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Monday, September 10, 2012

Dawn of Millennium - and the Y2K exclusion clause that Insurers had

The dawn of New Millennium – 1st of Jan 2000, was the time for merriment and joy for  billions of people around the world who  welcomed  the New Millennium with some of the most spectacular celebrations ever seen. For many,  it was indeed unique global experience, enthusiasm heightened by relentless hype of the media too.   There was wide coverage of the celebrations at the Sydney Harbour Bridge where millions converged for one of the world's most impressive fireworks displays. 

While people looked forward to the event, the wise Insurers were wary of a  ‘holocaust’ !! yes ~ the Insurers  were a worried lot…….  There were wide and varied apprehensions that  the  dawn of the year 2000 would bring in its wake,  the potential breakdown of computer information systems due to a programmed inability to recognize a reference to a four-digit year. The possible scenarios for loss and liability included breakdowns in the banking and financial-services industry, manufacturing lines, and transportation systems.

It was called the ‘Millennium Bug’ and frenzied  International estimates put the figures arising out ouf Y2K bug at around US$ 600-800 billion, the exorbitant cost factor – very high of those days.  To understand things as they were at that time, a couple of years earlier to 2000 – read this. 

In the 1960s, when computer memory and data storage space were limited and very expensive by today’s standards, computer programmers designed programs that used as little memory and storage as possible. In date code functions, considerable space was saved by storing and manipulating the date code in two digits rather than four.  Thus it was all of dd-mm-yy i.e., year was not of 4 digits but customarily 2 digits i.e., 25-06-83 [the day India lifted the Prudential World Cup].  By the late 1980s, technology advanced  and the storage limitations were practically eliminated making the  rationale for the two-digit code was essentially obsolete. However, most organizations chose not to change their computer systems to a four-digit code due to the cost, complexity and inconvenience. Programmers continued to use the two-digit date code in new development so that new programs would remain compatible with the vast amount of existing two-digit date data, and new systems often reused date reprocessing routines from older systems. As a result, the two-digit code remained the standard for date processing, manipulation and storage.

In that scenario, how computerized systems using two-digit code would handle dates beyond December 31, 1999 correctly was the major concern.  It was feared that they could interpret the year 2000 and beyond as the year 1900 and following. There were concerns that this ‘data error’ could make some systems behave wildly or not function at all and could bring things to a creeching halt.    Though this problem was recognized at least a decade earlier, not all took remedial measures as it was too costly.  Heightened by fears that computers at strategic locations could malfunction – flights could stop suddenly, ATMs may not function, more importantly blood analyzers and medical equipments could throw random results as their in build chips could malfunction !

Insurers were wary that compliance Y2K could be an expensive preposition and not all Companies would resort to – and there would be an avalanche of property, breakdown and other losses brought about by the Y2K confusion.

Insurance is often viewed as a panacea, but  not always.  So fearing that individual companies could face losses and liabilities resulting in them preferring claims on Insurers, Insurers devised an exclusion – named ‘Y2K’ exclusion – as they feared there could not only be property claims arising out breakdown and liability but also ‘loss or profit’ claims.   Any machine that contained an embedded chip could be affected and was a possible candidate for a claim.  S0, the Insurers in India [remember there was the GIC and its four subsidiaries only and no Private players] – stated a categorical "no" to proposals for products specifically designed to cover Y2K risk.  To insulate themselves against unwarranted claims arising out of Y2K damages, General Insurance Corporation (GIC) drew up  exhaustive exclusion clauses which were appended to all policies being issued in 1999 or perhaps a little earlier. 

Almost all policies carried ‘an electronic date recognition clause’ which stated that the insurance policy  would  not cover loss, injury or damage caused by anomalies of data brought about by a date change in any computer system, hardware, software or programme, non-use of any property or equipment arising out of Y2K, or inability of any advice, consultation, rectification or repair to determine potential or actual failure of any of the above.  That was to exclude  a wide range of accidents (arising out of bug problems).   However, the exclusion was not to apply to Personal insurances like those on personal accident, mediclaim, motor, and inland transit.

The D Day dawned at last.  On 1st Jan 2000, people celebrated across the Globe.  A spectacular fireworks display along Sydney's waterfront sparked off Australia's celebration of the new millennium. Some one million people were reported to have lined Sydney harbour to watch an extravaganza which included illuminated barges and laser beams bouncing off the Sydney Opera House. Fireworks exploded up to a height of 1,000 metres, across the sky and the landmark Sydney Harbour Bridge, which was lit up by a huge, glowing smiley face.

Eventually, there reportedly was only one claim arising out of Y2K and in that too the Canadian Court  held that, since the loss suffered was not fortuitous, it was not covered under the policy. “Fortuitous” means that the cause of the loss is neither intentional nor inevitable. The Y2K problem was not the result of improperly designed code or careless implementation of the design, but rather was the result of an intentional decision to limit computer systems’ ability to recognize date information. The court also denied the claim on the basis that the loss was caused or made necessary by an inherent vice, and therefore was occasioned by an excluded peril.  

If you are wondering why Sydney celebrations get a special mention here, the  $3.5m fireworks display was operated on a computer system that went through without a hitch.

Insurance is all about fortuities…… incidentally 9th of Sept. was also significant – known as ‘End of File day’  9/9/99 was expected to wreak havoc  - as "99" is an error code for many computer software systems and "9999" an end of file code – that date also passed off without any fuss………………………

With regards – S. Sampathkumar

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