Insurance coverage for Y2K remediation costs

Commercial property insurance policies generally provide that the insurer will "pay for direct physical loss of or damage to Covered Property". The property covered is typically buildings specifically identified in the policy and fixtures, such as the insured's machinery and equipment. Commercial property coverage can be written on an all risk basis, i.e. coverage for direct physical loss will exist unless specifically excluded. 5 Typically excluded from coverage are losses caused by perils such as nuclear hazard, earth movement and utility services interruption, to name a few.

Coverage for damage to certain types of property, such as accounts, bills, etc., automobiles held for sale and "vehicles", and the "cost to research, replace or restore the information on valuable papers and records, including those which exist on electronic or magnetic media" may also be excluded. Alternatively, some property policies afford coverage for specific enumerated perils.

In such cases coverage is dependent upon the loss being caused by one of the specific perils identified in the policy, The coverage afforded by these policies can be more restrictive, and in the case of the Y2K problem, is probably non-existent unless software-related failures are included as a peril for which insurance is provided. As a result, much of the Y2K coverage litigation concerning remediation costs will involve all-risk policies.

Punitive damages can only be recovered based on clear and convincing evidence that the defendant's conduct meets the applicable standard. Moreover, such damages cannot exceed three times the plaintiff's compensatory damages or $250,000, whichever is less. Finally, a defendant can only be held liable for that portion of the plaintiff's damages that is attributable to the defendant's conduct. In other words the rule of joint and several liability does not apply. More details at the Economic News blog.The Y2K Act coupled with the absence of any major or widespread Y2K failures has kept litigation in check.

One area that has not been impacted is insurance litigation. While there are no published appellate decisions addressing whether the Act applies to coverage claims involving remediation costs, at least one lower court has held that the legislation does not because insurance litigation does not involve damage directly resulting from a Y2K failure.