United States: Cyber Insurance Claim Denials

There have been a series of recent high profile cyber insurance claim denials.  As a result, policyholders are asking questions.  What, if anything, did we purchase?  Is our cyber coverage any good?  Were we duped by all of the marketing hype offered to sell cyber insurance products?  Why are cyber insurers denying claims?  Why are cyber insurance claim denials so common?

Policyholders rightly expect cyber insurance to respond to cyber crimes — But, insurers don't see it that way

There are a number of reasons for the large number of cyber insurance claim denials.  First, claims determinations under cyber insurance are particularly susceptible to insurers arguing that they did not intend to cover a type of claim, even  when their policy language often tells a different story.  Second, as with many new products, cyber security insurance policies have not yet normalized around a single coverage grant and standardized exclusions.  Third, insurers are writing coverage to cover very specific types of risks, yet the types of liability policyholders are facing in the cyber world seem to be changing all the time.

This, however, is not putting a damper on sales of cyber insurance products.  With the amount of media coverage each cyber-attack receives, corporations continue to add cyber insurance to their portfolios.

Who Is Buying Cyber Insurance?

Recent estimates show that roughly one third of US companies purchased cyber insurance coverage.   The rate of penetration varies significantly across industry groups.  While healthcare and retail sectors reveal a 50% penetration rate, manufacturing is lagging behind at only 5%.  Not surprisingly, the largest claims and some of the most notorious breaches have occurred in the healthcare, finance and retail sectors, driving the interest in cyber insurance in such markets.  The highest growth rates, however, are in the manufacturing business sector, suggesting that more industries across the board are concluding that even if the internet is not the primary way they interact with customers or potential customers, such businesses may see value in purchasing cyber insurance products.

What Does Cyber Coverage Offer

Standalone cyber insurance typically provides coverage for both first party and third party losses resulting from a computer based attack or malfunction of a policyholder's information technology systems.  Despite the lack of a standardized coverage form, the coverage grants provided by cybercrime policies are finding growing consistency.  Many offer first party coverage for costs arising from investigations of security breaches, restoring business services, notifying affected individuals, credit monitoring services, extortion and ransom payments and business interruption.  Like property coverage, many cyber policies contain sub-limits which can substantially limit available coverage for defined losses, including most often cyber extortion and "computer attack."

Unlike standard property policies, cyber policies also include third party liability coverage. Common third party liability coverage applies to costs from defending against public or private investigations, settlements, judgments and possibly fines and fees arising from such third party claims. Again, cyber insurance policies employ sub-limits to simultaneously limit the available coverage, including limits applicable to data compromise, network security and electronic media.

While policy coverages may be becoming more consistent, policy exclusions continue to have substantial differences.  The most common exclusions were for criminal/fraudulent/dishonest activity, disregard for computer security, contractual liability and payments of fines or fees. Just from the labels one can see that such exclusions potentially apply to most common cyber-attacks.

One such example is theft coverage. Cyber policies often exclude losses resulting from theft, yet fidelity and crime policies that cover theft often limit coverage for computer fraud by excluding "electronic data." If the data is the very thing the hacker is interested in taking, it's possible that such thefts fall in between the cyber insurance coverage and the crime and fidelity coverage. Less common exclusions apply to limit coverage for collateral damage, failure to disclose a loss of which an executive was aware and unsolicited disseminations of communication.

Even when policies contain similar exclusions, the specific wording can differ from policy to policy meaning the scope of the exclusion similarly can differ. The differences in language can also mean that the limited judicial interpretations of these clauses may or may not apply to your specific policy wording. Be wary of insurers who argue that a case decided on another insurer's policy language bars or limits your coverage. The policy language is not settled and the case law suffers the same difficulties. Experienced coverage counsel is required to evaluate an insurer's efforts to avoid coverage.

Common Causes of Cyber Claims

The most common cause of cyber insurance claims are hackers, or persons or groups that use unauthorized access to computer systems and access personal data or files. Nearly as prevalent are attacks using "socially engineered malware," where a user is tricked into running a program that delivers malware to the target, and often today that means data encrypting ransomware. Each of these two types of claims illustrate how even the most sophisticated policyholders can fall prey to improper cyber insurance claim denials.

In an all too common scam, hackers infiltrate a business' databases and steal customer credit information or other personally identifying information. Such attacks often carry substantial costs in protecting customer credit information going forward, as well as significant fines and fees from credit providers. But insurers have issued Cyber Insurance Claim Denials for such actions by use of exclusions for theft or exclusions for fines and fees. Another common form of hacking is "spoofing," sending an email to make it look like it came from within the company. Insurers have argued that such claims are not covered because the theft is not "direct" because someone within the company took the last step to fraudulently wire the money. But again the cases and policy language differ such that insurers are potentially attempting to deny a covered claim.

Recent cyber insurance claim denials also illustrate how insurers are limiting or denying coverage for ransomware attacks. One common practice is for insurers to limit coverage through the use of deductibles and sub-limits. The most recent ransomware deployed against the computer systems of the City of Atlanta is just one example, but hospitals and other commercial enterprises have similarly proven vulnerable to these types of hacks.

Ransom coverage is typically included in cyber insurance policies but collecting on such coverage may prove difficult. A newer trend in ransomware claims sees the extortionist making what appear to be smaller demands that may fall within standard deductibles such that the coverage does not come into play. Ransomware actors have discovered that lower demands put pressure on victims to pay, as the ransom often is several times smaller than the cost of duplicating the lost data. For example, in the attack against the Atlanta, the city was asked to pay 6 bitcoins, at current values approximately $36,000. Similarly, the "WannaCry" attack, which crippled computers across the world, resulted in a relatively small payment of $140,000 spread among multiple victims. Given the existence of deductibles, its doubtful cyber insurance played a substantial role in one of the largest attack in history.

An Overview of Cyber Insurance Claim Denials

With cyber insurance, insurers seem to be denying more claims than they are paying, and in some instances getting away with improper cyber insurance claim denials. Like any insurance policy, having a cyber insurance policy does not guarantee you coverage when a cyber event occurs. For example, in Recall Total Mgmt, Inc. v. Federal Ins. Co., 317 Conn. 46, 115 A.3d 458 (2015), the personal injury coverage applied to the electronic, oral, written or other publication of material that violates a person's right or privacy. The insured, Recall Total, transported computer tapes carrying details of IBM personnel. The tapes were lost, and IBM incurred costs in providing identity-theft services to its employees, which it in turn sought from Recall Total. Losing hardware or other media is a common type of cyber security event.

Despite this, Federal (a Chubb/ACE company) denied the claim, arguing that there was no proof of publication. The court agreed that because there was no evidence that anyone had found and accessed the computer records, there was no evidence that they had been published so as to trigger coverage. "Publication" was not a defined term in the policy and there is no reason why "finding and accessing" the information was required or could not be presumed. The fact that the information was made publicly available and may have circulated on the "dark web" unknown to the insurer or the insured, and the fact that the insured had to bear costs to remedy the error, was not determinative, despite the fact that the insured thought it had protection for such cyber events.

Travelers tried the same arguments in Travelers Indem. Co. v. Portal Healthcare Solutions, LLC, 35 F.Supp.3d 765 (E.D.Va. 2014), where it claimed that when the insured unintentionally made third party medical records available on the internet, that action was not a "publication" of the records. Travelers claimed that accidentally allowing access was not the same as publication. Here the Court disagreed, since anyone searching a patient's name on google could gain access to their private medical records. Since "publication" was not defined in the policy, the court rejected Travelers' efforts to give it a narrow definition and found that "publication" occurs when information in "placed before the public." Whether it is read or not is irrelevant to whether it was published. The same rationale would have been of significant benefit to Recall Total in their claim.

As these cases demonstrate, stand-alone cyber insurance products remain highly variable and largely untested by the Courts. As these policies gain further traction in the marketplace, and as cybercrimes expand and alter over time, these policies are very likely to lead to substantial disagreement between insureds and insurers about the application of the coverages to real world cyber events. These factors require the early involvement of coverage counsel to strategize and advocate for the insured seeking coverage under these policies.

Conclusion

Cyber insurance claim denials are far too common. Insurance carriers sell cyber insurance products into a rising tide of fear, but when a cyber insurance claim is presented, insurance carrier lawyers vigorously fight to deny or otherwise limit coverage. The cyber insurance market has not yet equalized. Cyber insurance products are flying off the shelves of insurers. While, at the same time, cyber insurers are issuing more and more cyber insurance claim denials.

Although there are reasons for this, this immature cyber insurance market will not correct itself unless policyholders evaluate and pursue cyber insurance claims. Involving insurance counsel at the earliest stage of the claims process is the first step to addressing improper cyber insurance claims denials that policyholders are facing. Additional information can be found in Computer Fraud Two Similar Scams Two Very Different Insurance Outcomes; Cyber And Intellectual Property Claims; The Wild Wild West Of Cyber Insurance; The Impossible Intersection of Baseball Cybercrime and Insurance; Strategies for Addressing Cloud Computing Risks. Please feel free to contact us at Miller Friel if you have any questions.

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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