Risk management issues arising from computer date recognition problems

The following scenarios are imaginary.  No claims have yet been intimated to the Master Policy insurers.  If the profession is to be kept free of problem, a cautious approach should be adopted when year 2000 compliance could be an issue.

The time

It is December 2000 and, mercifully for most inhabitants of the planet, all the fuss and hype about the Millennium Bug is a facing memory.  There have been reports of isolated business failures, some of them major companies, but there was no meltdown in the world markets.  Many people and businesses experienced some inconvenience as a result of the bug, at home and at work, but aircraft didn’t plummet to the ground; nuclear weapons systems did not malfunction.

A number of firms of solicitors are not enjoying the sense of relief that other area. 

Scenario 1

Take the firm whose cashroom partner has disappeared leaving a six figure shortfall on the client account and a substantial deficit in the firm’s account.  The partners are now very much regretting that they believed all the explanations and reassurances given by the cashroom partner about the computer problems resulting from the Year 2000 date change and the fact that the firm’s systems were, so he said, non-compliant.

The partners wish they had heeded all the warnings of the Law Society and others that the profession needed to be particularly alert to fraud risk and the possibility that the Millennium Bug would be used as a smoke-screen to conceal evidence of fraudulent activity.  That is precisely what had happened here.

Scenario 2

What about the firm which had advised their major clients, a highly successful local entrepreneur and his family on the sale of the family company to a PLC.

There had been problems with some of the embedded chips in the plant on which the manufacturing process was so dependent.  The family are facing a major clawback under the warranty provisions in the contract.

The family have now instructed another firm to act and one of the issues raised is the suggestion that the family should never have been advised to sign up to the particular warranty provisions.  The warranty stated that all the plant was Year 2000 complaint.  The problems occurred immediately after New Year and the claim is based on allegations of non-compliance.

The firm has intimated a claim to insurers.  There is no problem as far as Master Policy cover is concerned but the firm’s “top-up” insurers are reserving their position regarding cover on the basis that the allegation of negligence appears to relate to a date recognition issue.  The “top-up” cover arranged by the firm contains a total “Year 2000 exclusion”.

A firm of auditors is also being pursued but the word is that their professional indemnity cover has already been exhausted.

Scenario 3

Another firm has discovered that a number of client matters which they are handling and which should have been actioned during September have not been actioned and are now time barred.  The firm has a fairly sophisticated diary/case management system but for some reason all dates entered in a particular period have disappeared from the system.

One of the partners had previously recommended introducing a procedure of reviewing files on a regular, rolling basis and taking hard copies of critical date lists.  Had these precautions been taken, the firm could have avoided the problem it now faces.  Taken individually, none of the cases involves a very large sum of money.  However, the total amount involved adds up to a considerable claim and because of the date recognition element, insurers have advised that the carious clients’ claims will be treated as a single claim for indemnity purposes and will be subject to an aggregate limit.  The defence costs incurred by the insurers could be substantial and they will reduce the amount available to meet the clients’ claims.  There is a serious risk that the firm will be partially uninsured.

Scenario 4

Another firm had acted for a couple in the purchase of a filling station business.  The missives made no reference to Year 2000 compliance.  Now the couple are alleging that they should have been advised to obtain warranties regarding compliance.  The pump metering failed, allegedly because of the date change and now there are disputes with the sellers of the business as well as with the fuel company.

Scenario 5

A series of problems arose out of the letting of units in a retail development.  The landlords’ instructions were to make Year 2000 compliance a tenant’s obligation in the leases.  The standard lease provision does not achieve the desired effect and various problems have arisen out of failure of the sophisticated climate control system.  The landlords are alleged that their potential losses exceeded £2m and they are holding the solicitors responsible.

The firm has top-up insurance of £500,000 in excess of the Master Policy limit of indemnity (£1m).  Insurers are pointing out that the claim related to “date recognition provisions” in the lease documentation and, accordingly, Master Policy and “top-up” cover is on an aggregate basis with defence costs included in the limit of indemnity.  The defence costs could be very substantial.  There is a possibility therefore that the firm’s cover will be insufficient.

Scenario 6

A trustee of a charitable trust has just written to solicitors who manage the trust’s investment portfolio hinting that the trust hold the solicitors responsible for the fact that no action was taken to divest the trust of shareholdings in two companies which were heavily dependent on IT and were the subject of adverse comment regarding Year 2000 readiness.  The companies’ share prices have plummeted because they are forecasting a massive reduction in revenues and profits.

Scenario 7

A client who purchased a very expensive house has just notified a claim on the basis that he alleges his solicitors ought to have warned him of the dangers of buying a house in which the electrics were non-compliant.  The house was “state of the art” incorporating climate control and various other features.  The systems failed at the beginning of the year and the client has been involved in some very costly remedial work.

Management of Year 2000 “Advice Risks”?

  • Clients should be clear that you accept no responsibilities for advice about the adequacy of the Year 2000 compliance of a business, property, investment or other asset being acquired.
  • Advise clients at the start of relevant mattes that you are not offering advice on Year 2000 compliance as such.
  • If a transaction or advice raises the prospect of Year 2000 compliance related risks, notify the client of the position and advise the client to take advice from suitably qualified professionals.  Err on the safe side.  If in doubt about relevance of Year 2000, raise the subject.
  • Ensure that all staff are aware of the issues and are aware of the need for caution in relation to client work.
  • Time limits – ensure that you are not wholly dependent on computer based diary system.
  • Styles and proformas – produce a hard copy of all styles and proformas. Review all styles and proformas for warranties in relation to Year 2000 compliance.Control the use of styles and proformas. Prohibit use of non-approved styles and proformas.
  • Websites – check information/advice and check disclaimer.

Many will consider these warning and precautions unnecessary, however, from a Professional Indemnity Insurance point of view, please aim to avoid a debate about these issues by drawing Year 2000 risks to the client’s attention and putting the onus on the client to seek expert technical advice.

Alistair Sim is Associate Director at Sedgwick Professions

The information/advice in this page is (a) advice on practical Risk Management an not on legal issues and (b) is necessarily of a generalised nature. It is not specific to any practice or to any individual, nor should it be relied on as stating the correct legal position.  

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