Consider this coordinated approach to loss prevention and risk reduction.

On New Year's Eve in 1996, software controlling an aluminum smelter shut down without warning. As a result, temperature controls in the melters failed, causing more than $1 million in physical damage to the machinery. Two hours later, in another time zone, the problem recurred as another smelting plant entered the new year. Both smelters used the same software, which did not recognize 1996 as a leap year.

These cases, and others like them, demonstrate the physical damage potential of date-related programming -- and illustrate that loss potential is not confined to computers nor the Year 2000 (Y2K) problem. Many industrial policyholders are confused about equipment breakdown insurance coverage and often are unaware that an exposure exists with many types of equipment at various points in time.

Everyone has heard the doomsday prognostications of widespread computer failures on January 1, 2000. While some of the more dire predictions are no doubt fanciful, industrial heat processors should be concerned about potential losses resulting from date-related programming. Mainframe and personal computers are not the only systems that will make for a nervous new year: Date-related programming also affects processes and equipment with programmable logic controls (PLCs). In other words, almost any process has cause for concern. And, in an operating environment where the potential hazards include explosions, fire and loss of life if a temperature control or electronic safety control fails, this concern is a compelling one.
 

Take Action Now

The most important actions any processor can take in advance of January 1, 2000, are risk avoidance and loss prevention. This may appear to be a daunting task, given the extent to which programming codes are embedded in electronic systems. But, the following four steps, if taken now, can help reduce risk and prevent loss:

1. Conduct a thorough inventory.

A good starting point is to conduct a thorough inventory of all equipment -- not just computer systems, but also electronically controlled production equipment, building environmental controls, communications systems, other electronics and software. Key elements of an inventory include:

• What computers and electronic controls do you depend on?
• Who manufactured the systems? Who supplied the software controlling the systems? Use the model numbers to confirm with controls suppliers whether the controls and/or software are Y2K compliant.
• What plant-wide software are you running? Will it impact any equipment on the production line? Is it Y2K compliant?
• How will facilities-related control systems impact the production line? Are the essential building controls Y2K compliant?

2. Research your equipment and its suppliers.

Date-related programming may be embedded in an array of electronic equipment, and a single overlooked component may be enough to bring a system down. As a result, all systems and components should be evaluated. A good source of information is the original equipment manufacturers (OEMs) and software providers who can, if necessary, make recommendations such as testing or upgrades.

Many large temperature and process control suppliers have personnel dedicated to ensuring that their products and installations are Y2K compliant. Check with your controls supplier to determine what resources they can offer.

3. Upgrade or replace.

Systems and equipment that are not Y2K-compliant should be upgraded or replaced promptly. When in doubt about compliance, it may be less expensive to replace a suspect system rather than simply hope that it is compliant. Similarly, convert all archives and databases.

4. Test, test, test.

Many systems can be tested by taking them off-line, setting the date to January 1, 2000, and observing the result. However, be aware that some systems that are not Y2K-compliant may not be able to recover from such a test. Before taking this action, consult with the OEM and/or software provider to determine whether such testing is feasible. And, just to be on the safe side, back up all systems.

Even a thorough inventory, careful analysis and controlled testing may not uncover every potential for equipment failure due to date-related programming. These exposures have given rise to specific Y2K insurance products, but this coverage may be limited, and the premiums and deductibles tend to be high. Instead, given the uncertainty surrounding date-related programming and the high cost of Y2K specific products, a loss prevention program (in combination with equipment breakdown insurance) is vital.

What's Covered? What's Not

Although many industrial processors are focusing their attention on what might happen on January 1, 2000, already there are documented instances of date-related programming causing physical damage to equipment, as the problems at the two aluminum smelting plants demonstrate. The fact that date-related programming has and will continue to cause physical damage illustrates the value of equipment maintenance insurance as a part of a plan to minimize Y2K losses.

In effect, equipment breakdown insurance coverage pays for the financial loss incurred as a consequence of breakdown; but, like all property insurance, it is triggered by physical damage to covered equipment. The inability of a computer or other electronic equipment to recognize a particular date or time does not constitute an accident under the terms of equipment breakdown policies.

Further, equipment is not physically damaged simply because it shuts down or does not operate properly due to date-related programming. A good analogy is an engine that runs out of fuel: While the engine stops running, it has not suffered an accident. Similarly, a computer that was not programmed to recognize a particular date may shut down, but it has not suffered an accident. Rather, like the engine without fuel, it was not given what it needed to continue to operate.

Two hypothetical situations can demonstrate the difference between losses that are covered vs. those that are not covered.

Scenario 1. Suppose a computerized control in a cold storage warehouse is not programmed to recognize Year 2000. On January 1, 2000, the control fails to recognize the date and ceases to function, causing the goods in storage to spoil. Is this a covered loss?

Although there is spoilage (and therefore, loss of product), there is no physical damage to the warehouse or equipment. Because the computerized control shut down, the event does not meet the definition of an "accident"; thus, there is no coverage under an equipment breakdown policy.

Scenario 2. Now consider a slightly different scenario involving the same cold storage warehouse and computerized control. In this scenario, though, the control's inability to function does more than merely shut down the refrigeration system. Instead, the control failure causes a compressor to overheat and seize up. Is this a covered loss?

Because physical damage occurs to covered equipment (the compressor and refrigeration system), this loss would be covered. In addition, the spoilage losses directly resulting from the compressor breakdown also would be covered (subject to the terms of the policy).

Avoid a Nervous New Year

The clock is ticking toward Year 2000, and processors should not delay in addressing the issue of date-related programming. In fact, as dates other than January 1, 2000, can activate problems, efforts to eliminate date-related production stoppages should begin as soon as possible.

Many Y2K events are not covered by property insurance. But, there are circumstances where date-related programming can result in physical damage due to an equipment breakdown. Because of the difficulty in fully ensuring that all exposures are eliminated, having equipment breakdown insurance coverage in place is a sensible precaution you may want to take.