Second Annual Conference September 16, 2015 to September 18, 2015 Chicago, IL

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1 Second Annual Conference September 16, 2015 to September 18, 2015 Chicago, IL

2 Using Insurance Coverage to Mitigate Cybersecurity Risks To Warranty and Service Contract Businesses Barry Buchman, Partner Adrian Azer, Of Counsel Gilbert LLP 2

3 Cybersecurity Risks to Warranty and Service Contract Businesses Cyber-attack directly against warranty and service contract providers: This can be especially costly given the significant amount of personal identifying information that is obtained in connection with warranty and service contracts. Cyber-attack on Warranty Management Vendor: Many warranty and service contract providers are outsourcing data management to vendors such as warranty management solutions businesses to maintain their warranty and service contracts. This creates the additional risk of cyber-attacks against warranty management vendors that exposes both the warranty and service contract providers and vendors to liability. Cyber-attack on Cloud Computing Technologies 3

4 Two Types of Losses That Result From a Cyber-Breach First Party Losses: Damage to the policyholder s own data or systems, lost income, and extra expenses. (1) the costs of providing notice to individuals whose identifying information was compromised; (2) the costs of investigating/stopping the breach; (3) the costs of replacing damaged hardware or software; (4) business interruption costs; and (5) the costs of a public relations firm. Third Party Losses: Policyholder s potential liability to customers, government or regulatory entities, or another third party. (1) customer lawsuits; (2) government investigations and government enforcement actions; and (3) potential shareholder suits. 4

5 Increasing Cost of Cybersecurity Breach The average cost of a data breach has risen, with the average cost in 2015 being approximately $3.79 million. See 2015 Cost of Data Breach Study: Global Analysis, Ponemon Institute LLC (May 2015). Both large and small companies are increasingly acquiring cybersecurity insurance coverage; data suggests [that] small companies are actually targeted as frequently, and if not more, than larger companies. See Mark Sanchez, Data Breaches Push More Firms to Consider Cyber- Insurance Policies, MiBiz (Jan. 18, 2015); see also Matt Egan, Companies Turn to Cyber Insurance as Hacker Threats Mount, Fox News, Business (Mar. 20, 2014). Boards of Directors are increasingly concerned about cybersecurity. See Henry Stoever, Only 11% of Corporate Directors Say Boards Have High Level of Cyber-Risk Understanding, National Association of Corporate Directors (June 22, 2015); see also C. Dunn, Cybersecurity Becoming No. 1 Concern for GCs and Directors, Corporate Counsel (Aug. 15, 2012). 5

6 How Cyber-Breaches May be Covered Under Traditional Insurance 6

7 Overview of Traditional Insurance Policies Most businesses maintain: Comprehensive-General-Liability insurance ( CGL ) Typically covers: (1) bodily injury or property damage caused by an occurrence (accident); or (2) personal and advertising injury. Property Damage/Business Interruption Insurance Errors and Omissions Insurance Directors & Officers Insurance Most insureds have sought coverage for cyber-breaches under the personal and advertising injury coverage of CGL policies. 7

8 Coverage for Cyber-Breach Under Traditional Insurance Policies Coverage may be available under CGL policies as many courts have found coverage, and a number of jurisdictions have not addressed this issue and may conclude that coverage exists. See, e.g., Hartford Cas. Ins. Co. v. Corcino & Assocs., 2013 WL (C.D. Cal. Oct. 7, 2013); Retailer Ventures, Inc. v. National Union Fire Insurance Co., 691 F.3d 821 (6th Cir. Aug. 23, 2012); Eyeblaster, Inc. v. Fed. Ins. Co., 613 F.3d 797 (8th Cir. 2010). Two recent decisions, however, have rejected coverage for cyberbreaches under the personal and advertising injury coverage of CGL policies. Recall Total Information Mgmt. v. Federal Ins. Co., 317 Conn. 46, (2015); Zurich Am. Ins. V. Sony Corp. of Am., Case No /2011, 2014 WL (N.Y. Sup. Feb. 24, 2014). Both the Connecticut Supreme Court and a trial court in New York held that there was no publication by the insured to trigger the personal and advertising injury coverage. 8

9 How Cyber-Breaches May be Covered Under Specialty Cybersecurity Insurance 9

10 Specialty Cybersecurity Insurance Coverage There are three fundamental coverage types in specialty cyber-security insurance: Liability for loss or breach of data (third party). Defense and settlement costs for third-party claims by customers. Remediation costs to respond to the breach. Response costs following a data breach, including investigation, public relations, customer notification, and credit monitoring. Coverage for fines and/or penalties imposed by law or regulation.* Costs to investigate, defend, and settle fines and penalties that may be assessed by a regulator. * Where insurable by law. 10

11 Considerations When Negotiating Cybersecurity Insurance Policies When procuring cyber-security insurance coverage, warranty and service contract businesses should: Negotiate the terms of the policy. These policies are negotiable given the lack of a standard form. Warranty and service contract businesses should ensure that a breach at a data management vendor or cloud-based vendor is within the scope of coverage, e.g., avoid policy provisions requiring connection to a network. Know your limits and sublimits. Many cybersecurity policies include sublimits that limit the recovery for certain types of losses. Carefully complete the application. Be careful when representing the security measures in place as the insurer may use the application to avoid coverage. 11

12 Four Areas to Watch Related to Cybersecurity Insurance (1) Security Requirements (more commonly known as, Best Practices or Minimum Required Practices Provisions) In 2015, an insurer preemptively filed a lawsuit seeking a declaration (a declaratory judgment ) that its cybersecurity policy did not cover a cybersecurity breach because of an insured s alleged failure to have appropriate security measures. Columbia Casualty Co. v. Cottage Health Systems, No. 2:15-cv (C.D. Cal May 7, 2015). (2) Act of War and Terrorism Exclusion Given the prevalence of state-sponsored cyber-attacks or cyber-attacks by rogue terrorist organizations (e.g., ISIS), insurers may begin to rely on this exclusion to avoid their coverage obligations. The exclusion, however, may not be as broad as an insurer asserts. See, e.g., Pan Am. World Airways, Inc. v. AETNA Casualty & Surety Co., 505 F.2d 989, (2d Cir. 1974). (3) Third-Party Acts and Omissions There may be questions regarding whether cybersecurity insurance covers cyber-attacks at third-party vendors who are providing data management or cloud-based services. (4) Coverage for Statutory Damages There may also be disputes regarding coverage for regulatory fines or penalties. 12

13 Practical Considerations When Addressing Cybersecurity 13

14 Insurance Considerations When Negotiating Vendor Contracts In the event of a cyber-security breach, there are two possible avenues for recovery: (1) insurance coverage, and (2) indemnities from vendors and other contracting parties. These two avenues of recovery often overlap and are intertwined; however, the pursuit of indemnities may detrimentally impact the business relationships between warranty and service contract providers and their vendors. Parties can structure cross-indemnities to mitigate the impact on the business relationship, including by: requiring that a party be named as an additional insured under the other party s insurance; be careful about relying solely on certificates of insurance; structuring indemnities so that they are net of insurance, i.e., they require the pursuit of insurance before the pursuit of indemnities; and negotiating whose insurance will respond first. 14

15 Conclusion and Other Practical Pointers Businesses involved in warranties and service contracts should conduct an insurance audit -- analyzing their policies, the requirements to pursue coverage, and their indemnities. In the event of a loss, these businesses should consider: Notice requirements in their policies; Policy preservation and examination; Review policies issued not only to your business but also to other businesses, e.g., vendors and affiliates -- such policies may provide additional insured coverage; also not just the current year s policy but also prior policies. Communication protocols, both for internal communications and communications with insurers; and Proof of loss deadlines and contractual limitations periods. 15

16 Additional Reading Adrian Azer, Cyber-Attacks Against Government Contractors and the Availability of Insurance Coverage, Gilbert Insurance Law Blog (Aug. 6, 2015). Miriam Smolen and Adrian Azer, Insurance Cybersecurity Regulations What Insurance Coverage Do You Need?, Gilbert Insurance Law Blog (Feb. 15, 2013). Barry Buchman and Adrian Azer, Recent Trends in Cybersecurity Scrutiny, Law360 (Oct. 22, 2012). 16

17 Adrian C. Azer Telephone: Gilbert LLP 1100 New York Avenue, NW Suite 700 Washington, DC gotofirm.com