21st Century & CSC Enter $100 Mln. Arbitration Battle

Although it may seem that in the wake of tightened IT budgets and greater ROI scrutiny there would be an increase in the number of disputes between insurers and technology vendors, frequency of contractual disagreements has actually remained stable, despite the economy.

"With technology transactions, it's a fairly regular occurrence that there are misunderstandings and disputes as to who was supposed to do what," says Patrick Hatfield, partner, Lord, Bissell & Brook (Atlanta). "Because software development projects are fairly high-risk transactions, there is a greater likelihood that disputes will arise."

Going to Arbitration

The latest evidence of this reality is the dispute between 21st Century Insurance ($1.4 billion in assets, Woodland Hills, CA) and Computer Sciences Corp. (CSC, Austin, TX). Because it deemed the results of a deal with CSC "a complete and utter failure," says Fiona Hutton, spokesperson, 21st Century, the carrier has commenced an arbitration proceeding against CSC. The carrier contends that since CSC agreed to provide COGEN and 3r insurance software and reportedly didn't deliver the technology, 21st Century is seeking $100 million in the arbitration that will be conducted by the American Arbitration Association (New York). The action is now in its preliminary stages.

Although CSC declined to comment directly on the arbitration, the company referred Insurance & Technology to a statement released in December 2002, in which it countered that it provided state-of-the-art, integrated software systems, including database management, workflow, marketing and insurance processing software, to 21st Century. CSC claims 21st Century currently is using those systems to process its personal automobile insurance business for customers located in Nevada, Oregon and Washington. The carrier offers personal automobile, motorcycle and umbrella insurance in California and auto insurance in Arizona, Nevada, Oregon and Washington.

Hutton of 21st Century confirmed that the carrier is using CSC's solutions in some states, but says the original terms of the agreement have not been fulfilled. "CSC implemented its solutions in some Western states and then it was to convert the California business over," says Hutton. In its official statement, CSC said that it believes that the carrier can implement CSC's software systems to process its personal auto business in California and that it has complied with its contractual obligations. In its statement, CSC also expressed that with 21st Century's cooperation, it believes that the systems 21st Century is using in other states can also be successfully used in California.

So far 21st Century has paid more than $66 million to CSC in licenses, products and services, according to Hutton. The carrier is seeking $100 million in an attempt "to recoup a whole host of business losses that 21st Century has incurred due to delays and failures of the system," she says. "Sixty-six million dollars is a significant amount of money for a system that doesn't work." The insurer began the arbitration proceeding rather than going to court because of the terms of the original contract.