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Two hundred billion IoT devices could be in use by 2020, according to one estimate cited in the World Economic Forum’s recent report, Mitigating Risk in the Innovation Economy.  This rapid integration of the digital world and the physical world presents unprecedented opportunities for businesses in a wide array of industries.  But it also

By John G. Buchanan and Marialuisa S. Gallozzi

Although the National Cybersecurity Awareness Month of October has come to a close, it is not too late for corporate counsel and risk managers to be thinking about cyber-risk insurance — an increasingly essential tool in the enterprise risk management toolkit. But a prospective policyholder purchasing cyber insurance for the first time may be hard put to understand what coverage the insurer is selling and whether that coverage is a proper fit for its own risk profile. With little standardization among cyber policies’ wordings, confusing labels for their covered perils, and little interpretive guidance from case law to date, a cyber insurance buyer trying to evaluate a new proposed policy may hardly know where to focus first.

After pursuing coverage for historically major cyber breaches and analyzing scores of cyber insurance forms over the past 15 years, we suggest the following issues as a starting point for any cyber policy review:
Continue Reading Top Tips and Traps for Cyber Insurance Buyers

The recent National Institute of Standards and Technology (NIST) publication of cybersecurity guidance for the Internet of Things (IoT) is a useful reminder that hacking incidents can result not only in privacy breaches, but also in bodily injury or property damage — via critical infrastructure, medical devices and hospital equipment, networked home appliances, or even children’s toys. In addition to enhanced system security engineering and preventive education efforts, insurance is an increasingly essential component in any enterprise risk management approach to cyber vulnerabilities. But purchasers of cyber insurance are finding that nearly all of the available cyber insurance products expressly exclude coverage for physical bodily injury and property damage.

Continue Reading Insurance Coverage Issues for Cyber-Physical Risks

Cyber insurers commonly require insureds to complete detailed applications, often including extensive technical disclosure and risk self-assessments. The complaint recently filed by the insurer in Columbia Casualty Co. v. Cottage Health System illustrates the pitfalls in these requirements.

Cottage Health, an operator of a hospital network, suffered a data breach in 2013 resulting in thousands of its patients’ private medical information being publicly disclosed. In addition to other losses, Cottage Health paid $4.125 million to settle a putative class action in 2014 and faces additional proceedings arising from the breach. Columbia’s lawsuit denies all coverage for the breach and seeks to rescind its policy due to the insured’s alleged failure to comply with the cybersecurity practices described in its application.
Continue Reading Cyber Insurer Seeks to Void Data Breach Coverage Because of Purported Misstatements in Policy Application

Data breaches suffered by retailers and other businesses that handle payment cards can result in substantial assessments by card brands such as MasterCard and Visa. Retailers typically do not process payment card transactions directly with the banks that issue their customers’ cards. Instead, they contract with an intermediary—called an acquiring or servicing bank—to process their customers’ card transactions with the card-issuing banks. In the event of a payment card data breach, the card brands typically impose assessments on the retailer’s acquiring bank, which in turn pursues indemnification under its service contract with the retailer.

That was the situation in P.F. Chang’s v. Federal Insurance Co., in which a federal district court in Arizona recently held that Chang’s had no cyber coverage for over $1.9 million in credit card assessments that it had to pay as a result of a data breach. The Chang’s court found that the Federal cyber policy’s “Privacy Injury” coverage did not respond to an acquiring bank’s claim against Chang’s for reimbursement of card brand assessments, because the Federal policy’s definition of “Privacy Injury” required that the compromised confidential records at issue be the claimant’s. As is typical, the payment card information stolen by the hackers belonged to Chang’s customers and the card-issuing banks, not the acquiring bank that made the actual claim for reimbursement by Chang’s.
Continue Reading P.F. Chang’s Ruling Highlights Potential Pitfalls of Cyber Insurance