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Most Y2K Claims Won't Be Covered by Federal Act.

POINT CLEAR, ALA. -- Most year 2000 claims arising out of a failure of, or related to, computer hardware, software or embedded chips, will not fall within the coverage of the Federal Y2K Act. That was the opinion of James R. Sutterfield of Sutterfield & Webb in an address on subrogation delivered to the combined meeting of the Central and Southeastern Claims Executives Associations here on Oct. 10-12.

"The Y2K act, by its terms," Sutterfield said, "does not apply to contract or warranty claims, or claims involving wrongful death or personal injury [which is defined to equate 'bodily injury' as that term is used in standard insurance contracts], including mental anguish, emotional distress, psychological injury, etc., when accompanied by physical injury The act will also not be applied to suits filed before Jan. 1,1999 or to those alleging an actual or potential failure after Jan. 1, 2003.

"Further, it only applies to failures defined in the act as Y2K failures," he added, which essentially have to do only with malfunction or other failure resulting from the inability of a computer program, including failure of computer hardware, software or embedded chip, to recognize that the year 2000 follows the year 1999.

For the claims outside the Y2K act, "it will be business as usual for contribution, indemnity and subrogation," Sutterfield added.

Regarding contributions, Sutterfield indicated that a party cast in judgement can only be held in the judgement for its proportional share. "What this means," he said, "is that whatever percentage of fault the finder of fact determines to be allocatable to a defendant, that is the amount for which judgement will be entered against that party, so that there will be no opportunity to pursue others in contributions, as he will not have been held responsible for more than his share."

However, at payoff time, if a party fails to pay within a six-month period and the plaintiff is a consumer or small business, the other defendants are considered to be jointly and severally liable for the unpaid share. "However, the non-paying defendant is still liable," he added. The paying defendants can collect from the non-payer, if he can be reached.

As far as indemnity goes, the New Orleans attorney said, "Much of the underlying claims which generally provide a basis for indemnity are precluded by the act." It does not allow for strict products liability nor strict premises liability. Although the act is silent as to indemnity, Sutterfield believes that indemnity, "at least of the variety wherein a vicariously liable party can obtain relief against the true party at fault, will be allowed."

He also pointed out that the act provides that "any written, contractual term, including a limitation or exclusion of liability ... shall be strictly enforced, unless the enforcement of that term would manifestly and directly contravene applicable state law in any statute in effect on Jan. 1, 1999, specifically addressing that term." He concluded, "A written or contractual indemnity provision is, if anything, a limitation or an exclusion of liability. Accordingly, it would appear that given a fair reading, written agreements providing for indemnity would be strictly enforced. This, of course, is the opposite of most state law interpretative rules, which state that burden shifting agreements, such as indemnity agreements, are to be strictly construed rather than strictly enforced."

Regarding subrogation, Sutterfield said, "As is the case with indemnity, the word 'subrogation' does not appear in the Y2K act. However, there are several provisions of the act which make it clear that the idea of subrogation is allowed and there is nothing in the act that would preclude it." Referring to the act's reference to "a special right of contribution," he said, it is "a classic case of subrogation."

He added, "The act allows a settling defendant who has discharged, not only his own liability, but that of another, to pursue the other for his fair share -- also a classic case of subrogation. Accordingly, I believe that the act does allow contribution, indemnity and subrogation."

Sutterfield, however, did feel that some special problems exist particularly for first-party insurers seeking subrogation because the act does not allow for recovery of economic loss. He added, "In essence, the items of loss payable under a first-party policy may be far broader than those recoverable against the wrongdoer, either by the assured or by the insurer standing in his shoes by virtue of subrogation."

He also said, "There are special problems created for liability insurers. The act provides greatest protection for defendants who have not committed fraud, who have not committed intentional acts and who are responsible for harm or injury, which arise from, or [are] related to, an actual or potential Y2K failure."

Sutterfield told the claim executives two points bear remembering. He said, "The first is that while [a] Y2K claim alleging personal injury is not subject to the defenses of the act, neither are indemnity, contribution or subrogation claims arising out of such claim, as a party liable for such damages may 'pursue any remedy otherwise available under the federal or state law against the person responsible for that Y2K failure to the extent of recovering the amount of those damages.'

"The second point is that while the act provides in some circumstances for joint and several liability in a judgment and in some other circumstances for joint and several liability for payment of the unpaid portion of a judgement, it also provides in that same section, 'Nothing in this section preempts or supersedes any provision of state law that 1) limits the liability of a defendant in a Y2K action to a lesser amount than the amount determined under this section; or 2) otherwise affords a greater degree of protection from joint or several liability than is afforded by this section.' Clearly a state law that does not allow joint and several liability provides stricter limits on damages and liabilities than does the Y2K act," he said.

Further, Sutterfield read from the act's final section: "Nothing in this chapter shall be construed to affect the application of any state law that provides stricter limits on damages and liabilities, affording greater protect to defendants in Y2K actions, than are provided in this chapter."

"In the absence of a specific state law concerning Y2K, the general law would apply to Y2K actions," Sutterfield said. "Taken at face value, this provision would mean that, in a state such as my home state of Louisiana, where there are no punitive damages, except in cases involving drunk drivers and pedophiles, the provision for a punitive damages cap is meaningless because there will be none to 'cap."'
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Copyright 1999 Gale, Cengage Learning. All rights reserved.

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Author:Gillmeister, Ron
Article Type:Brief Article
Geographic Code:1USA
Date:Nov 1, 1999
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