In an effort to protect insurance companies, regulatory moves by 47 states allow insurers to exclude loss and damage claims caused by year-2000 problems from business insurance policies. As yet, Maine, Massachusetts, and Alaska have not introduced such regulations.

Although many of these exclusions went into effect on April 1, legal experts say many companies renewing existing policies are totally unaware of the changes.

"That's a given [that people are unaware of the exclusions]," said David Schaefer, a principal at Armfield, Harrison and Thomas, an insurance broker specializing in technology risk, in Washington.

Attorneys and analysts say the new exclusions clearly shift year-2000 noncompliance penalties to companies. For instance, a policy for a fire caused by a noncompliant chip in a boiler thermostat may cover the physical damage, but not the ensuing loss of business.

Insurance companies said the exclusions are necessary.

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"The idea behind filing exclusions is that insurers had not collected premiums to cover these [year-2000] perils," said David Dasgupta, a representative for Insurance Services Office (ISO), a New York-based advisory organization for 2,900 insurance companies. ISO drafted the exclusion language, which was approved by state insurance commissioners and agencies.

State insurance authorities in California and Florida declined to comment on the exclusion language or the manner in which exclusions were approved. Large insurance brokers Aon, in Chicago, and Willis Corroon Group, in Nashville, Tenn., also declined to comment.

Some attorneys claim the exclusions are too broad. Jim Kalyvas, chairman of the IT practice at Foley & Lardner, a Los Angeles law firm, said the exclusions spare insurers from losses caused by hardware, software, operating systems, embedded microprocessors, and even products, services, and data.

"They're basically wiping out the potential coverage for failure of the components, or losses or damages resulting," Kalyvas said.

And with the cost of some year-2000-specific policies, companies will be left with few choices to protect themselves monetarily from year-2000 noncompliance.

A recent letter from William Kelly, senior vice president at J.P. Morgan, in New York, and president of the International Federation of Risk and Insurance Management Associations (IFRIMA), addressed IFRIMA directors and said that some proposed year-2000 policies may limit coverage to $200 million for a premium payment of $20 million.

"They are heinously expensive. No one but the largest companies can afford them," Schaefer said.

According to Schaefer, the high premiums and relatively low limits are necessary because the cash reserves of the entire insurance industry in North America total only $380 billion. The Gartner Group, in Stamford, Conn., estimates that year-2000 litigation costs could reach $1 trillion.

Even with such insurance, IT departments will still feel year-2000 pressure as insurers demand convincing statements of readiness.

Analysts and lawyers say the ultimate impact of the exclusions may have to be decided by the courts when companies seek coverage for year-2000 losses.

Blaise Zerega is a senior writer for InfoWorld.