Consumer Bulletin

US. DEPARTMENT OF COMMERCE/Office of Consumer Affairs/Washington, DC 20230

The Year 2000 (Y2K):

What do consumers need to know about insurance?

The Year 2000 is upon us. As we approach the next millennium, the "Y2K problem," or the "millennium bug," forces us to ask whether our computers will run smoothly or will software programs developed during the past 30-40 years blow up as computers struggle to identify "00" as the Year "2000" or "1900" or another century?

Computers and computer microchips have become so commonplace that we may not even know they are present. Many machines have "embedded chips," microchips that run the machine but are not obvious to the user.

What is your government doing about this problem? The Y2K Council was established by President Clinton on February 4, 1998, to coordinate solutions. The Department of Commerce has joint responsibility with the Federal Reserve in leading the Federal government's efforts to coordinate Y2K conversion in the insurance sector. The Office of Consumer Affairs is preparing a series of Y2K consumer bulletins to show how individual sectors are dealing with the change to the Year 2000. This first bulletin discusses the insurance industry.

Due to the insurance industry's heavy reliance on computer systems, it was one of the first to recognize the Y2K problem. Insurance companies are responsible for their own readiness and also must be concerned about their vendors. Since the industry is regulated by the states, readiness is closely monitored by state insurance regulators as well as the National Association of Insurance Commissioners. Below, we present some frequently asked questions and answers based on discussions with the American Insurance Association.

The insurance industry--health, life, automobile, property/casualty--appears ready for the Year 2000. John Koskinen, chairman of the President's Y2K Council, has asked the industry to assess itself to verify this. In addition, insurance regulators in all 50 states have surveyed insurance companies about the status of their Y2K remediation efforts. Most state regulators have approved Y2K endorsements for commercial insurance policies, such endorsements are not likely to be filed for personal lines of insurance, such as homeowners or automobile insurance.

Consumers: If a product malfunctions because of Y2K problems, will it be covered under existing insurance policies?

Industry: Whether a loss is covered depends upon the circumstances of the loss and the specific language in the insurance policy. It is very important, therefore, that policyholders discuss their coverage with their agent or insurer.

Most insurance policies will not reimburse a policyholder for the cost of repairing a malfunctioning product; therefore, these policies will not cover the cost of repairing a product that malfunctions due to a Y2K defect. On the other hand, if a product malfunction causes damage to other property, or injures a person, most policies will usually take care of these losses. For example, if a home heating system malfunctions and causes a fire in a house, the standard homeowners' policy would cover repair costs for the house. It would make no difference if the malfunction is Y2K-related.

Another example would be an elevator that malfunctions and injures a person riding in it. The commercial liability policies insuring the elevator manufacturer and the building owner may well cover the loss resulting from the injury, but as commercial insurance policies can differ, it is particularly important that business people review their coverage with their agent or broker.

Consumers: The insurance industry is regulated by state insurance commissioners. Will my coverage under insurance policies vary according to where I live?

Industry: Each state has unique insurance laws. However, although these laws and regulations do result in some differences in how policy language is interpreted, for the most part, the differences between what is covered and what is not are usually minor. Of course, whether a loss is covered by your insurance policy will depend upon the type and circumstances of the loss, and the kind of coverage provided by your insurance policy.

It is important to remember that each company can, and often does, create its own policy language, subject to approval of the state insurance commissioner. This is especially true for commercial insurance policies. It is therefore very important that you contact your insurer or agent on any question of coverage.

Consumers: If my car contains components that might malfunction due to Y2K, will my automobile insurance cover them?

Industry: If a malfunctioning automobile part causes an accident, the standard auto insurance policy would cover damage to the vehicle as well as the driver's obligation toward others involved in the accident. To illustrate, if your tires are worn or defective, the standard automobile insurance policy would not cover replacement of tires. However, if the car's bald tires cause an accident, the auto policy would pay for damages that result from the accident. A loss or accident caused by an automobile part that has a Y2K defect is no different. For example, if a Y2K defect in the ignition system causes a fire, the fire damage would be covered under the comprehensive portion of the standard auto insurance policy. Similarly, if the malfunction causes an accident with another car, then the auto policy will pay to take care of your responsibility toward the other driver and passengers, and for the collision damage to your car (that is, if you have collision coverage). The auto policy would not, however, pay to repair or replace the malfunctioning part itself.

Whether the question concerns auto insurance or any other type of insurance, your insurance company and agent are the best, most reliable sources of information about what your policy covers and what it does not cover.

Consumers: Does my homeowner's policy cover damages if a dwelling catches fire due to a defective microprocessor in my home heating system?

Industry: Homeowner's insurance has two parts, property and liability. While a Y2K loss could theoretically give rise to claims under both property and liability coverages in a homeowner's policy, the chances are remote. Unlike businesses, few homeowners have many date-sensitive applications that are likely, even if they malfunction, to result in damage or injury.

The standard homeowners' insurance policy provides coverage for fire damage. In the unlikely event that a home heating system malfunctioned due to a Y2K defect and caused a house to catch fire, the standard homeowners policy would pay for the fire damage. The homeowners insurance company in turn would have the right to seek reimbursement from the company responsible for the defect.

The same concept applies to auto insurance. If, for example, a Y2K defect in the ignition system caused a fire, the fire damage would be covered under the comprehensive portion of the standard auto insurance policy.

However, insurance policies may differ somewhat in the coverage they provide. Therefore, policyholders are advised to contact their insurer or agent if they have any questions regarding the scope of coverage.

The insurance industry appears well prepared for the Year 2000. But consumers must be forward-looking and follow the industry's advice to contact their insurer or agent with any questions about coverage. Identify all date-sensitive programmable devices such as security systems and contact the companies that manufactured or installed the devices. Request that products be tested for Y2K compliance and where necessary, be repaired or replaced. Your insurer or broker may also be able to recommend resources to help you identify potential Year 2000 problems to prevent losses from occurring.

Contacts for More Information about Y2K:

www.aiadc.org: The American Insurance Association, 1130 Connecticut Ave, NW, Suite 1000, Washington, DC 20036; phone (202) 828-7100; fax (202) 293-1219

www.naic.org: The National Association of Insurance Commissioners, Support & Services Office, 120 West Twelfth Street, Suite 1100, Kansas City, MO 64105-1925; phone (816) 842-3600; fax (816) 471-7004

www.y2k.gov: The President's Council on Y2K Conversion, 115 Old Executive Office Building, Washington, DC 20502; phone (202) 456-1414

www.consumer.gov: One-stop shopping for consumers to locate consumer information provided by an ever-expanding number of Federal government agencies. Federal Trade Commission, Consumer Response Center, Washington, DC 20580; phone (202) 326-3128

www.nist.gov/y2k/: Public Inquiries Unit, National Institute of Standards and Technology, U.S. Department of Commerce, Gaithersburg, MD 20899-0001; phone (301) 975-NIST(6478); fax (301) 926-1630; e-mail questions to year2000@nist.gov

For more information about the Office of Consumer Affairs, consumer bulletins and other publications, contact:

Office of Consumer Affairs
U.S. Department of Commerce
Room H5718
Washington, DC 20230
Web site: www.doc.gov/oca
E-mail: CAffairs@doc.gov
Voice: (202) 482-5001
Fax: (202) 482-6007 (10/98)