Gte Corp. v. Allendale Mutual Ins. Co.

• Decision Date: 21 June 2004
• Docket Number: No. 03-2139.,03-2139.
• Citation: 372 F.3d 598
• Parties: GTE CORPORATION, Appellant v. ALLENDALE MUTUAL INSURANCE COMPANY; Affiliated FM Insurance Company; Allianz Insurance Company; Federal Insurance Company; Industrial Risk Insurers.
• Court: U.S. Court of Appeals — Third Circuit

372 F.3d 598

GTE CORPORATION, Appellant v. ALLENDALE MUTUAL INSURANCE COMPANY; Affiliated FM Insurance Company; Allianz Insurance Company; Federal Insurance Company; Industrial Risk Insurers.

No. 03-2139.

United States Court of Appeals, Third Circuit.

Argued December 9, 2003.

Decided June 21, 2004.

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Robert F. Ruyak (Argued), Jerrold J. Ganzfried, Howrey, Simon, Arnold & White, Washington, DC, for Appellant.

Henry J. Catenacci (Argued), Podvey, Sachs, Meanor, Catenacci, Hildner & Cocoziello, Newark, NJ, for Appellees Allendale Mutual Insurance and Afilliated FM Ins. Co.

Mary K. Vyskocil (Argued), Simpson, Thatcher & Bartlett, New York, NY, for Appellee Industrial Risk Insurers.

William N. Erickson, Robins, Kaplan, Miller & Ciresi, Boston, MA, for Appellee Allianz Ins. Co.

Richard M. Mackowsky, Cozen & O'Connor, The Atrium, Philadelphia, PA, Bernadette N. Gordon, Cozen & O'Connor, Newark, NJ, for Appellee Federal Insurance Company.

Before: AMBRO, FUENTES and CHERTOFF, Circuit Judges.

OPINION

CHERTOFF, Circuit Judge.

Plaintiff-Appellant GTE Corporation ("GTE") seeks coverage for costs and expenses incurred in remediating its computer systems to avoid Year 2000(Y2K) related date recognition problems. GTE contends that it is entitled to such costs and expenses pursuant to insurance policies entered into with Defendant-Appellees Allendale Mutual Insurance Company ("Allendale"), Affiliated FM Insurance Company ("Affiliated"), Allianz Insurance Company ("Allianz"), Federal Insurance Company ("Federal"), and Industrial Risk Insurers ("IRI") (collectively "Insurers"). The District Court granted summary judgment in favor of the Insurers. Specifically, the District Court concluded that: (1) GTE's Y2K remediation falls under the design defect and inherent vice exclusions of the policies; (2) the exceptions to these exclusions were inapplicable; and (3) the Sue and Labor and Preservation of Property Clauses (hereinafter referred to collectively as the "Sue and Labor Provisions") of the policies did not entitle GTE to coverage for costs incurred to prevent an excluded loss. For the reasons stated below, we will affirm the District Court's grant of summary judgment.

I.

A. The Y2K Problem

The approach of the year 2000 evoked fears of various millenarian catastrophes. One such fear was the "Y2K problem," and it arose from the entirely predictable fact that the passing of the year 1999 resulted in a change in all four digits of the written representation of the succeeding years.

Historically, software was routinely programmed omitting the first two digits in year dates. See, e.g., Steve Lohr, Technology and 2000-Momentous Relief: Computers Prevail in First Hours of '00, N.Y. Times, January 1, 2000, at A1. There were a number of reasons for this traditional use of two-digit years as an ingredient of software programing. "The two-digit shortcut originally was taken to conserve space that a four-digit entry would have occupied in a computer's memory." Bruce W. Foudree, The Year 2000 Problem and the Courts, 9 Kan. J.L. & Pub. Pol'y 515, 517 (2000). Particularly in light of the high cost of storing information in the early days of computers, this shortcut provided numerous benefits, including "allow[ing] substantial cost savings," enabling "[m]anufacturers ... to make chips available to consumers at more affordable prices," and "shortening the production time for chips and software." Id.

With the approach of the year 2000, however, experts voiced dire predictions that the four-digit changeover could utterly upset computer programs. This problem, commonly referred to as the "Y2K problem," is essentially summarized as follows:

[C]omputers have trouble distinguishing between years in the 1900s and years in the 2000s. Until comparatively recently, date-sensitive computer programs identified years by their last two digits. For example, using the standard format of mm/dd/yy, 1988 was entered as "88" by programers. Thus, on January 1, 2000, many computers and equipment which contain computer chips ("embedded chips") may not be able to recognize the difference between 1900 and 2000 since both are abbreviated as "00."

Foudree, supra, at 516-17; see also Jeffrey W. Stempel, A Mixed Bag for Chicken Little: Analyzing Year 2000 Claims and Insurance Coverage, 48 Emory L.J. 169, 177 (1999).

Commentators acknowledged that while "[n]o one can accurately predict the scope, severity, or duration of Y2K disruptions..., Y2K-related failures have the potential to touch every sector of society and cause widespread and systemic economic failures and public panic." Foudree, supra, at 517-18. A likely scenario of the consequences of the Y2K problem was described as follows:

The most common scenario for a Y2K problem involves a computer reading two-digit dates of "00" or "01" and either being stymied (if an inanimate object can be stymied) or reading the dates erroneously as "1900" or "1901," a misreading that in the estimation of many has "potentially devastating results."

For example, information systems may lock or freeze, causing interruptions and emergency repairs or perhaps even requiring the discarding of old equipment and its replacement with new. Misread dates could lead to lost funds, improperly administered medicine, or failure to replenish inventory. For example, an insurance policy could be canceled, a lease terminated, or astounding late fees assessed when a computer mistakenly reads the date "2000" as "1900."

Stempel, supra, at 177 (internal citations omitted).

These fears prompted the undertaking of extensive Y2K remediation efforts. Corporations and governments invested more than $250 billion worldwide in addressing the Y2K program, with the United States government alone spending $8.4 billion. Lohr, supra, at A1.

In retrospect, we now know that catastrophe did not materialize, perhaps in part because of the success of remediation efforts. See, e.g., Lohr, supra, at A1. Nevertheless, the benefit of hindsight should not cloud our appreciation of the widespread perception, in the years leading up to 2000, that failure to correct the Y2K problem could result in disastrous consequences. Moreover, even those who did not predict "catastrophic" consequences cautioned that the Y2K problem was "serious enough to require correction if contemporary business is to continue to function in the twenty-first century." Stempel, supra, at 172.

B. GTE's Y2K Efforts

Because this is an appeal from a grant of summary judgment, we must view the evidence in the light most favorable to the nonmoving party GTE. See Marino v. Indus., Crating Co., 358 F.3d 241, 247 (3d Cir.2004).

GTE is a worldwide leader in telecommunications services, including local telephone, wireless, and internet services. GTE operated a substantial number of computer based systems and networks which employed the common practice of two-digit date recognition. As the new millennium approached, GTE identified several Y2K-related threats. Such harms included the prospect that GTE's computer programs and external programs interacting with GTE's systems would crash immediately, make erroneous calculations while continuing to process, endlessly churn before taking a "time out" or shutting down, or process data correctly to no avail. GTE's Rule 56.1 Statement of Material Facts ¶ 38, J.A. at 3118 (citing GTE 2000 President's Operations Review, p. CORP PMO 1893938 (Exhibit 35)).

In an effort to protect its expansive network, GTE undertook an extensive Y2K Program at a cost of about $350 million to protect data, records, and to ensure continued business operations. In a December 1998, corporate disclosure document, GTE explained its activities as follows:

GTE's Year 2000 program is focused on both information technology (IT) and non-IT systems....

. . . .

GTE's Year 2000 program has been organized into five phases as follows: Awareness: program definition and general education; Assessment: analysis and prioritization of systems supporting the core business; Renovation: rectifying Year 2000 issues; Validation: testing the Year 2000 solutions; Implementation: placing the tested systems into production.

GTE Corp. 10-K for 12/31/98, J.A. at 3979-80.

Notably, GTE appears to have been aware of the potential threat posed by the Y2K problem as early as 1994. In December of that year, GTE Service Corporation published a report entitled Algorithmic Anarchy: Chaos in the Year 2000, identifying the potential impact of the Y2K problem on GTE, and outlining preliminary strategies for addressing the problem. See J.A. at 1395-1428. In 1995, GTE established a Program Management Office (PMO) "to oversee the planning and execution of a corporate-wide Year 2000 initiative," as well as a "Master Schedule for GTE's Year 2000 Program." GTE Millennium 2000 Program-Year 2000 Year End Report-1996 (December 10, 1996), J.A. at 1598, 1602 ("1996 Year End Report"). Moreover, in 1996 GTE completed the Proposed Criteria for "Century Compliance", "provid[ing] information regarding the scope of the ... (Y2K) challenge and ... identif[ying] and discuss[ing] four suggested criteria for consideration in assessing century compliance." J.A. at 1477. From the inception of its Y2K program, GTE exhibited an awareness of the tremendous resources required to address the date-recognition problem. For example, the 1996 Year End Report reported that the "cost of the Year 2000 Program is currently estimated to be $361 [million]." J.A. at 1598.¹

C. Insurance Policy Provisions

GTE contends that in an effort "[t]o protect its expansive network from damage and destruction, [it] ... contracted for extensive insurance protection." Appellant Br. at 11. The insurance policies to which GTE refers were sold in 1996 and 1997. As the District Court explained, GTE was actually insured by a "panel of insurers" who provided different percentages of coverage on the primary layer and...