information may no longer present an accurate picture.
In the context of the Year 2000 problem, Insurers may wish to consider, while bearing in mind the above limitations, use of questions in the proposal form to provide them with as much information as possible as to the Insured's Year 2000 compliance or otherwise. Clearly, the questions to be put to the Insured must be carefully thought through. Broad questions such as 'are you Year 2000 compliant?' are less likely to yield valuable information than more targeted and detailed questions. Equally, if Insurers prepare a substantial list of questions but omit certain issues, this has the potential to constitute waiver. Clearly a balance needs to be struck and this will, in large part, depend upon the nature of the Insured. Insurers will need to obtain advice not only on the questions which should be asked but to assist them in interpreting the information provided by the Insured in answer to those questions.
A number of Insurers are already using questionnaires aimed specifically at the Insured's Year 2000 readiness. Once again, where such questionnaires are used before inception of the policy or on renewal, where the answers to the questions are clearly expressed to be warranties upon which the subsequent contract is based, this may provide Insurers with a valuable remedy, should it subsequently transpire that the information provided by the Insured was inaccurate.
8.Limitations or Exclusions
Even where Insurers have, so far as possible, assessed the likely exposure represented by an Insured by the use of proposal forms/questionnaires, there will, almost inevitably, be instances where the Insurer is faced with the choice of whether to decline to write the business at all, to limit liability in relation to Year 2000 related losses financially, or to seek to exclude them altogether.
In the context of the Year 2000 problem, this is likely to be the case where an Insurer considers that the Insured has no intention of taking steps to achieve Year 2000 compliance and is, instead, intending to lay off any losses on his insurance.
Insurers considering the use of exclusions will need to bear in mind the following. In the case of claims made policies, such as professional indemnity and Directors and Officers covers, Insurers should be aware from previous Marketwide issues such as the litigation arising out of pensions transfers, that the response of some Insureds may be to attempt to make a blanket notification of Year 2000 non-compliance as "circumstances which may give rise to a claim under the policy". Their purpose in so doing would be to take advantage of so-called "deeming clauses" under the policy pursuant to which, where a proper notification of circumstances is made and the circumstances develop into a claim, the claim will be deemed to have been notified in the policy year in which the notification of circumstances was made. By this means, the Insured may hope to bring any claims within a policy which does not exclude Year 2000 claims.
The law as to what constitutes a proper notification is, however, uncertain and it is doubtful whether a notification simply of non-compliance would in itself be sufficient. Thus, in seeking to make a blanket notification, the Insured may in fact worsen his position in that he may well ultimately not be found to have made a proper notification and because of the notification his current policy will no doubt contain an appropriate exclusion. Insureds would be much better advised to discuss the issue with their Insurers during the currency of their existing policy than to assume the worst from their Insurers. It may be that a common solution can be found provided the Insured has taken reasonable steps to minimise its exposure.
If an exclusion is to be imposed, Insurer and Insured have freedom of contract and are able, accordingly, to agree what will be covered and what will be excluded by the contract of insurance. In the case of insurance contracts between two commercial parties, this rule is particularly far-reaching since exclusion clauses expressly fall outside the ambit of the Unfair Contract Terms Act 1977 and are thus not subject to tests of reasonableness. In the case of contracts of insurance where the Insured is a consumer, that is acting for purposes outside his business, The Unfair Terms in Consumer Contracts Regulations 1994 will apply to impose a test of reasonableness on exclusion clauses.
There are, however, a further small number of statutory and other constraints which are relevant to the Insurers' ability to exclude; among these are provisions within the Employers Liability (Compulsory Insurance) Act 1969 which prevent employers from limiting their liability for their employees' bodily injury. In the area of professional indemnity, the Institute of Chartered Accountants' approved wording would not, in its current form, permit a millennium exclusion.
The Courts, in construing any Year 2000 exclusion clause, will give the terms used their ordinary meaning. In a technical area such as this, however, it is likely that the evidence of experts within the information technology industry may, in various instances, be called upon , for example to consider whether, in a given case, the loss for which the Insured claims was truly caused by the Year 2000 problem.
In common with other instances where the wording of a policy is in dispute, the wording of any Year 2000 exclusion will be construed 'contra proferentem'; that is, where drafted by or on behalf of the Insurer, in favour of the Insured.
CONCLUSION

By way of summary and conclusion it is useful to emphasise, once again, the following:

the problem potentially impacts upon many classes of insurance business and is, accordingly, industry wide.
it is, however, an equal if not greater problem for Insureds themselves, because of the potential for lack of insurance either because losses are found not to be fortuitous or a risk is uninsurable in any event, for example permanent loss of goodwill
despite the large amount of press coverage of the Year 2000 problem, there is still a disturbing lack of understanding on the part of Insureds, and perhaps Insurers, as to how the problem may affect them.
Insurers, accordingly, need to develop a focused plan to deal with what is a novel and highly technical area.
A "knee jerk" reaction to the lack of certainty, from Insurers' point of view, may result in a headlong rush to exclude entirely losses arising from the Year 2000 problem; indeed this is already happening in some quarters. While this may, on an individual basis, be the correct approach in specific cases, once Insurers have had an opportunity to assess the risks and Insureds have done what they can to eliminate obvious exposures, other Insurers will, in turn, afford cover for residual risks albeit such cover may be subject to financial limits. The availability of such cover will, however, to a large extent be determined by the attitude of reinsurers as much as the direct underwriters.

About the Authors

Anthony Hobkinson is head of Cameron McKenna Insurance and Reinsurance group and a member of the firm's multi-disciplinary Year 2000 Group. Anthony advises on a wide range of contentious and non-contentious reinsurance issues. He also specialises in liability and warranty claims and recall incidents for the aerospace, computer, automotive, consumer goods and food and drink industries.

Maxine Cupitt is a senior solicitor in Cameron McKenna Insurance and Reinsurance group and a member of the firm's multi-disciplinary Year 2000 Group. Maxine specialises in the field of computer-related insurance issues.

Anthony and Maxine were commissioned by the Association of British Insurers ("the ABI") in 1997 to advise on the potential insurance risks represented by the Year 2000 problem across a number of different classes of insurance and are continuing to advise both the ABI and individual Insurers directly on various aspects of the problem.

They can be contacted at:Sceptre Court
40 Tower Hill
London
EC3N 4BB

T+44(0)171 367 3000
F+44 (0)171 367 2000

E [email protected]
E [email protected]