Canada: Cybersecurity And M&A – Part Three: Cyber Insurance

In the second installment of this series we offered a brief review of cybersecurity provisions and considerations in M&A transaction agreements, and in the first installment of this series we offered a brief review of cybersecurity issues that can arise in the course of M&A transactions and discussed the importance of cybersecurity due diligence by the buyer. This third installment will focus on cyber-insurance and some specific considerations relating to cyber insurance that targets and acquirers should make in the context of M&A transactions.

As data breach incidents continue to rise and legislative regimes provide more and more stringent regulation of data breaches, including the proliferation of mandatory breach notification provisions, the expense associated with data breaches also rises. Estimated costs of dealing with a data breach, even to resolve a potential attack, or an attempted breach, have been as high as $5.3 million.1 Costs can be incurred as a result of forensic and investigative activities, assessment and audit services, crisis team management, and the necessary internal and external communications. As cybersecurity breaches increase in number, scope, and impact, organizations are looking to transfer the risk associated with security breaches.2

The most common way of transferring risk is by obtaining insurance policies. Cyber and privacy insurance has been available for the last decade, covering an organization's liability for a data breach in which the organization's or customers' information is lost or stolen. Marsh Inc., a global insurance broker, has said that the number of organizations that purchased cyber insurance in the US increased by 33% from 2011 to 2012, and that cyber insurance is currently the fastest growing area of commercial insurance in the world.3 Policies vary, with cyber insurance offered as an add-on or included in more general policies, or sold as a distinct product.

Cyber Insurance Coverage

An important preliminary note on cyber insurance is that cyber insurance is often confused with technology errors and omissions insurance (commonly called "Tech E&O" insurance). Tech E&O insurance protects providers of technology services or products, such as software designers and manufacturers, whereas cyber insurance protects consumers of those products and services.4

Generally, cyber insurance is divided into first party coverage protecting the policyholder, and third party coverage protecting from third party claims against the policyholder.

First party policies may cover:

  1. the costs associated with investigating the scope of the breach and taking steps to mitigate against the damage caused by the breach;
  2. the costs of providing notice to individuals whose identifying information was compromised;
  3. public relations services to counteract the negative publicity that can be associated with a data investigation;
  4. the costs of responding to government investigations;
  5. the costs of replacing damaged hardware or software, or remediating existing systems;
  6. legal costs and other related expenses, such as regulatory fines;
  7. the costs of responding to parties vandalizing the company's electronic data; and
  8. business interruption costs.

On the other hand, third party policies may cover claims:

  1. for permitting access to identifying information of customers;
  2. emanating from the impacts which a security breach may have on a third-party system;
  3. for transmitting a computer virus or malware to a third-party customer or business partner;
  4. for failing to notify a third party of their rights under the relevant regulations in the event of a security breach; and
  5. for potential "advertising injury," i.e., harms through the use of electronic media, such as unauthorized use or infringement of copyrighted material, as well as libel, slander, and defamation claims.

Cyber insurance can also specifically cover the crisis stage of a data breach. This could include any expenses related to the management of the incident, such as investigation, remedial steps, required notifications, call and public relations management, credit checks for the subjects of the data, and any legal costs including fines or the costs of litigation. A further advantage is that a qualified consultant, often a lawyer, may be assigned during a crisis stage. In this way, clients may be able to better navigate the regulatory landscape following a data breach. An updated awareness of privacy laws is particularly relevant with the passing of the Digital Privacy Act, SC 2015, c 32, in June 2015.5

M&A-Relevant Considerations

In the context of an M&A transaction, an acquirer will need to fully understand the target's and its own existing coverages in order to determine how best to structure cybersecurity insurance coverage once the acquisition is complete. Acquirers should conduct due diligence to assess a target's risk profile and whether the target has an existing and adequate cyber insurance policy in place, or consider implementing an appropriate insurance policy as part of the transaction to mitigate the costs of a cybersecurity breach of the target's systems.

As all insurance policy coverage is dependent on the particular terms and conditions in the policy at issue, a review of existing policy coverage should consider a number of questions to better understand the risks involved in the target's business, including:

  1. What security controls can be implemented that will reduce the premium?
  2. Will a security risk review need to be undertaken?
  3. What is expected of the target or acquirer to reduce or limit the risks?
  4. What assistance is provided to improve information governance and information security?
  5. How does compliance with organizational protocols affect future premiums?
  6. What support, if any, will be provided to assist in making the right security decisions for the industry/business the target is in?
  7. Given that the security/protection industry is very fast-changing, how can one ensure that the insurance policy is current?
  8. Do all portable media/computing devices need to be encrypted?
  9. Are malicious acts by employees covered?
  10. What if there is uncertainty around whether the incident took place a day before the coverage was in place or on the same day?
  11. Are court attendances to defend claims from others covered?
  12. Could a claim outside the coverage period be made if the intrusion was not detected until several months or years have elapsed?6

Every acquirer and target will face different challenges with regard to data breaches. The size, industry, type of data, potential exposure, business model, and many other considerations, will affect the scope and detail of the ideal cyber insurance policy.7 Acquirers should ensure that they have all the necessary background information from the target. Conducting due diligence of cyber insurance policies is imperative, as policy language evolves rapidly.

A few of the specific due diligence considerations an acquirer should make include:

  1. Ensuring that the target's response plan to a potential or actual breach is sufficient.
  2. Reviewing extensions of coverage that exist in other policies and whether there are any "other insurance" clauses in the different insurance policies that could leave different insurers pointing the finger at one another in the event different policies are triggered at the same time.
  3. An examination of service providers and the dove-tailing of incident response plans to fit the separate organizations. If separate incidence response plans are in place, it will be important to vet the service providers who will be in place with the insurer so that the triage process in the event of a claim is approved in advance.
  4. A review of the retroactive date to ensure that any existing conditions on a network before completion of the transaction could be covered if it develops into an incident.
  5. A contract review to assess whether any cybersecurity coverages are mandated and at what thresholds. This is especially important where the acquirer does not have a cybersecurity policy going into the transaction.
  6. A review of the applicable directors' and officers' coverage to ensure that the policies adequately dove-tail in the event a breach spirals into a class action to ensure there are no gaps and the policies provide the directors and officers with adequate limits to avoid paying out-of-pocket.
  7. In the case of add-on cyber insurance, consider a careful review of the exclusionary language with the assistance of a broker since this can be very limited.
  8. An investigation of the vulnerability of networks including, where feasible, vulnerability testing and table-top exercises.

For various reasons, acquirers who already have cybersecurity insurance may wish to retain their own policies going forward after the completion of the acquisition. In this case, the acquirer should consider the exclusionary language in their existing policy and, in particular, the acquisition thresholds contained within the wording and the associated reporting provisions.

Cyber insurance is a supplement to the overall risk management strategy of an enterprise, and should be considered alongside other insurance and risk management mechanisms that the acquirer and target may have in place, such as insurance for representations and warranties. The latter in particular may be an effective means of settling an impasse in the event of disagreement in the course of negotiating an M&A transaction.

Takeaway

Cybersecurity insurance is an important means by which organizations can transfer some of the risks of cybersecurity breaches to third party insurance providers and is becoming an increasingly important consideration in M&A transactions.

Acquirers in particular should begin to think about the post-acquisition cybersecurity coverage framework from the very early stages of an M&A transaction and should conduct specific and targeted due diligence on the target's cyber insurance policies and networks.

The parties, and particularly the acquirer, should consider working with a knowledgeable insurance broker to identify specific areas of concern and develop a post-acquisition policy framework that will provide appropriate coverage in light of the relevant industry and business practices of the combined enterprise.

The authors wish to thank Greg Markell, FCIP, CRM, Account Manager Cyber/D&O at HUB International HKMB, for his assistance with this post.

Footnotes

1 Howard Soloman, "Cost of an average Canadian data breach is $5.3 million: Study" IT World Canada (4 June 2015) online: itworldcanada.com (http://www.itworldcanada.com/post/cost-of-an-average-canadian-data-breach-is-5-3-million-study#ixzz3mlmF26t1),  citing the research conducted by the Ponemon Institute in 2015.

2 "Cyber insurance in demand after recent data breaches: banks, hotels, educational institutions buying cyber insurance", July 28, 2013, CBC News, online (http://www.cbc.ca/news/technology/cyber-insurance-in-demand-after-recent-data-breaches-1.1396187).

3 Ibid.

4 "Technology Errors & Omissions Insurance", International Risk Management Institute, online: (http://www.irmi.com/online/insurance-glossary/terms/t/technology-errors-and-omissions-insurance-tech-eo.aspx); "Cyber and Privacy Insurance", International Risk Management Institute, online: (http://www.irmi.com/online/insurance-glossary/terms/c/cyber-and-privacy-insurance.aspx).

5 For more information about the Digital Privacy Act, SC 2015, c 32, see: Daniel G.C. Glover et al, "Digital Privacy Act is Now Law", June 19, 2015, McCarthy Tétrault, online: (http://www.mccarthy.ca/article_detail.aspx?id=7117).

6 Questions taken from "An Introduction to Cyber Liability Insurance Cover", ComputerWeekly.com, online: (http://www.computerweekly.com/news/2240202703/An-introduction-to-cyber-liability-insurance-cover).

7 "An Introduction to Cyber Liability Insurance Cover", ComputerWeekly.com, online: (http://www.computerweekly.com/news/2240202703/An-introduction-to-cyber-liability-insurance-cover).

To view original article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
Norton Rose Fulbright Canada LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
Norton Rose Fulbright Canada LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions