pay. The issue is challenging legal and insurance minds. Insurers are unwilling to cover Y2K losses since the problem is predictable. But Ahmed ElAmin discovers there are grey areas where insurers may have to pay. The issue is challenging legal and insurance minds.

Local businesses and homeowners will find a new exclusion clause in their insurance policies when renewing them next year.

The "Year 2000'' exclusion clause will serve as notice to business owners and executives that they'd better not rely on their insurance to cover losses due to their lack of action in dealing with the worldwide computer problem.

Simply put -- the business or the home is not covered, insurance companies are claiming.

The insurance companies say the clause is simply a reminder to policy holders that they are not protected by a foreseeable event. Insurance can only protect against fortuitous events -- those losses that hit the policy holder by chance or accident.

Since Year 2000 is a predictable event any losses will not be covered, the insurers argue. Covering the Year 2000 problem would be like covering a homeowner who phones up an insurance company after a fire has started and asks for a policy.

But lawyers and industry experts are arguing that even with the exclusion clause, insurance firms could still face enormous costs from legal fees over litigation involving events which fall into grey areas and from coverage of directors and officers liability.

The Year 2000 problem refers to the fact that most older computers programmed to read a two-digit date could mistake January 1, 2000 for New Year's Day 1900, prompting machines to crash or produce errors. Argus Insurance Co. Ltd.

chief executive officer Gerald Simons said the company was inserting a Year 2000 exclusion clause in all of its policies coming up for renewal as a reminder to customers they must look at protecting themselves.

The company he argued would be protected anyway as the Year 2000 problem was a predictable event which businesses and homeowners had been warned would occur.

The clause reads: "The indemnity will not apply to legal liability of whatsoever nature directly or indirectly caused by or contributed to by or arising from the failure of any computer or other equipment or system for processing storing or retrieving date, whether the property of the Insured or not, and whether occurring before, during or after the year 2000 (i) correctly to recognise any date as its true calendar date. (ii) to capture save or retain, and/or correctly to manipulate, interpret or process any data or information or command.'' If for example, a hair dressing salon loses its customer list because the computer fails and has to close for a day, the business won't be compensated under its business interruption coverage policy.

However, like most insurance executives the world over Mr. Simons admitted there would be some ambiguous areas that would have to be decided by the courts.

For example what happens if a building burns down, and the fire alarm system fails to work because of the Year 2000 glitch? Perhaps the fire department might have arrived in time to save most of the damage -- or perhaps not. There are endless variations on the theme and insurance executives will be looking at precedent setting cases as they wend their way through the courts.

"We don't know what will happen,'' Mr. Simons said. "We don't have any precedents. The problem is challenging some of the best legal and insurance minds. It's an area for the courts.'' BF&M Ltd. president and chief executive officer Glenn Titterton said the company was putting in similar Year 2000 exclusion clauses in its policies.

"The damage caused by the Year 2000 problem is not fortuitous or accidental and can be foreseen,'' he said. "There is no insurance cover. Exclusion clauses are being put in basically to clarify the situation. The general feeling is that policy holders are not covered anyway.'' Both local firms are also not offering specialised insurance coverage specifically for Year 2000.

There are some international companies now offering some sort of specialty coverage but the cost is high, Mr. Titterton said.

Meanwhile a London insurance expert, who did not want to be named, said he believed many companies may take a softer line on coverage depending on the amount of damage to the policyholder. "Insurance companies would have sympathy and may give more leeway to a business which is doing everything it can but is about to go out of business because of the loss,'' he said. "You would see the insurance industry coming in and paying for the loss. It's not a completely blanket exclusion. There is going to be a lot of common sense used because each claim needs to be judged on its on merit. They won't have to compensate companies but they can contribute to part of the cost of the problem.'' While most damage payouts will be left to the judgment of the insurance companies under this interpretation, some lawyers are warning policies covering directors and officers may be more contentious and cause far greater damage to the bottom line.

Insurers issue warning Jan Woloniecki, head of civil litigation at Milligan-Whyte & Smith, predicted there could be many suits from shareholders against directors and officers of a company for neglecting to deal with the problem if a business fails or suffers harm from the Year 2000 problem.

Insurance companies may then have to foot the bill for the legal actions, or for payouts if the shareholders win. Indirectly the insurance companies could also pay for costly legal actions to defend themselves from such payouts.

The area was one which was ripe for speculation and many lawyers didn't know what will happen he said.

A controversial amendment in 1996 to Bermuda's Companies Act expanding indemnification to directors may give some protection. The amendment allows companies to add a by-law exempting directors from any litigation claiming "wilful negligence'' and "wilful default'' in their duties.

Companies are not only prohibited from exempting directors for fraud and dishonesty while performing their duties.

Mr. Woloniecki, a vocal critic of the amendment, said it would be interesting to see how directors might use the clause -- if it was in the company's bylaws -- to protect themselves in the event of any Year 2000 litigation.

"It could conceivably protect directors if they were acting honestly, and really thought the Year 2000 problem was a huge joke or thought it was some sort of conspiracy by computer technicians,'' he said. "Then they might get away with it.'' Glenn Titterton Gerald Simons