vice must be inherent in the property for which recovery is sought.'" American Home Assurance Co. v. J.F. Shea Co., Inc., 445 F. Supp. 365, 368 (D.D.C. 1978) (quoting Employers Cas. Co. v. Holm, 393 S.W.2d 363, 367 (Tex.Civ.App. 1965)).
The Port of Seattle court appears to be the only court to have dealt with inherent vice as it relates to the Y2K problem. While its discussion on the inherent vice issue is neither extensive nor binding, the Court finds it instructive. There, the court determined that the Y2K problem was an excluded inherent vice "because the date field is an internal quality that brought about its own problem." Port of Seattle, 48 P.3d at; 339.
In American Home Assurance Co. v. J.F. Shea Co., the court determined that the inherent vice exclusion did not apply to the threatened collapse of a system supporting an excavation site, where the threat was most likely due to faulty plane slippage of the earth. The court explained that "[b]ecause the insured property in the case at bar did not contain its own seeds of destruction but rather was threatened by an outside natural force, the exclusion for inherent vice" cannot apply. American Home Assurance Co., 445 F. Supp. at 368.
Here, however, the insured property, GTE's computer systems, do contain their own "seeds of destruction" — that is, the two-digit date limitation. Moreover, GTE is not threatened by any external force; the threat is entirely internal. The Court finds that the exclusion for inherent vice is applicable here.
GTE disputes the applicability of both the design defect and inherent vice exclusions, but it does not reveal any evidence within the record to support its argument. Instead, GTE contends that these exclusion arguments are premature at this point in the litigation. Pointing to Motter v. Everest & Jennings, Inc., 883 F.2d 1223 (3d Cir. 1989), GTE claims that design defect is a technical issue requiring expert testimony and possible determination by a jury. GTE mistakenly relies on Motter, a products liability action, for the standards applicable in this insurance contract dispute. GTE has not demonstrated that such standards are applicable in this case. The Court also takes issue with GTE's contention that the factual issues regarding design defect are reserved for later stages of this litigation. The Court sees this issue as inextricably tied to the Phase I issue of coverage under the policies.
GTE also argues that the use of a twodigit date designation cannot be a design defect because it is a "best practice." For support, GTE relies on Leslie v. United States, 986 F. Supp. 900 (D.N.J. 1997), aff'd 178 F.3d 1279 (3d Cir. 1999). Leslie, however, is another products liability case, and does not involve exclusionary language in a property insurance policy. The Court finds no merit to GTE's proposition regarding best practices. The Court further notes that one of GTE's own witnesses stated that the use of the two-digit date designation was not a best practice, but instead, just a common practice. (Catenacci App. Vol. 5, Ex. 87, Cohen Dep., at 42:19-42:22.)
GTE further contends that other courts have determined that the Y2K problem does not stem from a design defect. GTE points to Kaczmarek v. Microsoft Corp., 39 F. Supp.2d 974 (N.D.Ill. 1999) to support this proposition. In Kaczmarek, the plaintiff tried to bring a class action against Microsoft, alleging that Microsoft sold software that claimed to be, but was not, Y2K compatible. The court determined that the software, a software development program, provided two date field settings. See id. at 976. In the "Century On" setting, the programmer was required to use a four-digit date format so that the program would understand both twentieth and twenty-first century dates. If a twodigit date format was used in this setting, the program would assume a twentieth century date. In the "Century Off" setting, the programmer could use a two-digit date format, and the program would assume a twentieth century date. See id. The Court found
nothing inherently wrong with computer software that
assumes a two-digit year entry means the Twentieth
Century, particularly when the default setting is
disclosed as part of the contract. Moreover, FoxPro
is Y2K compliant; a developer can use the Century On
feature to provide a four-digit field when a client
needs an application that will process dates
occurring later than December 31, 1999. . . .
Id. at 977. The case has no bearing on the facts at hand here, and does not support GTE's argument.
Finally, GTE contends that its computer systems faced risk from Y2K related events caused by external systems, and therefore, its claim cannot be barred by the design defect or inherent vice exclusions. According to GTE, it faced the risk that its systems would be corrupted or fail because of its reliance on third party systems with their own date recognition problems, and it also faced the potential for loss resulting from the negligence or inattention of third-party vendors, and the potential for loss from fires or vandalism that could have resulted from Y2K related problems.
This argument gives the Court pause. GTE's statements of material facts describe GTE's various problems with external systems. For example, GTE describes how its systems faced potential failure as a result of "corrupt or destroyed data stemming from interactions with computer systems and networks outside of GTE that were affected by the Y2K rollover" (GTE's Rule 56.1 Statement ¶ 39), and also, that "GTE faced a separate and distinct risk of Y2K issues from systems that were designed and maintained by third party vendors." (GTE's Supplemental Rule 56.1 Statement ¶ 83). GTE further explained that even after it corrected its own Y2K issues, it "might still have suffered Y2K related failures if they relied on defective third-party sources of data. If an external system had corrupted or distorted data it would be integrated into GTE's data collection and storage systems and corrupt or distort valid data." (Id. ¶ 84).
While the Court does not discount the fact that GTE might have faced a legitimate threat from external systems, GTE has failed to identify how its Y2K efforts were intended to prevent such external threats. None of the citations to the record contained in GTE's statement of material facts describes any measures taken to combat these external problems.
GTE claims that it faced a threat of Y2K-related loss from systems designed and maintained by third party vendors. The record, however, does not reflect any action taken by GTE to mitigate that threat. GTE does explain that it contacted its third party suppliers to determine whether their products faced any Y2K compliance issues, and in certain cases, the suppliers either offered GTE replacement products or directions for fixing any potential problem with the product. See Catenacci App. Vol. 2, Ex. 11 at 40. In those cases, however, GTE obviously refers to systems designed or provided by third parties but maintained by GTE. The Court fails to see why such systems would not fall under the design defect or inherent vice exclusions, just as the Court fails to see what efforts GTE took to prevent loss threatened by systems wholly maintained by third parties.
As to GTE's contention that it faced threatened losses from external systems generating corrupted data, GTE has not identified any part of its Y2K program intended to prevent those types of losses. The record before the Court demonstrates that GTE's Y2K program was intended to, and in fact, succeeded in, remediating its internal system problems. When asked whether "any part of GTE's Y2K remediation program involved something other than the correction, repair, improvement, modernization, upgrade or maintenance of GTE's computer systems and software, including hardware and embedded chips," Armen Der Marderosian, GTE's senior vice president of technology and systems, replied that it did not. (Catenacci App. Vol. 5, Ex. 89, Deposition of Armen Der Marderosian at 311:23-312:4.) GTE's 1996 Year 2000 Year End Report summarized the Y2K program:
The program covers GTE's internal business support
systems, products and services that GTE provides its
customers, the GTE network infrastructure, and all
end user computing assets. Current analysis of the
Y2K issue throughout GTE has shown that every
business unit of GTE is impacted by this issue.
Without appropriate, timely, coordinated action our
major customers could suffer denial of service, the
delivery of incorrect data, or key system failures.
(Catenacci App. Vol. 4, Ex. 79 at PMO 1704.) The report further identifies several key purposes of the Y2K program, including:
[to] ensure that operational and functional
continuity of all GTE business units is achieved
across the millennium date change of 1/1/2000;
[to] minimize the overall cost of Y2K system
migration by pooling resources where feasible, and
through standardization of process and methodology
across business units;
[to] ensure interoperability and achieve date
standardization of systems across and between
business units; and to demonstrate confidence in our
company, and in our industry, that this business
threat can be met and successfully overcome without
panic or decline in shareholder value.
(Id. at PMO 1704-05.) The record does not reflect that the program was intended to eliminate any external threats, as described by GTE. Based on this record, the Court finds that GTE's Y2K limitation falls under the design defect and inherent vice exclusions.