Cyberinsurance Law Blog

October 17, 2018

“Voluntary Parting is Not Sweet Sorrow”

It’s (approximately) the ides of National Cybersecurity Awareness Month. Yes, it’s a thing. A 15-year old thing. Appropriately, I spent last night at a cybersecurity seminar hosted by Citrin Cooperman (thanks, by the way). It sparked this first of a two-part blog post about the “voluntary parting” exclusion. Get your popcorn ready.

First, the scene. We’re at the Union League in Philadelphia. It’s kind of dark, because it’s always kind of dark in there. Everyone is wearing coats, because everyone has to wear coats there. Despite the lighting and formality (to which I should really be more accustomed in my 11th year as a lawyer), the panel is exceptional. An ethical hacker demonstrates the ease with which he can figure out all of our passwords using software that makes billions of guesses per second. A valuation expert explains the process of quantifying cyber incident losses. Of most interest to me, the general counsel of a sophisticated insurance brokerage offers specific claims insights (no names, of course).

Consistent with the narrative that many of us are hearing, she emphasizes that carriers are by and large responding quickly to, and paying, the majority of cyber claims. So, I ask: “Are there any exclusions that you are seeing create some deviation from that narrative, maybe exclusions that could be addressed during the front-end application process given the tailored nature of cyber policies?”

September 28, 2018

“In Other News…DOJ Issues Cyber Incident Response Framework”

By Jordan M. Rand

This month, the Department of Justice issued a fairly comprehensive set of pre and post cyber security incident recommendations. For all you total geeks, you can get the whole thing here. For those of you preoccupied with, well, other news, here’s some highlights.

Pre-incident, the DOJ recommends having a breach response plan. We’ve all heard this repeatedly at this point, and many companies and firms still do not have actionable response plans. Some of the important components of these plans highlighted by the DOJ include: (1) identifying your most vital resources and prioritizing their protection; (2) having a clear internal and external reporting structure that focuses on containing the incident, mitigating its effects and preserving information to later understand the scope and source of the incident; (3) identifying and establishing relationships with applicable law enforcement authorities and regulators who have jurisdiction in your industry or jurisdiction; and (4) finally hammering out appropriate policies and procedures for the use of and access to key information assets, as well as investing in appropriate technical protections.

Post incident, DOJ basically recommends – wait for it – following the plan you established pre-incident.

July 31, 2018

“The New Millennium, and the Old CGL Policies”

By Jordan M. Rand

The war to find data breach coverage under commercial general liability (CGL) policies continues to wage. In St. Paul Fire & Marine Insurance v. Rosen Millennium, Inc. et al., filed in March 2017 (M.D. Fla. 6:17-CV-00540), an insurer is seeking a declaration that neither the insured’s 2014-15 nor its 2015-16 CGL policy cover data breach costs and a couple million dollars worth of PCI fines.

In 2016, the insured, a hotel, discovered that its payment network had been compromised by malware between September 2014 and February 2016, resulting in the disclosure of customer credit card information. The hotel first tendered to Beazley, its cyber insurer, but Beazley denied coverage on the ground that the “occurrence” happened prior to the applicable retroactive date of the hotel’s 2015-16 policy. More on those notorious retro dates here.

The hotel turned to its CGL carrier, St. Paul, which denied coverage for a variety of reasons. Two are especially noteworthy. First, St. Paul argues that the ready and known availability of cyber insurance for data breach losses is itself an indication that CGL policies are not intended to cover those losses. Second, St. Paul points out that the insured actually purchased cyber insurance since 2015-16. Relying on cases holding that courts should construe insurance policies so as not to find duplicative coverage, St. Paul argues that the CGL policies must be interpreted so as not to provide coverage for data breach losses because the insured’s Beazley policy did provide that coverage.

June 27, 2018

To Be ExSPECted? Or not to be?

By Jordan M. Rand

Like a brown-paper-bag-wrapped birthday present, the Fifth Circuit’s June 25th decision in Spec’s v. Hanover arrived in my in-box with a resounding ‘meh.’ You see, I get daily emails from Westlaw attaching opinions that may or may not implicate cyberinsurance coverage law. I use the broadest search terms imaginable to make sure I don’t miss anything by being under-inclusive. And when you ask for everything, you get, well, everything. Most days I can tell from the caption of the attachment whether it’s a case I should read. Most days, it isn’t.

But today the Fifth Circuit redefined the fairly typical contractual liability exclusion in the cyberinsurance context. The fact pattern is common. Retailer hires credit card processor. The processor says, ‘ok, we’ll take your business, but you’ll sign a contract that makes you responsible if anything goes wrong.’ The retailer has no choice because you need a processor and they all use the same liability shifting language in their contracts. Then the data breach…

Following the breach, the Payment Card Industry (PCI) comes down on the processor with considerable fines and enhanced security requirements. The processor passes both along to the retailer. The retailer is in the hole, big time.

June 14, 2018

Living Too Social in the Education Industry?

By Jordan M. Rand

The 2018 Verizon Data Breach Investigations Report indicates that in the education industry (yes, it’s an industry), the most prevalent type of data breach is “social attacks.” What’s a social attack?

Phishing is a social attack. That’s when you get an email with a link or attachment that just begs to be clicked. And clicking is the functional equivalent of leaving your front door open when you go on vacation.

A more nuanced social attack is now referred to as “pretexting.” This is sort of like phishing, though it involves more detailed back-and-forth dialogue with the malicious actor, who often takes on a specific persona to facilitate the scheme. As Verizon more eloquently explains, pretexting is the “creation of a false narrative to obtain information or influence behavior.” Think impersonating executives or your Facebook friends.

May 29, 2018

The Data on (Breached) Data: Chubb Shares Two Decades of Cyber Claims Data

By Jordan M. Rand

Since 2016, Verizon has annually declined to estimate the average cost of a data breach. Verizon reasons that since there are many variables that can determine breach cost, there is no reliable “average” data point. There are, however, identifiable factors that we know impact breach cost, like industry sector, threat actor, number of records, impacted data type etc. So, the more we know about a particular entity’s risk profile, there better equipped that entity is not only to protect itself but also to predict the potential cost of a breach.

Enter Chubb’s Cyber Risk Index. It’s 20 years of claims data, organized by industry, annual revenue and time period. Since industry sector and company size are significant differentiators in the context of data breach analyses, this tool lets companies hone in on meaningful data about the nature and extent of their data breach risk. And it’s free, whether you’re insured by Chubb or not.

I played with the interactive index a bit and here are a few interesting data points:

May 21, 2018

Colorado Strengthens Consumer Privacy Protections

By Jordan M. Rand

On May 18, 2018, the Colorado legislature sent HB 18-1128, an Act Concerning Strengthening Protections for Consumer Data Privacy, to the governor’s desk for execution. The bill is one of a number of recent efforts by states to respond to a slew of high profile breaches announced this year, including Equifax, Facebook, Panera Bread, Under Armour and – well, you get it.

The bill mimics a trend of inching toward the heightened and more specific standards employed by the EU’s General Data Protection Regulation. For example, HB-18-1128 replaces an ‘as soon as practicable’ breach notification requirement with a deadline of not later than 30 days from the date a breach is determined to have occurred. That’s more latitude than GDPR’s seemingly impossible 72-hour time limit (where feasible, of course), but it is another indication of regulators’ insistence on firm, identifiable timelines.

Also like the GDPR, the Colorado bill explicitly mandates that data is maintained “no longer than needed,” an example of the growing trend toward data minimization. With respect to security measures themselves, the bill requires “reasonable security procedures and practices that are appropriate to the nature of the personal identifying information and the nature and size of the business and its operations,” a ‘commercially reasonable’ standard of sorts that also mirrors the GDPR (appropriate technical and organizational measures in light of a host of factors). Want one more similarity? The bill requires covered entities to mandate implementation of reasonable security measures by third party service providers, another trend reflected both in the GDPR and newer legislation being passed or proposed around the country.

September 26, 2017

“To Be ExSPECted? Contractual Liability Exclusion Bars PCI Fine Coverage Again”

By Jordan M. Rand

In Spec’s Family Partners v. The Hanover Insurance Company, the Southern District of Texas became the second court to grapple with the interaction among Payment Card Industry (PCI) fines, payment card processor contracts and the infamous contractual liability exclusion that is still present in many cyberinsurance policies.

You can read about the first court to do so here. Spoiler: also no coverage.

Spec’s, a family-owned retail chain, suffered two data breaches of its payment card system resulting in the loss of customer information and credit card numbers. Spec’s processed its credit transactions through a third party, First Data Merchant Services. Following the breaches, First Data was fined almost $10 million by MasterCard and Visa. First Data invoked the indemnification provision in its processor agreement and demanded that Spec’s pay the fines.

July 11, 2017

“I’m a Little Short – Gladly Pay You Tuesday?”

By Jordan M. Rand

Solvency. It means you can pay your tab. Cyber attacks are occurring with greater frequency and effectiveness, resulting in an ever-increasing bill. The cyberinsurance market is booming, but will policy premiums and carrier reserves keep pace with the cost of claims?

It’s a fair question.

Consider the magnitude of loss problem first. Once upon a time, to steal from a bank, you had to ride a horse, drive a car, take an Uber – whatever – and enter the bank. Now, automated cyber attacks can launch innumerable attempts per hour, with likely anonymity and without the constraints of physical travel or the risks that follow telling everyone to get on the ground. I suppose you could still create a hostage scenario to shut down a casino for a while, but a distributed denial of service attack targeting an online gaming platform is easier, less risky and potentially far more damaging. In the Dyn, WannaCry and the recent Petya (or not Petya) attacks, we saw how far-reaching a ‘single’ attack can be. Fact: It’s easier and less risky to do more damage now than ever before. Insureds are more vulnerable as a result.

February 23, 2017

“3 Tips for Public Pension Funds”

By Jordan M. Rand

On Tuesday, I was privileged to be part of a panel discussing cyberinsurance for public pension funds at Kessler Topaz’s Evolving Fiduciary Obligations for Institutional Investors conference, joining Victoria Hale, General Counsel of the Denver Employees Retirement Plan, and pension attorney Chris Waddell. We emphasized that the cyberinsurance procurement process is unique as compared to the renewal of traditional lines. The coverage is highly negotiable and definitely not one-size-fits-all. Here are a few pension-fund specific tips.

First, make sure intentional employee misconduct is covered. Insider misuse is among the most prevalent causes of data breaches for financial and public institutions. Yet, because cyberinsurance forms largely trace their roots back to commercial general liability policies, some of them still contain the traditional ‘intentional acts’ exclusion that bars coverage for an insured’s intentional misconduct. To make sure that your policy covers one of the most common breach causes, push back on this exclusion. Carriers will typically agree to a carve-out for ‘rogue employees,’ or will limit the definition of “insured” to employees only when acting within their scopes of employment. Either should leave coverage in tact when employees purposefully misbehave.

Second, be wary of cyber-endorsements to E&O and D&O policies. These endorsements are presented as low-cost alternatives to stand-alone cyberinsurance, but, as I covered here, you may be purchasing dangerously limited coverage. Many of these endorsements cover only third party risks – i.e., the class action lawsuit filed by individuals whose data has been compromised. This is likely not the most significant risk faced by funds. In fact, the most expensive elements of a data breach for public and financial institutions are legal advice for breach notification, forensic IT work to identify the problem and fix it and the breach notification itself, which generally costs $2-3 per notice recipient. Cyber-endorsements can be inexpensive, but they are only valuable if they contain an appropriate mix of first and third party coverages, the former of which must include breach coaching, IT response and breach notification.