The insurance industry continues to respond to the growing threat of data breaches by directing businesses facing that risk towards new, risk-specific cyber insurance products, while attempting to restrict coverage for data breaches under standard insurance policies. Nevertheless, companies without cyber insurance have successfully obtained coverage for these risks under existing standard policies, including under the Personal and Advertising Injury Liability provision (often referred to as Coverage B) found in many commercial general liability ("CGL") policies. Obtaining coverage, however, may soon become more difficult. Policyholders will begin to see a new endorsement in their CGL policies that is designed to avoid coverage for data breaches and other cyber liability.
The personal and advertising injury liability provision found in standardized CGL policies prepared by Insurance Services Office, Inc. (ISO) provides coverage for injuries arising out of, among other things, "oral or written publication, in any manner, of material that violates a person's right of privacy." Policyholders have successfully argued that the improper use and disclosure of consumer data—even if not disclosed to the public—is covered by this provision. For example, courts in California and Maryland have found that Coverage B applies to liability arising out of software that monitored users' internet browsing activities (Netscape Communications Corp. v. Federal Ins. Co., No. C 06-00198 JW, United States District Court, Northern District of California), the unsolicited mailing of credit offers generated from credit reports (Zurich American Ins. Co. v. Fieldstone Mortgage Co., Civil No. CCB-06-2055, United States District Court, District of Maryland), and the disclosure by optometrists of medical information to a sales company for marketing purposes (Lenscrafters, Inc. v. Liberty Mutual Fire Ins. Co., No. C 04-1001 SBA, United States District Court, Northern District of California).
Not all policyholders, however, have been successful in obtaining coverage. Earlier this year, a New York state court concluded that there was no coverage under a policyholder's personal and advertising injury provision for lawsuits brought against the company related to a breach of data belonging to users of the company's online gaming product. The court concluded that the CGL policy only provides coverage for publication of information by the policyholder and because hackers—not the company—had published the personal information at issue, there was no coverage. (Zurich American Ins. Co. v. Sony Corp. of America, No. 651982/2011)]
In response to the uncertainty surrounding this potential for coverage, ISO has prepared mandatory endorsements to its standard CGL and commercial liability umbrella policies designed to exclude data breach losses from coverage under the policies' personal and advertising injury liability provisions. While the phrase "data breach" is not explicitly used in the new endorsements, a summary of the forms authored by ISO explains that the endorsements were prepared for the purpose of excluding coverage for this risk. The exclusions state that Coverage B does not apply to injuries "arising out of any access to or disclosure of any person's or organization's confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information." Similar—but optional—endorsements prepared by ISO would exclude coverage along the same lines under the bodily injury and property damage liability provisions of ISO's CGL policies (also known as Coverage A). The endorsements also exclude from coverage the costs often incurred by policyholders when such breaches occur, such as notification, credit monitoring, and public relations expenses.
Companies facing the threat of data breaches need to be mindful of these new endorsements when purchasing insurance and carefully assess the insurance products being offered upon renewal to ensure that they receive all of the protection they need.
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