Tech Center

Many Insurers Shun Liability Policies
Find Insurance Difficult or Costly to Get

By DEBORAH LOHSE
Staff Reporter of THE WALL STREET JOURNAL

For 19 years John Danieli never had a problem getting insurance for his
computer-consulting company, Computer Merchant Ltd. But recently his
broker had a bit of bad news.

While his insurer, CGU PLC, would renew his professional-liability policy for
as much as $2 million in coverage, any work Mr. Danieli's firm did to fix clients'
year-2000 computer problems wouldn't be covered. He checked around to
find a more lenient insurer for the so-called errors-and-omissions coverage, but
gave up. The premiums and policy terms "would have been astronomical," said
Mr. Danieli, who estimates that only about $2 million of his firm's $125 million
in annual revenue is related to helping clients make sure their computers will
work come 2000.

Mr. Danieli's business is far from the only
year-2000 fix-it company out in the cold when it
comes to professional-liability insurance.
Year-2000 problems represent a huge unknown
risk to insurers, and these carriers don't want to
get caught having blithely written, broad professional-liability policies only to be
hit by a tidal wave of claims from technology consultants who have been sued
for failing to properly debug their clients' computer systems.

Danger of Litigation

"If there is anything in the remediation that goes wrong even to the slightest
degree, that is going to be brought into litigation," said Kae Lovaas, a vice
president for technology at property-casualty insurer St. Paul Cos., which has
dissuaded its underwriters from quoting prices for consultants with heavy
year-2000 remediation business.

Insurance brokers say Chubb Corp., Reliance Group Holdings Inc., CNA
Financial Corp. and American International Group Inc. also are avoiding
writing such coverage, although most of the carriers say they regularly make
exceptions, especially for existing clients.

CNA declined to comment, while CGU, Mr. Danieli's carrier, declined to
comment on Computer Merchant's coverage, but agreed that it is generally
seeking to reduce its Y2K exposure.

What this means, insurance experts say, is that small consulting firms with large
year-2000 exposure are the most likely to be refused this type of coverage.
MatriDigm Corp. found this out recently. The San Jose, Calif., firm, which gets
the majority of its $5.5 million in annual revenue from year-2000 analysis and
remediation, recently was asked by a client to secure professional liability
insurance before doing year-2000 work, but MatriDigm had no luck. "The
insurance carriers said we don't underwrite" such policies, said Robert Luth,
MatriDigm's chief financial officer. The client ultimately didn't require the
coverage, he added.

Changes in Commercial Policies

The crackdown on year-2000 exposure comes even as the market for other
commercial coverage -- such as fire insurance for a company headquarters,
auto insurance for company cars, or general-liability policies in case a customer
falls on the premises -- has gotten steadily cheaper and more comprehensive,
reflecting fierce industry competition.

Industry observers say insurers are trying to avoid a repeat of their experience
with asbestos and pollution claims. Carriers have been mired in coverage
disputes for more than a decade, having written policies that didn't clearly
exclude these costly items. "They do not want the millennium to become the
next asbestos problem," said Michael Griffin, an insurance broker with
NorthStar Insurance Services in Wellesley Hills, Mass.

But the weak commercial-insurance market is forcing some insurers to provide
professional-liability coverage to some large consulting clients who do Y2K
remediation work, because they are afraid the customers will yank their more
prosaic coverages if they don't.

Boston-based Keane Inc., a $1 billion-a-year consulting firm, was able to get
professional-liability and other coverage through USF&G, now part of St. Paul,
that included the 37% of its business that involves year-2000 work, but at a
steep cost. The company pays about $1 million a year, under a three-year
contract, for $42 million of overall coverage, said Keane's treasurer, Francis
Cleary.

Arrangements Not Foolproof

Keane's insurance broker, NorthStar's Mr. Griffin, estimates Keane is paying
as much as $200,000 a year in extra premiums because of its year-2000
exposure than would a comparable company with no year-2000 work. And he
notes that the insurer stipulated that if it can't get adequate reinsurance in the
second and third years of the contract, then it has the right to provide only a
portion of the $42 million coverage in those years. Keane "got about as good a
guarantee as we can get, but it's still not foolproof," Mr. Griffin said.

In other cases, insurers are trying to make sure that consulting clients have
taken steps to bullet-proof themselves. Philip Edmundson, president of broker
William Gallagher Associates, said he was able to secure coverage for a client
that derives half its $10 million in annual revenue from year-2000 work by
persuading the client to add defensive language in its consulting contracts,
clarifying, among other things, that "if something was simply unknowable at the
time, their customer will not hold them accountable for that."

Even so, the company's annual premium for coverage, including $2 million in
professional-liability insurance, was $20,000 compared with $10,000 for
similar companies without Y2K exposure, and the deductible was $50,000 for
each claim compared with $10,000 typically.