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Cover note

Insurance is no substitute for preventative action when it comes to the millennium bug.

Anyone who had been relying on an insurance policy instead of dealing with the threat of the

millennium bug is likely to get a shock when they read the small print at renewal time. This month has marked the start of widespread introduction of exclusion clauses, with just a year to the first of a series of 'danger' dates.

Model exclusion clauses have been issued by the Association of British Insurers, but there are hundreds of variations in use. And next year's policies may contain yet more, as there is still over a year to go to the main problem date, the new millennium, says broker Sedgwick Risk Consulting Services associate director Peter Le Vey. 'You need to prepare for the fact that you will probably have very little insurance cover,' he warns.

The key issue is that insurance only applies to fortuitous events; unexpected ones in other words. This is certainly not the case with regard to the arrival of 1 January 2000 and the consequential IT problems. 'It is difficult to know how insurance companies will respond. But our argument is that if a firm does everything reasonably possible to prevent problems, but still suffers a loss, then it could be covered as that would be fortuitous,' says Le Vey.

The Year 2000 problem can arise in systems which use only two digits to represent a year. The system may not know how to interpret the date 00. Before then comes another problem date: 9 September 1999 - some systems use a string of nines to denote when files can be discarded. Another arises in systems that do not acknowledge 2000 as a leap year.

Insurance largely doesn't cover equipment malfunctions, but it may cover the consequences of that malfunction.

'Mostly insurers are going to apply an absolute exclusion for all electronic date recognition problems, but there may be coverage if they result in loss by fire and other defined perils,' says Le Vey. 'If the heating system fails and pipes burst, then the flood damage is potentially insured but not the failure of the heating system.'

Insurers cannot exclude the statutory cover provided for employers' liability to their staff, but most are looking to apply absolute exclusion with regard to third party liability. Similarly, there can be no escape from the statutory third party liabililty for vehicles.

'From a professional indemnity standpoint, if you are aware of anything that could give rise to a claim then tell your insurers,' advises Sedgwick development manager Andrew Perry, who is in the construction department. How the client approached can affect the cover - telling a client about a potential problem could imply acceptance of liability, he warns.

Directors' and officers' liability could also lead to claims. They insure against liability for their 'wrongful acts', that may for example cause the share price to plummet. 'If the auditors put a qualifying note in the accounts, saying that no year 2000 action has been taken, then the directors may be in a difficult position,' says Le Vey. 'It could impact on the share price.'

There are a couple of specific year 2000 insurance policies in the market place, but they aren't the answer for small companies. 'You would have to be a Footsie 250 company to afford the premiums,'

says Le Vey.

Prepare yourself in advance of seeking cover, he advises. Negotiations will go far more smoothly if a firm can document what precautions it is taking. And keep good records, to support any potential claim. But, points out Le Vey, keeping those records only in a computer might not be such a wise idea. LR

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