Cyber hacking, data breaches and privacy concerns have become commonplace headlines. While not always front page news, one study reported on 1,700 instances of computer hacking, cyber terrorism, and other data breaches in the past seven years, resulting in some 900 million compromised records. Another study of 49 breaches in 2011 reported that the average cost of a data breach (including detection, internal response, notification, post-notification cost and lost customers) was $5.5 million. For businesses which have not yet purchased stand-alone cyber insurance policies, a recent federal appellate court case may provide the basis for coverage under other policies.
Providing policyholders with another method by which to receive data breach coverage, the Sixth Circuit Court of Appeals recently held that a computer fraud rider to a "Blanket Crime Policy" covered losses from a hacker's theft of customer credit card and checking account data. While most insurance companies have attempted to exclude cyber risks from many general liability and first-party property policies, this holding potentially adds crime policies to the list of policies that cover data breach costs, a list that, in addition to insurance-industry preferred cyber policies, also includes general liability, errors and omissions, media E&O and directors and officers policies.
In 2005, a hacker used the local wireless network at one of
plaintiff DSW's stores to hack into its main computer system
and download customer credit card and checking information,
pertaining to over 1.4 million customers of 108 stores. The
hacker used the credit card information to engage in fraudulent
credit card transactions. Unsurprisingly, plaintiff incurred
significant expenses as a result, paying over $5.3 million for
customer communications; public relations efforts; customer claims
and lawsuits; attorneys' fees in connection with state and
federal investigations; and, most significantly, fines imposed by
Visa and Mastercard. Plaintiffs paid the two credit card
companies over $4 million as a result of the data breach and
aftermath.
Plaintiff sought coverage from its insurer, defendant National
Union Fire Insurance Company of Pittsburgh, PA ("National
Union"). National Union denied coverage, asserting that
the loss was excluded under the computer fraud rider because it was
related to the theft of confidential customer information.
Moreover, National Union asserted that plaintiff's loss did not
qualify as a loss "resulting directly from . . . the theft of
any Insured property by Computer Fraud," as required by the
policy. The District Court in Ohio granted summary judgment to the
policyholder for the amount of the loss plus interest, including
the fines paid to Visa and Mastercard due to the data breach.
The District Court rejected plaintiffs' bad faith claims.
The Sixth Circuit affirmed the District Court
opinion in its entirety.
In affirming the District Court, the Sixth Circuit found that a
commonly used, broadly worded exclusion for proprietary and other
confidential information did not apply to the loss in this
case. The coverage exclusion provided that "Coverage
does not apply to any loss of proprietary information, Trade
Secrets, Confidential Processing Methods, or other confidential
information of any kind." The Court agreed with the
District Court's finding that even if the copying of customer
information qualified as a "loss," it was not a loss of
"proprietary information . . . or other confidential
information of any kind." The Court interpreted the
definition to include only "confidential information" of
DSW's involving the way in which its business is
operated. Moreover, the stolen credit card and checking
account information was not proprietary because it was owned or
held by many entities, including the customers, financial
institutions, and merchants involved in the stream of
commerce. The Court concluded that the term "other
confidential information of any kind" did not mean all
information belonging to anyone that is expected to be protected
from unauthorized disclosure, because that interpretation
"would swallow not only the other terms in [the] exclusion but
also the coverage for computer fraud."
Secondly, the Court rejected the insurer's attempts to liken
its policy to a traditional fidelity bond, which does not provide
third party liability coverage. The Court noted that the
terms of the policy, rather than its title, govern the coverage
provided.
Finally, the Sixth Circuit agreed that, under Ohio law, the losses
plaintiff suffered did result directly from the data breach as
required by the terms of the policy. The Court found the
phrase ambiguous, and further found that "resulting directly
from" does not unambiguously mean that the data breach be the
"sole" or "immediate" cause of the
insured's loss, as defendant urged. Instead, the Court
found that the language only required that the breach be the
proximate cause of the loss.
This ruling represents a favorable outcome for policyholders that
have been resistant to purchase cyber policies, as yet another
commonly used policy has been held to cover data breach
costs. At least in the Sixth Circuit, commonly used, broadly
worded exclusions for proprietary and other confidential
information will not exclude coverage for customer credit card and
checking information, and a less exacting proximate cause standard
will be applied in determining whether an insured's loss will
be covered by crime policies.
Proskauer's
Insurance Recovery & Counseling Group focuses on assisting
policyholders facing these issues by conducting strategic policy
reviews that can identify potential gaps in coverage, and by
representing policyholders in disputes with their insurers.
The
Privacy & Data Security Group also works with clients to
review their privacy policies to ensure compliance with applicable
laws. Please call or email us if you need assistance or have
a question.
*This blog was written by Marc Rosenthal, a partner in Proskauer's Chicago office and member of the Insurance Recovery & Counseling and International Arbitration Groups, and Joe Clark, an associate in Proskauer's Los Angeles office and member of the Litigation Department.
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.
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