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Y2k – Insured Or Not Insured? That Is The Question







Thank you for the invitation to address you this morning.

I am immediately conscious of being the inexpert part of a panel that will have much more practical experience of the issues under consideration than me.

Consequently, I will tailor my remarks to be more by way of general overview than specific detail, but in so doing, I hope to be able to draw attention to some of the issues that are relevant to the question you have posed.

May I begin, however, with my own assessment of where New Zealand stands with regard to overall Y2k preparation.

As you may be aware, I have taken an interest in this subject since long before it was fashionable – the story of United’s life really – and have previously been extremely critical of both the lack of overall preparedness and certainly the lack of political commitment to taking this issue at all seriously.

Three years ago when I started talking about the need for special liability legislation; a public awareness campaign; and, a government sponsored commission to lead our Y2k response, I was dismissed as an eccentric alarmist.

The prevailing view was that the market would take care of any problems that emerged, and that there was certainly no need for panic, or any serious government action.

After all, if the threat of business failure was not of itself a strong enough incentive for people to get their act together, what on earth else was there?

With the typical circumspection, commitment to accuracy, and disdain for mindless grandstanding that has marked his political career to date Rodney Hide even went so far as to claim I was the man who genuinely believed we could legislate against the millennium.

As usual, he was wrong, woefully so.

The reality is that today, all of the things I was calling for have been put in place, albeit belatedly, with my critics now extremely quick to claim the credit for their prescience.

In part, my frustration, impatience and slight bitterness has stemmed from our seemingly inherent lethargy in dealing with this major issue, and in part also from the apparent “she’ll be right” blind complacency that for too long came from the very top by way of official response to the Y2k threat.

I am pleased to say that things have improved considerably over the last few months, due in the main to the determination and professionalism of the Y2k Readiness Commission.

This has done a magnificent job, despite being under-resourced and established a year later than it should have been.

That is far more a tribute to the quiet, unruffled leadership provided to the Commission by Basil Logan than it is to any form of changed political commitment, and I congratulate him wholeheartedly on the way he has led the Commission through some quite troubled waters.

Through his leadership, the Commission has managed to get some of the resources it has needed to do its job properly, and to give New Zealand more than a fighting chance of entering the year 2000 in some shape equipped to deal with Y2K issues.

In many senses, I think that the lethargic and uncertain way in which the Government responded to the mounting Y2k problem over the last two years was as much a consequence of that predictable Kiwi reaction to uncertainty of trying to pretend it is not really there, as it was a consequence of a self-proclaimed know-all Minister who thought he alone had all the answers.

Anyway, compared to where we were a few months ago, the situation today is rather more promising.

There are clearly greater levels of public awareness about Y2K issues.

There is some evidence of general public preparedness steps being taken; and, encouraging signs that large private sector and government enterprises, with only one or two obvious exceptions, are getting on top of the problem; or, at least, that they have adequate contingency and business continuity plans in place, or in hand.

Also, there seems to be a general acceptance of the notion that such adverse events as there will inevitably be are likely to be sporadic and of comparatively short duration.

We have come through the first of the feared trigger dates – 9/9/99 – without obvious disruption, here or abroad, and major infrastructure sectors like telecommunications and banking are becoming increasingly certain of their ability to enter the year 2000 without major upheaval.

Even the airlines are more certain today of the safety of flying over the New Year period.

All of this is very positive, and well beyond what we might have dreamed was the possibility a few months ago.

So what is there to worry about?

Surely Y2k has been just a lot of hype from the computer industry, after all, swept along by gullible politicians and journalists, as some commentators were so very keen to scornfully predict?

Well, would that it was so simple.

While we have come a long way over the last year, and while all of us can feel consequently a little more optimistic about the dawn of the new century, there are still some serious Y2k issues we must not lose sight of.

The first is that while this problem is called the Y2k problem, its impact is likely to extend far beyond the first few weeks of next year.

Indeed, some estimates I have seen suggest that only 10% of Y2k problems are likely to occur over the coming New Year period.

Around 60% of Y2k problems are likely to occur between January 2000 and June 2001.

The longevity of this problem should ring particular alarm bells for those involved in your industry, both in terms of ongoing liability issues, and the present understandable focus on the advent of the millennium.

This is not an issue we can simply put behind us around the middle of January next year – about the time we come back from holiday, when we start to focus on real issues like who is going to win the America’s Cup.

Y2k, unfortunately, will still be with us.

An immediate test of commitment for the next Government, whatever its make-up, therefore, will be the extent of its ongoing support for the work of the Readiness Commission.

Will the Commission be retained until such time as we are certain that the major Y2k risk has been averted, or will it be an early victim of next year’s Budget round, especially since the election will be safely out of the way by then?

The chest-beating politicians, so quick now to claim credit for waking up from their Rip van Winkle sleep and discovering Y2k a long time after some of us, are curiously and perhaps tellingly silent on that point.

The second issue flows from that.

Despite all the laudable efforts to date, we simply do not know, and will not know until 1 January 2000, the likely scope of the problem.

If you listen carefully to all the experts, even the most optimistic, they are all extremely guarded in their predictions of what is likely to happen.

However outwardly confident they may wish to appear, they all preface their comments with qualifying phrases like “as far as we can tell” or “based on our assessments and the advice we have received.”

The fact is it remains inevitable that there will be Y2k problems and disruptions, and that some of these will be quite severe and their magnitude unexpected.

For example, Lloyd’s Register has issued new guidelines for international shipping telling ship owners to “expect the unexpected”, especially with regard to engine, steering and navigation facilities, including radar, diesel generators, bridge controls and steering gear.

The potential threat of large, semi automated ships loose in international shipping lanes, or in major ports like Rotterdam, or Singapore, and Y2k immobilised is clearly real, and possibly too large for us to contemplate the real significance of.

At the start of this year, for example, the Port of London was sufficiently wary of what might have gone wrong to have ordered all ships not to discharge liquid cargoes for one hour either side of midnight for fear that the changeover to 1999 might affect ships’ computers.

Just imagine how much more severe the risk could be upon the changeover to the year 2000.

Issues of maritime safety, international pollution risks, salvage and insurance are all tied up in these potential circumstances.

What gives this risk an added sense of reality is the fact that while increasingly rare, major shipping disasters are not entirely unknown, and their consequences not easily resolved.

Therefore, today’s outward confidence has to be tempered with a sense of reality.

At the same time, the increasing likelihood that many of the worst problems we have feared may well be averted, at least in this country, has opened the door to the wider consequences in terms of liability and accountability for Y2k problems.

Many have joked that this is likely to become yet another lawyers’ paradise, and the Americans have even gone so far as to suggest that ongoing litigation is likely to bog down the American Courts for most of the first decade of the 21st century!

A typical over-reaction, you might think.

However, there is some evidence that in terms of the legal and accountability issues that Y2k potentially gives rise to, the position is still far from clear.

An examination of some issues surrounding insurance law and practice demonstrates this uncertainty.

A few months ago, Action 2000, the British Government’s equivalent to our Readiness Commission, commented that the implications for the insurance industry of companies not being ready for Y2k were unclear, but that any companies hoping to offload their responsibilities to insurers were “misguided.”

“To expect insurers to cover any liabilities or events which may arise out of a lack of Y2k preparedness is to go down a dangerous route, especially when most insurers have specified the type of cover that will apply to Y2k-related claims,” Action 2000 said.

That view was supported by the business risk manager of Royal Sun Alliance who commented that underwriters know exactly what they are looking for, and will provide no hiding places for irresponsible businesses.

A similar view seems to prevail in Australia.

The Insurance Council of Australia has warned businesses and consumers that they should not expect to be covered by existing policies for Y2k-related losses.

The Council has made it clear, as has the Insurance Council in this country that any such losses are foreseeable, and therefore preventable, with remedial steps able to be taken to deal with any likely problems before 1 January 2000.

That all seems rather unambiguous and non-problematic you might think.

Well, not quite, I suggest.

You see, the Australian industry, which is held to be typical of the industry world-wide, has also taken the view that unforeseen events are still likely to be covered, even if the Y2k bug is involved in that event.

For example, if a fire alarm system is not Y2k compliant, and fails to go off when a fire occurs, a standard fire insurance policy is still likely to cover the resulting damage, but not the replacement of the faulty alarm system.

Moreover, any company suffering Y2k problems might be able to pursue claims against insurers because insurance policies would still be expected to cover unforeseen problems that were obviously not the fault of the company insured.

If power failures cause business problems and failures, for example, that is a problem outside the immediate control of the company, and grounds for a claim might therefore exist.

So while Y2k problems might be foreseeable, therefore preventable and not subject to cover, their consequences could well come into the unforeseen type of circumstances that the insurance industry has traditionally dealt with.

You can begin to see clearly the types of boundary and definition problems this approach is likely to lead to.

Indeed, there are already signs in the United States that this is happening.

A few months ago, it was reported that GTE Corporation was suing five of its property insurers for US$287 million for Y2k remediation expenses.

The insurers rejected the claim as baseless according to the grounds advanced above, saying that “unless you’ve been living under a rock, Y2k is pretty well known,” and that “an insurance policy is not a product warranty.”

However, the lawyers for GTE Corporation, and a number of other Fortune 100 companies, with an interest in the issue, are arguing strongly that many existing insurance policies do cover Y2k remediation expenses by virtue of the fact that they require policy holders to mitigate actual or imminent losses.

Most policies with these provisions provide coverage of expenses incurred in mitigating actual or imminent losses, therefore these costs are recoverable form the insurers.

It is estimated that most Fortune 100 companies have claims under these provisions that dwarf the quarter of a billion dollars claimed by GTE.

According to some lawyers, the total amounts involved could amount to more than all of the money advanced to resolve environmental protection and asbestos-related claims in the litigious United States in the last 20 years.

To further confuse the picture, United States aviation underwriters have concluded that existing commercial airline insurance policies will cover passengers against Y2k-related injury or property damage.

According to the underwriters, who cover 80% of American airlines, including United Airlines, Delta and Continental, the yardstick they will apply is whether the accident would normally have been covered.

If the answer is yes, they do not propose to distinguish between Y2k involvement or not.

However, the coverage relates to passenger and property liability only – they are not covering business loss arising from computer failure or reservation and scheduling problems.

So the overall position is not quite as absolute as Britain’s Action 2000 is suggesting.

It seems to me from the experiences I have quoted that the path of expecting coverage for Y2k-related problems is not so much the “dangerous” one, that Action 2000 has described, as more one that is at best rather confused and twisting.

As we have seen, in some cases, cover will be provided – in some cases, it will not be.

Maybe, therefore, to return to the topic of this discussion, it is not so much the stark choice of insured or not insured, but the extent and nature of the insurance cover provided.

The line appears variable – often dependent on particular industry or national circumstances.

The yardstick adopted by the American aviation industry of accepting cover where the accident would normally have been covered seems a logical, common-sense measure to apply.

But what are the practical, not to mention financial, implications of this?

How appropriate and applicable is that yardstick to our circumstances?

It is also interesting that in each of the countries I have referred to practice seems to be developing as a result of industry-led experiences, rather than through any centrally imposed Government regulation.

That is certainly consistent with the way things have developed in this area here over the last couple of years, with there being no current suggestion any regulatory intervention is required.

Nor, I hasten to add, am I proposing any alteration to that this morning.

Wherever possible, this is a matter to be resolved between the insurers and the insured.

Beyond that, it seems to me the basic question we have to resolve is where and how New Zealand will draw the line.

Can we leave this with confidence to the insurance sector to resolve of its volition, or will complexities or disputes emerge that will require wider intervention; and, if so, by whom?

Will we adopt the more cautious, and dare I say implicitly pragmatic, British and Australian approaches, with the qualifications they now seem to be acknowledging, or will we follow the more legalistic approach that seems to be emerging in the United States?

The experiences of this morning’s panel will, I hope, provide some guidance, if not answers, to what is happening in New Zealand in that respect, and I am looking forward now to what they each have to say.


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