March 22, 1999 

To Our Clients and Friends: 

As January 1, 2000 approaches, everyone who is reliant on computers is at risk of a programming error that can cause computer failure and the breakdown of any system relying on computers.  This problem is generally called the Y2K bug, virus or compliance issue and will likely influence you and your business.  It is widely believed that on January 1, 2000, many computers will malfunction or shut down.  Obviously, any such malfunction can have a dramatic affect on your business. 

To avoid potential liability you should immediately inspect your computer system if you have not already done so.  However, even if the computers you or your company use are fixed in time you may still be at risk if the companies with which you do business are not prepared for the Y2K problem. To that end, we have enclosed a draft letter, which we recommend you forward to all of your suppliers. 

In addition, you should have your insurance policies reviewed to determine whether coverage for losses will be excluded.  Several states have enacted statutes allowing insurers to include Y2K exclusions in their policies. As such, losses incurred may not be covered by your policy.  Moreover, insurers are now looking for ways to avoid coverage even where the policy does not have the Y2K exclusion.  If you have a "claims made" policy and have not yet renewed it with a policy containing a Y2K exclusion, you should consider giving immediate notice of your Y2K claims to your insurer. If you provide your insurer with notice prior to the insertion of a Y2K exclusion in your policy, you may be able to retain your right for recovery under an existing policy for losses not realized until after Y2K.  You may also want to consult with your insurer to determine whether it intends to provide coverage, and, if so, the extent of coverage it will provide.  If your insurer is not going to provide coverage, some insurers are offering Y2K policies.  These policies are expensive and should therefore be carefully reviewed and compared with other similar policies to ensure that you get the most coverage for your money.  If, for any reason, it appears that insurance coverage will not exist, you should begin to explore other options. 

Your options include, among other things, seeking redress from the responsible party.  In other words, the person who programmed your computer may have liability for not foreseeing and avoiding the Y2K problem.  The redress may include seeking damages for any losses suffered as a result and/or correction of the Y2K problem at the programmer’s expense. Assuming that your business is compliant in a timely fashion, and another business is not, you may have an action against that company for any damage done to your computer and/or business.  Conversely, you should seek ways to protect yourself and your business should your computers fail to be compliant.  You should also seek ways to protect yourself in case a supplier’s failure to be Y2K compliant makes it impossible for you to fulfill your contracts and obligations. 

Finally, while inspecting your computers for the Y2K bug and ensuring that your system is Y2K compliant, it is important for you to keep track of all related expenses.  The Internal Revenue Service has created certain tax credits or special expensing methods that will allow you to apply certain expenses associated with repairing the Y2K bug to reduce your income taxes. 

If you have any questions regarding the legal ramifications of the Y2K problem and what can be done to protect yourself, please feel free to call us.