Typically, errors and omissions (E&O) insurance policies do not specifically cover errors resulting from year 2000 or Y2K computer noncompliance, nor do they specifically exclude it. When policies were written several years ago, people weren't as focused on Y2K as they are today. "The issue of what is (or is not) covered should certainly be of interest to a TPA," says attorney Les Klein at Sonnenschein Nath & Rosenthal.
Y2K review.
A computer performing a date-dependent computation or operation may produce erroneous results because the system recognizes only the last two digits of a year. So in systems programmed with a 2-digit date field that have not been made Y2K-compliant, the year "00" of 2000 will be interpreted as the year "1900" rather than the year "2000."
Retirement plans depend on computers to perform critical operations such as benefit calculations and payments. "Knowing that TPAs have Y2K exposure, making the time to ask questions and ensure that proper coverage is in place is essential," says Klein. "If TPAs wait until there are claims resulting from Y2K errors to find out, it could be too late."
Grey Area.
If the E&O policy is not clear about whether or not Y2K issues are covered, it creates an environment of interpretive analysis for attorneys, suggests Klein. Debates over whether or not a computer malfunction falls under the category of an error or omission may compromise valuable coverage.
TPAs who have taken all possible steps to update their computer systems could end up holding the bag for others who don't. Not only do TPAs need to consider whether they are Y2K compliant, but they need assurances from clients that the payroll data they receive comes from systems that are Y2K compliant. Financial and insurance companies without compliant systems could also supply TPAs with incorrect information. Responsibility could become ambiguous.
A key issue is whether the E&O policy excludes Y2K coverage. "Service providers who have taken proactive steps to be Y2K compliant should avoid a Y2K Exclusion to their E&O insurance policy," suggests Shell Simonson of Professional Practice Insurance Brokers, Inc. "A professional liability (E&O) insurance policy is designed to cover errors in professional services which cause financial loss to others and should not be handicapped by unnecessary exclusions if the service provider has in fact taken prudent steps in order to ensure Y2K compliance," says Simonson.
TPAs need to check with their brokers to ensure that their policies do cover Y2K. "In the absence of an exclusion in a policy, it is certainly arguable that negligence relating to a claim that a TPA failed to adequately bring its system into Y2K compliance would be covered by an E&O insurance policy," says attorney Joe Faucher, Reish & Luftman.
Warranty Statement.
Service providers may be required to provide a warranty statement or complete a Y2K questionnaire when applying for E&O coverage. "The warranty statement or Y2K questionnaire may provide the underwriter with the comfort level necessary to proceed in binding coverage without a Y2K exclusion," says Simonson.
Fiduciary responsibility.
Plan fiduciaries are responsible for seeing that all involved with the plans-such as company payroll departments, financial institutions, and TPAs-are Y2K compliant. To protect plans all round, the Pension and Welfare Benefit Administration (PWBA) field offices conduct year 2000 reviews in all new and ongoing civil investigations. A Y2K warning will be issued in those cases where a determination is made that a plan fiduciary has failed to take appropriate measures to protect the interests of the plan and its participants. The warning is to place the plan fiduciary on notice of his or obligation and to encourage voluntary compliance in addressing the year 2000 issue. PWBA's guidance to regional offices for investigators says, "regardless of whether a warning is received by a fiduciary, in situations where plan fiduciaries fail to act prudently in performing their plan duties and plan participants are adversely affected, appropriate enforcement action may be pursued."
Copyright 1999 Aspen Publishers. All rights reserved. Reprinted with permission from the Pension Plan Administrator, March 1999 (vol 6, issue 3), pages 1 and 6. Copyright 1999 by Aspen Publishers, Inc. www.aspenpub.com