The Millenium Bug: a plan of action for co-ops and condos.

It is difficult to read any magazine, newspaper or trade journal without noticing a reference to the "Y2K Problem" or the "Millennium Bug." Yet, its practical effects on our lives is not easily grasped. Naturally, without an understanding of the precise implications of the Millennium Bug, it is also difficult to develop a strategy for reducing or eliminating its impact.

This article will briefly review the source and nature of the Millennium Bug, examine its potential implications on the operation and management of residential cooperatives and condominiums, and propose a strategy for boards of directors and boards of managers to achieve a seamless transition from the 20th to the 21st Century.

The Problem

The Millennium Bug is the product of a design and programming flaw in computer hardware and software. In many cases, when programmers entered the source code (the commands governing the functioning of a software application), they used only two digits to designate a year, not four digits. Alternatively, the microchip embedded in the computer uses a two digit year designation. The problem arises when, instead of designating the year 2000 as "2000," the computer designates it as "00." If not programmed properly, the computer will not read "00" as the year 2000, but will recognize it as the year 1900. This could result in the partial malfunction or the complete failure of a computer system. All told, it is anticipated that the failure to recognize the new century could have a devastating impact with immeasurable costs.

What does the Millennium Bug mean for the daily operation of co-ops and condos? It is useful to analyze the implications of the Millennium Bug by using a framework of "internal" and "external" issues. The internal issues relate to date-sensitive equipment or systems located within the building. For example, are the elevators operated by a computer? If so, and the hardware or software is not programmed to be "Year 2000 Compliant," what should you expect to happen at 12:01 on January 1, 2000? Various scenarios are possible; the elevators could malfunction due to the failure of the computer to recognize and adjust properly to the new century, or they could continue to function as usual. Similar problems should be expected with respect to other building systems that are date-sensitive but not Year 2000 Compliant. A short list includes the systems for HVAC, lighting and sprinklers, and security systems such as fire and burglar alarms, together with any video surveillance apparatus.

The "external" issues involve the co-op's/condo's vendors, suppliers and other service providers. Imagine a managing agent who maintains maintenance or common charge records on a computer system that is not Year 2000 Compliant. Will the system crash, resulting in the loss of valuable and irreplaceable records? Or will the system erroneously generate bills reflecting arrears from 1900? Additional examples include: lenders who could miscalculate interest rates; insurance companies who could cancel policies; and energy suppliers who could miss deliveries, literally leaving the building in the cold in January.

The possibilities are clearly vast, but they need not be itemized exhaustively to convey the message that co-ops and condos must regard the problem very seriously and deal effectively with it by acting now. Thus, although none of these "doomsday" scenarios may occur, it is recommended that co-op and condo boards implement the following plan.

The Solution

An effective plan to minimize the impact of the Millennium Bug must begin with a comprehensive audit of all date-sensitive functions. The audit should be conducted by a committee of the board, and should result in the creation of an inventory of all date-sensitive equipment and systems found in the building. The committee should also develop an inventory of all maintenance, vendor and supplier contracts. Examples include managing agents, banks, energy suppliers and contractors who maintain the building's equipment and systems.

When the inventories are completed, the next step in the audit requires a determination of whether the building's equipment, systems, maintenance providers, vendors or suppliers are Year 2000 Compliant. This will require contacting these individuals or companies directly. Representations from them should be obtained in writing and kept in a separate file. In the event any of the representations turn out to be false, they may form the basis for a claim for any damages sustained.

If it is determined that any of the equipment, systems, maintenance providers, vendors or suppliers are not Year 2000 Compliant, action must be taken. In the case of building systems or equipment, a decision must be made whether to replace or retrofit. This decision involves a cost-benefit analysis which can be made after determining the future life-span of the equipment or system and the cost to retrofit. This data should then be compared with the cost to replace the system before January 1, 2000.

With respect to maintenance providers, vendors or suppliers, representations and warranties must be obtained from them that they will become Year 2000 Compliant by a specific date in advance of January 1, 2000. Counsel can assist in the negotiation and preparation of the representations and warranties. In the event a third-party refuses to provide a representation and warranty, serious consideration should be given to replacing that vendor or supplier with one who is Year 2000 compliant.

Insurance Concerns

Full preparedness for the Millennium Bug should also include an assessment of whether adequate insurance coverage exists for any related loss. This analysis should be undertaken with the assistance of an insurance broker.

Specifically, the general liability insurance policy should cover personal injury or property damage caused by any building system or equipment failure related to the Millennium Bug. In addition, tenant-shareholders and unit owners may refuse to pay maintenance or common charges because of the failure of building services, equipment or systems. Thus, business interruption coverage should provide indemnity for those losses. Finally, directors' and officers' insurance should provide a defense and indemnity for claims made against the individual directors and managers that they failed to make the cooperative or condominium Year 2000 Compliant.

Conclusion

If left unchecked, the Millennium Bug may lead to serious complications in the operation of cooperatives and condominiums. If, however, a systematic and comprehensive strategy of securing Year 2000 Compliance is promptly and diligently pursued, it is possible to take the sting out of the move into the next century.