The Illinois Bankers Association is pushing state lawmakers to protect officers and directors from lawsuits relating to year-2000 conversions.

The trade group has drafted legislation that would allow customers to sue only the bank-not individual employees, officers, or directors-should its computer system malfunction on Jan. 1, 2000.

The proposed bill, backed by the Community Bankers Association of Illinois, also would protect the bank from lawsuits filed by "a customer of a customer." For example, if a business fails to deliver its product to a customer on time because of an error in the business's bank account, the customer would not be allowed to sue the bank for damages.

"We need to ensure that banks are not going to be subject to unlimited liability," said Linda Koch, the Illinois Bankers' vice president of government relations. "We are afraid there is going to be a free-for-all."

Banks nationwide are scrambling to meet federal guidelines requiring them to complete renovations of their information systems by Dec. 31, 1998, to allow time to test new systems before the millennium. Because many computer systems were programmed to identify the year by the last two digits alone, computers may assume the year "00" is 1900, not 2000.

While other industries, such as computer software manufacturers in California, are trying to limit their own liability through new laws, the Illinois Bankers Association's proposal is unique for the banking industry, said Matthew Street, general counsel for state issues at the American Bankers Association.

Mr. Street said the issue of directors' and officers' liability has blossomed only in the last couple of months. Because most states' legislative sessions are winding down, he said, only those states with extended sessions, such as Illinois, are in position to take action.

Similar proposals have been discussed in Congress, but so far no legislation has been introduced.

In Illinois, Ms. Koch said the bill would lessen banks' and individuals' legal exposure in a state where class actions are common.

She added, however, that because this is an "emergency only" session of the Illinois legislature-and with anticipated opposition from trial lawyers-there's no guarantee the bill would be considered this year. The session has scheduled to end in late May.

Thomas P. Vartanian, managing partner at Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C., said community banks may face considerable liability it their computers fail because of a date-conversion error. Small banks may be hit hard by lawsuits, because they cannot afford insurance that covers losses related to the year-2000 problem, Mr. Vartanian said.

"Line up every depositor, borrower and third party you do business with. They are all potential plaintiffs," he told a group of bankers in Chicago on Tuesday at a conference sponsored by America's Community Bankers.

Still, despite the concern over year-2000 exposure, few directors and officers are seeking protection. One popular D&O insurance provider, St. Paul (Minn.) Fire and Marine Insurance Co., does not even offer coverage for losses related to year-2000 problems, a spokeswoman said.

Of course, the best protection from lawsuits is to correct date conversion problems early and document the banks' efforts. As Mr. Vartanian put it: "You're on notice that you have this problem. If you solve the problem, you won't have any legal difficulty."

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