Law: Covering the cost of the Millennium bug

Solicitors' insurers are braced for claims arising from the year 2000, but can't find out how badly they are exposed. By Grania Langdon- Down

MORE THAN 3,000 solicitors' firms have still to fill out questionnaires detailing the precautions they have taken against the millennium bug, even though they risk a hefty fine.

So far, about 65 per cent of the 9,500 firms sent the forms by the Solicitors Indemnity Fund (SIF), which provides solicitors with compulsory professional indemnity insurance, have returned them.

Reminder letters are to be sent out shortly to the rest, as the fund needs to assess its potential exposure to millennium-related claims before it decides what the contributions should be for the year from September 1999.

The questionnaires were sent out in December in response to last summer's decision by Lord Woolf, the Master of the Rolls, that SIF, unlike most other insurers, would have to cover any claims against firms arising from year 2000 claims.

Solicitors are likely to be exposed on two fronts: by failure within their own systems leading, for instance, to missed court deadlines, and by failure to take account of Y2K problems when advising clients - a firm being taken over might turn out not to be millennium-compliant.

SIF, unhappy that the profession as a whole should foot the bill for those firms which have failed to take reasonable precautions, decided to find out just what measures firms have taken as a way of determining exposure. SIF rules impose an obligation on practitioners to ensure that all computer systems which they use or rely on are Y2K compliant and that appropriate advice is given where Y2K issues arise. If those obligations are not met, the fund has a discretion to claw back part or all of any claims it meets.

Firms which do not return the questionnaire could have to pay a "penalty contribution" of a minimum of pounds 3,000, or 10 per cent of this year's insurance premium if it is more than pounds 30,000. The answers, or lack of response, could also influence how much the SIF will recover if a firm is subject to a claim.

However, the definition of Y2K compliance in the questionnaire's notes has run into problems with the British Standards Institution (BSI). The SIF version amends the accepted BSI definition, and the institution has suggested the fund should withdraw the questionnaire because it is concerned that solicitors may rely on the amended definition when giving advice to clients.

SIF spokeswoman Sharon Bolton said: "We would be equally concerned if we felt solicitors were relying on the amended version when giving advice to clients. That was never the intention behind the amendment. Our objective was simply to clarify our guidance notes and we are in discussion with the BSI to see how those concerns can be addressed." She said the whole insurance industry was still "feeling its way" about the millennium issue. The fund had not yet received any Y2K-related claims but she said: "We have to set a contribution and to do that we need information. If we can give a message, it is that we want these forms back. It is in your own interests as much as in ours."

There has been uncertainty over the future of the fund. Its monopoly is being challenged from within the profession, despite the decision by the Law Society earlier this month that it should stay to guarantee consumer protection.

Ms Bolton said: "It would be a nonsense not to send the form back because of some possible litigation about the fund in the future. The millennium issue is not going to go away."

SIF is still considering how it should raise the money to pay for any millennium-related claims. One way would be through an added percentage put onto the contributions paid by the profession as a whole.

"Another way would be to put a higher deductible, or excess, on millennium- related claims, according to a firm's gross fees, regardless of how prepared they are. This would make the process more precise and would not preclude us from using our powers to recoup greater proportions of claims if we felt a firm had been negligent. However, using higher deductibles in this way would require a change to the rules," Ms Bolton added.

Barristers have to insure themselves through the Bar Mutual Indemnity Fund. Stephen Hockman, QC, chairman of the Bar Council's practice, management and development committee, said there were no plans for higher contributions or deductibles.

"We have been working in close collaboration with the two main software providers to chambers. Since it is in the suppliers' as well as chambers' interests to achieve any updating, we are fairly confident that the necessary arrangements are in place."

Adam Taylor, a partner at Withers, specialises in legal aspects of Y2K. He found SIF's questionnaire "tricky". While it was difficult drawing up a questionnaire to suit everyone from a one-man band to a big City law firm, he felt some of the questions were unclear and the options for answers were limited.

"There was no scope for explanation. I wonder how clear a picture it is going to give," he said.

Mr Taylor believed claims against solicitors would centre on when they should reasonably have been aware of Y2K issues and taken them into account. That date would have to be set by test cases but was likely to be some point in 1997 when millennium issues started receiving extensive media coverage. Mr Taylor said cases were starting to come to court in the US, but he would advise clients here to consider other ways of resolving any disputes - such as mediation - as a way of keeping time and costs down, while at the same time protecting their legal position.

CEDR, the Centre for Dispute Resolution, launched its Millennium Accord initiative in December, with the emphasis on "timely dispute prevention rather than retrospective redress". It has already successfully acted as mediator in two millennium disputes.

In one case, a company was suing a supplier after it turned out that it had been sold software which was not Y2K compliant. There was pounds 40m at stake.

The two parties settled after two and a half days of mediation. They had previously spent 16 months in litigation. The cost of CEDR's services was pounds 18,750 per party, with the defendant estimating a financial saving of between pounds 750,000 and pounds 1.5m and a six-month saving in senior management time.

Taylor said: "I don't think solicitors are more vulnerable than any other professions to Y2K claims. However, there is definitely a potential exposure for those who do not take Y2K into account when they advise clients. There are no excuses for that now."

How to protect against millennium claims

There are practical steps that solicitors should be taking to protect themselves against claims that are related to the millennium bug.

The Solicitors' Indemnity Fund rules impose extensive obligations on solicitors to take Y2K into account in all matters when advising clients.

Firms should ensure that their staff, particularly those dealing with transactional work, are fully briefed on the problem.

When it comes to solicitors' own systems, audits should have been completed or at least be well underway. If not, firms will have to prioritise the work because time is running out.

That means looking at the systems which will cause the most problems if they fail - word processors, telephones, account systems, debt collection programmes, case management systems. It is also important to check the computer systems covering the building itself - security, lifts, and air conditioning are all at risk.

Adam Taylor of Withers said: "There is no time left to haggle with landlords or computer suppliers over liability. The work has to be done now. However, it is also very important to protect yourself in case you need to take action later. For example, check legal time limits on bringing a claim as these could run out before 2,000.

"In many cases, suppliers are offering Y2K upgrades, frequently at a price and frequently at a very high price. There may be a case to say the user shouldn't pay for those upgrades because they were not supplied with a satisfactory system in the first place.

"You may have to go ahead and get the upgrade but, at the same time, reserve your rights under your existing contract so you are not acquiescing in any breach of contract there may have been.

"But, remember, the priority has to be achieving compliance."