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Lisa R. Lifshitz

Is cyber-liability insurance the answer to data breaches?

There is no doubt the world can be a scary and threatening place in which to do business. Cyber attacks are on the rise. Estimates show cybercriminals unleash 3.5 new threats targeting small and medium businesses every second.

Small businesses are now the target of 31 per cent of all attacks, a three-fold increase from 2011. And 29 per cent of small businesses have experienced a computer-based attack that affected their reputations, involved the theft of business information, resulted in the loss of customers, or experienced network and data centre downtime.

Verizon recently published its “2015 Data Breach Investigations Report,” which highlighted a number of interesting trends. The top three industries affected by cyber attacks are public (public admin, justice, public order and safety activities, electric, gas, and other utilities), information (publishing industries, software publishers, motion picture and sound recording industries, broadcasting, telecommunications, data processing, and hosting and related services) and financial services (finance and insurance, securities, brokers, banks, credit unions, and insurance). In 60 per cent of cases, attackers are able to compromise an organization within minutes.

Verizon also reported there were an astounding number of malware events (170 million) across all organizations — approximately five every second. In 2014, POS intrusions made up 28.5 per cent of attacks, while crimeware made up 18.8 per cent, cyber-espionage 18 per cent, and insider misuse 10.6 per cent. Denial of service attacks were only 0.1 per cent of incidents reported.

In 2013, phishing was associated with over 95 per cent of incidents attributed to state-sponsored actors and for two years running, more than two-thirds of incidents have featured phishing. The report estimates 23 per cent of recipients now open phishing messages and 11 per cent click on attachments. Nearly 50 per cent open e-mails and click on phishing links within the first hour.

Companies apparently are slow to install patches. Interestingly, for the overwhelming majority of attacks exploiting known vulnerabilities, the patch had been available for months prior to breach — 99.9 per cent were compromised more than a year after the vulnerability was published!

The report also revealed some interesting statistics. For example, Verizon estimated 68 per cent of breaches took months (62 per cent) or years (four per cent) to discover and 69 per cent of breaches were discovered by an external party (nine per cent by customers).

Insider misuse continues to be a problem: 14 per cent of attacks involved insiders and 50 per cent of these were former employees using old credentials.

The cost of managing and mitigating data breaches also continues to grow. The Ponemon Institute 2014 global cost of data breach study estimated the average cost of a data breach increased 15 per cent in 2014 and in the U.S., the average cost to a company was $US3.5 million. In 2014, data breaches ranged in cost from $US1.6 million to $US61 million.

Given these statistics, it is not surprising the cyber-liability insurance market is booming. Insurer Lloyd’s of London noted the cyber-insurance market has seen a 50-per-cent year-over-year increase in applications during the first three months of 2015, as recently reported by American Banker magazine.

Several high-profile cases, including one data breach involving Target Corp. ($US162 million in expenses across 2013 and 2014 relating to a data breach that affected 70 million customers), have demonstrated that data breaches are not just an IT problem anymore. They have become a responsibility for a company’s board of directors and audit committees.

As corporate directors are also waking up to the idea their traditional insurance policies may have gaps and they may find themselves on the other end of statement of claim for breaches of the duty of care and fiduciary duties, it is not surprising that there is increased in interest in this specialty product.

Recently, a U.S. shareholder launched a shareholder derivative action against directors of Wyndham Worldwide Corp., which had suffered three data breaches resulting in the theft of credit card information of more than 60,000 customers.

Plaintiff Dennis Palkon alleged the entire board, president/CEO, and general counsel of Wyndham breached their fiduciary duty by failing to have sufficient internal controls to protect customers’ personal and financial data and for allowing the company to conceal the data breach from investors.

While the case (Palkon v. Holmes) was ultimately dismissed in 2014 by a New Jersey court with prejudice, it is useful in showing certain steps directors can take to minimize their risk of cyber-liability and the importance of direct board involvement in cyber security.

Cyber-liability insurance is intended to cover claims not covered by traditional insurance and specifically cover cyber-exposures (protections for information and technology related risks). Some policies cover everything from information asset loss (reimbursement for the costs to restore data compromised or deleted during a network attack); cybercrime such as cyber-extortion expenses (the costs associated with paying experts to retrieve compromised data and/or negotiating and paying a ransom demanded by an extortionist); business interruption and extra expense (reimbursement of lost business income following a network attack, financial losses of third parties due to a company’s systems being unavailable); and data and network breach (investigation, assessment, and notification costs of affected individuals or entities in the event of a data breach/defence and liability resulting from a claim for a data breach or from a privacy regulatory proceeding).

Policies may also cover e-vandalism, breach of fiduciary duty to protect privacy of client information, content exposure — defamation or intellectual property, and onward transmission of computer viruses.

Cyber-liability insurance has its own vulnerabilities. For one thing, the cyber market is still quite young compared to traditional insurance products and so far, insurers have not had to pay out on big losses. It also doesn’t come cheap. Companies looking for significant coverage ($100 million-plus a year) may pay in the five to six figures annually.

The market is also changing rapidly. Terms that are offered in one year by an insurer may not be available in another year and some carriers have left the market.

Currently, there is also no standard form of this insurance — the scope of coverage will vary, including limits offered, carve-outs, and differing fine print. For example, one policy may exclude bodily injury or property damage due to cyber attack while others will not.

Insureds that purchase information-asset loss may not be reimbursed for physical damage to server or computer systems. Business interruption coverage will be limited and may not reflect the true value of the lost business. Some forms of data and network breach liability insurance may not pay out if the cause of the data breach was a rogue employee or other intentional or deliberate acts of any insured.

Also, consider whether coverage is extended if a third-party vendor is at fault?

Another issue is that given the potentially high payout involved, insurance companies that offer cyber-liability insurance will not simply just insure a client that has mindlessly checked off some perfunctory questions on a form. Insurers in this area perform extensive due diligence and any prospective purchaser will be carefully vetted and screened to ensure their internal technology controls and security practices are robust.

CIOs and IT managers can expect to be grilled and perceived vulnerabilities must be mitigated before any policies will be issued. Only companies that demonstrate good corporate governance in respect of IT and privacy, including the use of appropriate security technology, encryption, maintaining current data breach and security policies, etc. will be insured.

While cyber-liability insurance can certainly help mitigate some risks, it’s important to remember that purchasing a policy won’t stop hackers or data breaches from occurring.

While I sometimes recommend clients investigate purchasing this kind of insurance, I fully recognize obtaining such a policy does not offer a band-aid solution for a company’s security problems. Ultimately, responsibility continues to rest with the company itself and there are many other steps a company can take to protect its cyber-security and data integrity.

For example, CEOs must recognize (and act on) the importance of investing in proper security technology, training for staff about safe ways in using technology, and mitigating risks through the implementation of internal cyber-security reporting and controls.  All companies should prepare and maintain written cyber-security policies and adopt standards and practices, including a data breach policy.

Larger entities should hire a chief information security officer in addition to a chief privacy officer and ensure these individuals meet and liaise regularly with their boards of directors. Additionally, boards should establish a high-level privacy/security committee to oversee these corporate efforts.

Internal legal counsel should keep up to date on key cyber-liability developments and ensure detailed cyber-security/privacy requirements are routinely included in all their contracts with third-party vendors.

Lastly, companies should not shy away from hiring third-party experts as required to meet a company’s cyber-security requirements/needs.

  • CEO

    Danish Yusuf
    Thanks for this thoughtful piece. Although almost two years old, it is still a very important and relevant topic. The key point for me in here was how insurance is not a solution, but rather one tool. Companies have to protect their assets in the best way possible, and insurance is just one extra layer of security. My company (www.zensurance.com) focuses on helping small business manage their insurance needs, and almost every client asks for some level of cyber. It shows how even small businesses feel the need for cybersecurity insurance.

    In some ways, small businesses are the most vulnerable, as they lack the resources to pay for sophisticated protection. In that case, some expense on IT coupled with insurance makes for a good option.

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