managing cyber risk through insurance and vendor contracts dino tsibouris (614) 360-3133...

Managing Cyber Risk Through Insurance and Vendor

ContractsDino Tsibouris (614) 360-3133 dino@tsibouris.com

Tom Srail, SVP, FINEX NA – Cyber and E&O Team tom.srail@willis.com

Mehmet Munur (614) 360-3101 mehmet.munur@tsibouris.com

Outline1. Cyber risks2. Costs relating to cyber risks3. Use of insurance for cyber risks4. Lawsuits relating to insurance policies5. Strategies in obtaining coverage6. Traditional v. Cyber Insurance7. Vendors8. Conclusion

Cyber Risks• Hacking incidents• Data breaches• Privacy breaches• Unauthorized access• Social engineering• Vandalism or defacement• Cyber extortion• Regulatory enforcement following incidents

Cyber Risks• Privacy is a heightened & evolving exposure• Reliance on Vendors (Cloud, IT, HR)• Regulatory Changes• Underwriters are paying multi-million dollar

losses• Business Interruption and Systems Failure• Credit card related fines and lawsuits. • “Cyber” Insurance has broadened to address

these risks

“CYBER” INSURANCE TIMELINE

20001996 2002 2006

HIPAA

Cyber Insurance Introduced

2004 2008 2010

Broad Privacy Ins. Vendor Coverage Corp Confidential Info

1998

GLB SB1386 HITECH

TJX Heartland Card

Systems

NoticeCosts Covered

PCI

Reg. Fines

&Penalties

Insurance History

Regulatory/Industry History

Claims/Losses History

PCI Fines

& Penalties

Systems Failure

2012

Epsilon/Sony

SEC

What is the Data?

What Data do you collect/process?• Personally Identifiable Information (PII): SSN,

Drivers License, etc.• Payment Card Information (PCI): Credit Card,

Debit Card Numbers• Protected Health Information (PHI)• Personal or Sensitive Personal Data (EU)

Where is the Data?

Where is it? Do you share with third parties?• How well is it protected?• How long is it kept?What is a Breach?• Unauthorized disclosure • Unauthorized acquisition• Data compromised

79

9

19

21

35

Causes of a Data Breach

Hacked Systems

Malicious Insider or Code

Paper Records

Electronic Backup

Lost Laptop or Device

3rd Party or Outsourcer

Costs of a Data Breach

DIRECT COSTSNotificationCall Center

Identity Monitoring (credit/non-credit)Identity Restoration

Discovery / Data ForensicsLoss of Employee Productivity

INDIRECT COSTSRestitution

Additional Security and Audit Requirements

LawsuitsRegulatory Fines

Loss of Consumer ConfidenceLoss of Funding

$73

Cost per record:$214 (2010) (up $10

from 2009)

Source: Ponemon Institute

$141

Costs of a Data Breach• Notification: $1/individual• Credit monitoring: $15-$50/individual• Call Centers, Fraud Alerts, Database Scanning,

Restoration Services• Civil, regulatory and possibly criminal defense• Data Privacy counsel can cost $1,000+ per

hour. • Business Interruption Costs/Data Damage?

13.1

43.2

29.7

12.4 1.6

Rating for Potential Dangers Posed by Cyber Risks

Extremely Serious

Serious

Moderate

Mild

Very Mild

Source: Advisen Cyber Risk Special Report

24.4

52

23.6

Considering Buying Coverage Next Year?

Yes

No

Don't Know

Source: Advisen Cyber Risk Special Report

59.3

41.4

3.5

32.4

5

Heartland Payment Systems Breach

Visa & Banks

MasterCard

American Express

Legal Fees and Costs

Discover In millions of dollars

Source: SEC

TJX HPS RSA ChoicePoint Epsilon0

20

40

60

80

100

120

140

160

180

200

171.5

147.1

66.3

38.3

18.931.2

11

Total CostCovered By Insurance

Security Incidents and Insurance Proceeds

In millions of dollarsSource: SEC

Creative Hospitality Ventures v. US Liability Insurance

• Restaurant gives customers receipts showing full account number in violation of FACTA.

• Class action lawsuit ensues.• Restaurant seeks coverage

under CGL policy.

Creative Hospitality Ventures v. US Liability Insurance

• Policy limited to “personal and advertising injury.”

• Defined as any publication that invaded the right to privacy.

• Circuit court reversed magistrate holding that printing receipt was publication.

• Therefore, no coverage.

Auto-Owners Insurance v. Websolv

• Individual sues Websolv for sending unsolicited faxes as a violation of TCPA.

• Websolv seeks coverage under CGL policy.• Auto-Owners sued arguing that it had no duty

to defend under:– Advertising Injury – publication & privacy.– Property Damage – fax.

Auto-Owners Insurance v. Websolv

• Appeals court held that Iowa law, not Illinois law, applied and that policy did not cover the injury.

• Appeals court held:– Privacy interest v. seclusion interest.– Publication v. secrecy. – Damages expected v. intended.

• Concluded that there was no coverage.

Eyeblaster v. Federal Insurance

• Computer user sues Eyeblaster alleging injuries relating to its advertising software.

• Eyeblaster seeks coverage under CGL and Network Technology Errors or Omissions Liability policies.

• Federal denies coverage and brings this lawsuit.

Eyeblaster v. Federal Insurance

• CGL includes coverage for “physical injury to tangible property” but excludes “any software, data or other information that is in electronic form.”

• District court finds that there is no physical injury; therefore, no coverage.

• Appeals court finds that inability to use computer constitutes injury under the policy and reverses.

Zurich Insurance v. Sony

• Sony’s online networks are attacked and passwords are compromised.

• Sony shuts down PSN for weeks.• Sony offers fraud monitoring.• Sony offers discounted games in apology.• Sony is sued in tens of class action lawsuits.• Zurich sues Sony for declaratory judgment.

Zurich Insurance v. Sony• Sony has insurance through many providers,

including Mitsui Sumitomo, National Union, ACE, AXIS, Lloyd’s, Chartis, and others.

• Zurich claims that its insurance policies cover:– Bodily injury,– Property damage, and – Personal and advertising injury.

• Litigation ongoing.

Common Issues

• Interpretation of undefined terms crucial in coverage.

• Interpretation varies depending on trial court, appeals court, and state law.

• Litigating insurance policy consumes time and resources.

Common Issues

• Data may not be tangible personal property.• Publication may not have occurred.• Privacy rights may not have been breached.

Common Issues

• CGL policy covers specific risks.• Cyber risks may not be covered.• Coverage varies widely among policies.

Traditional Insurance Gaps• Theft or disclosure of third party information

(GL)• Security and privacy – “Intentional Act”

exclusions (GL)• Data is not “tangible property” (GL, Prop,

Crime)• Bodily Injury & Property Damage triggers (GL)• Value of data if corrupted, destroyed, or

disclosed (Prop, GL)

Traditional Insurance Gaps

• Contingent risks (from external hosting, etc.) • Commercial Crime policies require intent, only

cover money, securities and tangible property.• Territorial restrictions• Sublimit or long waiting period applicable to

any virus coverage available (Prop)

Preparation is Key• Policy must be part of an Enterprise Risk

Management program• Utilize privacy, security, and legal:

– Policies– Procedures– Controls

• Understand probability and magnitude of risk• Audit products and services

Preparation is Key• Ask Your Privacy / IT professionals:

– Incident Response Plan (tested?)– Vendor Contracts / Insurance Requirements

• Privacy Risk Assessment• Check Existing Insurance Gap Analysis• New coverage terms must integrate with

– Response Plans– Traditional Policies

Cyber Risk Coverage

• Data breach• Governmental civil actions• Virus liability• Content liability• Extortion• Lost data

Privacy & Network Coverages

Expense (Loss Mitigation) Coverage • Data Breach Expenses:

– Consumer notification and credit monitoring service costs (sub-limit)

– Forensics/Investigations– Public Relations/Crisis Management

Expenses

Privacy & Network Coverages

Liability Coverage• Privacy Liability • Network Security Liability• Media, IP and Content Liability

Privacy & Network Coverages

Direct (First Party) Coverage• Revenue Loss (Interruption to income due to

systems outage)• Data Reconstruction

Limits and Exclusions

• Must the insured notify you right away?• Indemnification for losses or claims, too?• Who chooses the lawyer to defend a lawsuit?• Are there preferred vendors?• Limitation of liability – dollar amount?

Vendor Contracts

• Breaches may occur at a vendor.• Contract clauses and limitations should

harmonize with insurance clauses.• Damage limits should factor policy limits.• Notify if a breach may have occurred.• Should they tender your defense?• You are liable, but they can help.

Vendor Contracts

IT/Software Companies• Request Tech E&O, plus Privacy/Network

Coverage• Some Tech E&O policies have security/privacy

exclusions• Breach could occur without “wrongful act”

being committed

Vendor Contracts

Business Services – Payroll, Auditors, Counsel• Request appropriate E&O coverage• Request Privacy/Network coverageCredit Card Processors/Acquiring Banks• Request Privacy/Network Coverage (Gaps in

Bond or Professional Liability coverage)

Vendor Contracts

Other Vendors that transport, touch, interact with your systems or sensitive information

• Request Privacy/Network coverage

Upcoming Issues

• Revisions to the EU Data Protection Directive that propose fines of up to 2% of annual turnover of a company

• Federal data breach notification in the U.S.• FTC Final Privacy Report and Privacy by Design• Department of Commerce multi-stakeholder

enforceable codes of conduct process

Outline1. Cyber risks2. Costs relating to cyber risks3. Use of insurance for cyber risks4. Lawsuits relating to insurance policies5. Strategies in obtaining coverage6. Traditional v. Cyber Insurance7. Vendors8. Conclusion

Questions

Dino Tsibouris (614) 360-3133 dino@tsibouris.com

Tom Srail, SVP, FINEX NA – Cyber and E&O Team tom.srail@willis.com

Mehmet Munur (614) 360-3101 mehmet.munur@tsibouris.com