First, the court found that the Year 2000 problem is a type of “design defect” and coverage is therefore barred by the policy's design defect exclusion. The court noted that GTE's computer systems, which were “designed” to process dates, were defective in that they failed to account for the year 2000 and beyond.

William Erickson, a partner in Robins, Kaplan, Miller & Ciresi L.L.P., the Boston-based law firm that represented Allianz in this litigation, noted that GTE (now Verizon) did happen to design its own computer systems, but that the result would likely have been the same even if the sytems were designed by an outsider. “The design defect exclusion is not tied only to the design activities of the insured,” Mr. Erickson said.

The court also agreed with the insurers' contention that the “inherent vice” exclusion negated coverage. In the court's view, the programming of the Year 2000 problem into the computer systems caused the systems to become “decayed” through the lapse of time.

“When property contains some characteristic that contributes to its own demise, the inherent vice exclusion applies,” Mr. Erickson explained.

The court also rejected GTE's argument under the “sue and labor” clause. Under that clause, money spent to avoid a loss from occurring is compensable. However, the court found that since Y2K remediation was not covered because of the design defect and inherent vice exclusions, money spent to avoid this type of loss was also not covered.

“If something's excluded in the first place, then you can't use 'sue and labor' to cover loss avoidance costs,” Mr. Erickson noted.

Chicago-based Bartlit Beck, the plaintiff's law firm, referred National Underwriter to Verizon's public relations department. A Verizon spokesperson would say only that they are “considering all options.” When asked if this meant an appeal is likely, the spokeperson had nothing to add.

David Schlecker, an attorney with Anderson Kill & Olick in New York City, said that the court's decision seemed to be influenced by proof shortfalls in the plaintiff's arguments. The sue and labor clause may be a viable coverage argument in some situations, depending on the facts of the case, he added. Anderson Kill is a prominent policyholder law firm, but is not connected to the GTE case.

“The trend is that courts are not quick to side with policyholders in Y2K cases,” Mr. Schlecker noted.

Reproduced from National Underwriter Edition, April 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. opyright in this article as an independent work may be held by the author.