Are We Y2OK?
THE RHA REVIEW
Volume 5, No. 2, First Quarter 1999
By Donald W. Bendure, MBA, CPCU, RPLU, RF, ACI
Quite possibly, the only subject that has been beaten into the ground more than Clinton's impeachment is the much-anticipated Y2K event and subsequent apocalypse. But encouraging events are taking place, and indications are that the U.S. is making significant strides. We all have been bombarded with what can happen, so for now let's look at some recent events.
We have already passed several sensitive dates without widespread system failures. The most recent date was Feb. 4, 1999, when the airlines and travel agents had to deal with reservations beyond Dec. 31, 1999. This date passed without incident, and all appears well with travel reservations, if only the airline pilots would not call in sick. It appears they had a "bug" of a different sort. Without doubt, other dates will pass, with plenty of praise owing to those that have spent the last several years remediating problematic computer code.
Year 2000 Information and Readiness and Disclosure Act (IRDA): This act became effective on Oct. 19, 1998, and offers nonsecurities-related liability relief to companies attempting to disclose their state of readiness. IRDA provided a window of opportunity for many companies to avoid liability by disclosing their state of readiness. Surprisingly, there are reports that not many companies took advantage of that window. For those that did, information can be shared relating to their remediation process without risk of prosecution for antitrust issues. This increases efficiency and speeds the process of remediation. There are those who feel, however, that this act does not provide much protection for a company's directors and officers.
State and federal legislation to limit liability: There have been attempts by state and federal legislatures to soften the blow when businesses encounter date-related failures. The movement to limit the liability of companies experiencing Y2K failure is gaining momentum. Now that Congress can get back to work on matters of national importance, we expect this issue to again be a high priority. The Year 2000 Consumer Protection Plan Act of 1999, introduced by Rep. Don Manzullo (R-Ill.) and sponsored by two other House Republicans, seeks to limit damages and protect directors and officers from liability for certain Y2K failures. More legislation is being offered by Senator John McCain (R-Az.) and others in an effort to stave off a flood of litigation.
Alternative Dispute Resolution (ADR): Several multinational corporations have pledged to seek mediation first before resorting to litigation. The CPR Institute for Dispute Resolution, based in New York, which negotiated these agreements, is a proponent of reduced litigation cost through advance agreement to mediation. Although it is not likely that all disputes will go to mediation, many will be efficiently handled in this arena. Much of the proposed legislation in Congress requires ADR before litigation can be filed.
Where will this lead? It remains to be seen how many waves of litigation will be spawned by Y2K issues. Interestingly enough, none of the proposed legislation speaks to the issue of insurance coverage yet. The first wave of litigation no doubt will come from the tort and contractual theories which are the subject of most legislation as things stand. Insurance coverage will be litigated soon thereafter, since many will want to close the financial gap generated by the cost of litigation.
Who will get immunity from prosecution? There is significant movement afoot in several states to limit lawsuits or grant immunity to state agencies, even if an agency is at fault. The chances are that governmental agencies will get the benefit of protection in some significant form unless there is a reversal of sentiment. Companies are forming lobby groups to limit Y2K litigation as much as possible. The National Association of Manufacturers, the U.S. Chamber of Commerce and the Information Technology Association of America, the leading Y2K accreditation organization, have banded together with more than 80 companies to promote liability limitation from Y2K bugs. We can expect that over the next three to four months, the die will be cast with regard to immunity or limitation of liability.
Where should we be directing our clients' concerns? Commerce over the last several years has become increasingly global. We have all read and understood where the U.S. is in regard to its state of readiness or lack thereof. Where are the really serious concerns? In a phrase - "over there." On a scale of one to 10, I would rate the U.S. as a solid six with regard to its readiness, moving to a seven if reports keep improving. Generally, the larger companies are doing much better than the smaller companies with regard to compliance, both external and internal. The problem that should keep us awake nights lies overseas, both in Europe and in the rest of the world. Certain countries in Europe have done quite well with their remediation plans, but others have not. It appears that Europe deserves a rating of three or better.
The rest of the world is quite another matter. Most of the world has barely begun to think about remediation and the implications of a Y2K event. Those that have are generally realizing the futility of meeting a deadline that is now only 10 months away. Asia has a whole host of pressing concerns that steal the spotlight. The World Bank has assisted by offering Y2K remediation loans in order to spur activity. There are justified concerns that there will be major disruptions of international commerce if the problem is not addressed more aggressively.
So are we Y2OK? We in the U.S. are getting there, but we still have a long way to go with the small to medium-sized firms. The good news is that these firms have the least number of lines of computer code to fix. The bad news is that they also have the smallest budgets to pay for the fix. But the highest-risk businesses are those that do significant importing and/or exporting, whether that business is a Fortune 500 or the new IPO. If that business touches other shores, then it has critical exposure to its supply chain and to its customer base. My opinion? Better get on the phone to these clients, and be sure they understand that it's even more expensive to litigate overseas.