With Y2K, the lawyers win again

But law firms are bracing for when the clock strikes midnight on December 31.

Plaintiffs' lawyers are gearing up to file complaints on behalf of those who may suffer because of the millennium bug. Corporate defense teams are aiming to shield their clients from an onslaught of product or service failure claims related to computer systems that go haywire because they fail to recognize the year 2000. In the meantime, the ever-growing Y2K groups within practices are trying to steer clients away from liability.

No matter how it plays out, there is money to be made.

"I think a lot of lawyers have done pretty darn well," said Dean Morehous, an attorney at Thelen Reid & Priest, who delved into Y2K legal issues five years ago.

Only 74 cases have been filed in state and federal courts against 45 defendants because of the Y2K problem, according to an August report released by PricewaterhouseCoopers, but legal observers say the count is closer to 100 now.

Still, actuarial firm Milliman & Robertson estimates that the total Y2K legal bill could add up to between $5 billion and $10 billion. The same firm estimates that insurers could pay $15 billion to $35 billion for claims and legal costs related to Year 2000 computer problems.

Many legal experts agree that insurance disputes are the sleeping giant of Y2K litigation.

"The interest in litigating insurance coverage seems to be an area where there is a potential for the expansion of both the dollar value [of the suits] and number of suits that get filed," Morehous added.

Although a surge of lawsuits regarding Y2K failures is expected to hit next year, already legal fights are brewing over insurance coverage. Companies fixing Y2K glitches are starting to hit their insurance firms up for reimbursement, in most cases under "sue and labor" clauses, which can be invoked to mitigate impending losses.

Xerox and GTE are among the estimated 100 companies tangled in federal lawsuits with insurance companies over Y2K. GTE, for one, has spent $283 million in Y2K remediation costs, which could rise to a total of $400 million, and Xerox expects to spend $183 million, according to a report by PaineWebber insurance analysts Alice Schroeder and Gregory Lapin.

"We believe these cases suggest that large corporate customers are more likely to attempt to use 'sue and labor' to offset their remediation costs, which at a minimum will add to the industry's legal defense bill," the analysts wrote in a June report.

Lawyers for the insurance industry say that most policies don't cover bills for Y2K fixes.

"The main argument the insurance companies will make is that the traditional policy they sell doesn't provide protection for this type of claim, and some insurance companies have been issuing exclusions saying that nothing under their policy applies to Y2K," said Michael Brady, a partner at Ropers, Majeski, Kohn & Bentley, who has published papers on the issue.

President Clinton has signed two laws aimed at curbing Y2K lawsuits. But most legal experts say that although the legislation forces some complainants to provide more detailed proof of how they were harmed, overall the bill will not slow down litigation.

"In the event of serious failures is it going to protect people from liability? No," said Michael Donovan, a partner at Hancock, Rothert & Bunshoft, who is part of its eight-person Y2K group.

Hancock, Rothert & Bunshoft started its Y2K group in 1996 and mostly works with clients to avoid liability.

"On a per-client basis, this isn't expensive legal advice," Donovan said. "But you have to expect that there is going to be litigation when problems arise."  

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