Balancing the books on Y2K LITIGATION

Does the next millennium begin officially on January 1, 2000 or January 1, 2001? That debate is better left to the academics. What is certain is that January 1, 2000 is the date computers must recognize. It is also the date which could signal the beginning of the biggest litigation attack to hit North America. Realizing the potential paralysis that Y2K could have on the court systems, plus the financial chaos that could result if no checks are brought into place to curtail litigation, the U.S. federal and state governments have responded with legislation that should limit and deter many liability lawsuits. The Canadian governments, however, seem to be putting their faith in the positive side of human nature.

The U.S. Congress and state legislatures have been more pro-active in forcing a cooling off period for Year 2000-related litigation than the Canadian parliament or the provinces. Some pieces of state legislation are self-preserving in tone, and are intended more to shield government from the avalanche of Y2K lawsuits otherwise expected to hit once the 2000 clock turns over. Other pieces of legislation, such as the federal government’s time-limited HR (House of Representatives) 775 (the Year 2000 Readiness and Responsibility Act) are aimed at discouraging frivolous law suits without pulling the rug from underneath potential litigants who have legitimate claims.

HR 775 was signed into law by U.S. president Bill Clinton on July 20, following last minute negotiations. The Bill takes precedent over laws passed by the states except in specific circumstances not covered by the federal legislation. The act applies to any Y2K action brought after January 1, 1999 for a failure occurring before January 1, 2003.

However, businesses interpreting HR 775 as a signal to ease up on Y2K contingency plans are mistaken. This legislation does not stomp over the injured party’s right to sue as much as it attempts to weed out the frivolous, or encourage settlements outside of the courts. Plaintiffs, for example, must demonstrate that they had taken all the necessary steps to avoid any year 2000 problems. Potential defendants have to provide written details of a complaint along with information about an individual who has the authority to negotiate a settlement prior to filing a claim. A defendant would then have 90 days to address a Y2K-related issue. This is expected to dramatically reduce the volume of Y2K actions. The legislation also limits damages defendants must pay to their contribution to a failure.

The need for a “legal stop-gap”

According to Melissa Shelk, assistant vice president of federal affairs for the American Insurance Association, the need for a legislative pause in legal action is clear. “Some lawyers are already planning to launch a tidal wave of lawsuits that will do nothing to help fix the problem but will divert time, money and resources away from readiness efforts.”

Already some lawyers could not wait. At least four Y2K lawsuits have been filed in U.S. courts. Three of them are class actions suits. The one that is not involves a supermarket chain suing its cash register supplier for registers that cannot read a credit card expiration date of 2000 or beyond. HR 775 does not apply to any of these court cases.

The threshold for Y2K-related class action suits was raised to more than 100 claimants with damages exceeding $10 million after the Federal Judicial Conference expressed concern over the potential deluge of class actions filed in federal court. HR 775 closes the class action loop further by insisting that in cases of “material defect” the court finds that the alleged defect would be material for a majority of class members. This was to prevent court rooms becoming a virtual battle ground for trivial actions such as suits involving a malfunctioning timer on a VCR.

In a country as litigious in nature as the U.S., it is the frivolous lawsuits that present the greatest concern for an already burdened court system. In addition to contributing to the court’s backlog, if left unchecked these suits could be instrumental in delaying the settlement of legitimate Y2K claims. However, it remains to be seen how successful HR 775 is in dampening the American appetite for lawsuits, or whether, in the words of Clinton, “the Bill’s provisions are misused by parties who did little or nothing to remediate in order to defeat claims brought by those harmed by irresponsible conduct”.

What is clear is that the U.S. Congress has tried to limit the damage of a potentially messy situation by laying down some ground rules that, if successful, gives business the breathing room to respond to actual year 2000 problems rather than for-profit litigation.

Contingency and continuity planning

The prospect of litigation, however, not the only live issue on the Y2K discussion table — with the “margin for error” in meeting compliance dates having become almost erased with the passing of time, insureds and insurers will have to focus on contingency planning. This applies not only to internal organization system failure, but technologies used by business partners such as suppliers and customers.

The issue is not only about contingency planning, but also that of continuity planning. While contingency and continuity planning are similar, there are important differences. Contingency is an immediate response to a failure or disaster. Continuity involves a longer-term response to the crisis, intended to keep the business operating. It should include a communications plan to assure suppliers and customers.

Continuity planning focuses on having the infrastructure or systems in place to minimize or eliminate disruptions to business, including automatically switching over operations to manual in the event of a systems failure. Companies relying heavily on computer and software supplier verifications, for example, may be in for a surprise. Several management teams who have discussed the Y2K problem with Royal & SunAlliance have reported that their experience with manufacturer and supplier verifications on Y2K compliance was, at best, mixed. Some suppliers would not or could not verify, while many were inaccurate.

Basics of planning

So, what goes into developing a contingency and/or continuity plans? Start with the basics. A contingency and continuity plan should identify potential sources of system failure and impact, and include strategies to cope with and recover from failures. This includes extraordinary measures which will also shield the business by minimizing the impact of external Year 2000 failures.

Does the company have alternative procedures in place to perform the operation of a failed system/infrastructure item manually, or meet delivery commitments disrupted by a malfunction? Are personnel with specialized skills available if the failure happens on New Year’s Day or on a weekend? Whether preparing the business for some fortuitous event, or getting ready for 2000, there are many key steps to be taken in developing a plan:

Identify systems vital to core business functions;

Determine what may be impacted by a systems failure;

Measure the probability of systems failures;

Calculate the ability to convert to manual operations;

Outline the overall objectives of the plan;

Estimate the time that a specific plan may be required (for example, the possible internal/external damage of Y2K will linger longer than a crippling January snowstorm);

The cost of implementation, ensuring that sufficient resources are available for first response and the aftermath;

Develop a crisis communications plan that designates specific spokespersons to reassure suppliers and customers with a consistent message.

A contingency and continuity strategy, however, should not be an exclusive response to Y2K, but an evolving document identifying and compensating for potential problems in critical areas. In this context, “the millennium bug” remains a temporary blip in the business cycle. For how long, or the extent of its consequences remains unknown.