We’ve all heard the story of the clerk at the local gas station who was double-swiping credit cards in order to make fraudulent copies. Online banking, restaurants, clothing retailers…every industry is potentially a target. Yet the industry that was the subject of more credit card thefts than any other sector in 2009?  Hotels.

To the point, SpiderLabs (an affiliate of Trustwave, a data-security consulting firm) has published a study which reports that 38% of the credit card hacking events in 2009 involved the hospitality industry.  Over one-third of all thefts of credit card numbers occurred at hotels. Much to my surprise, given the wealth of reporting on the subject, the financial services industry lagged well behind at a comparatively minor 19%. Retail followed at 14.2% while restaurants and bars were fourth at 13%.

I guess I shouldn’t have been surprised, though, as my own credit card number was stolen several years back while i was staying at a business travelers’ hotel in New York City. I had gone to the City for a Cinco de Mayo event sponsored by a major international insurer. Several days later, I received a call from my credit card company asking if I had bought gasoline on Long Island or a $5000 television at a big box retailer. While I do buy gasoline, I hadn’t been on Long Island. And while I certainly would have loved a $5000 television (or, for economy’s sake, something less pricey), I hadn’t bought that either. The conclusion was simple: my credit card number had been stolen when I used it at the New York hotel.

So, why hotels? According to security analysts, they’re generally easy targets. The large chain hotels may employ sophisticated security technology or other protections. Or they may not. In either case, how about smaller or private owned, non-chain hotels? The next time you check into a hotel, ask what security methods they use to protect credit card information. You probably won’t like the answer. The credit card number that you provide at check-in may sit in a folder or a file maintained right at the front desk. Who would prevent someone from simply lifting the file? Especially in the middle of the night. The single desk clerk on overnight duty?

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So, you think that a corporate cyberattack has nothing to do with you? If so, think again. Indeed, to the extent you own stock or securities, the value of your holdings could be at risk in the event of a cyberattack. I’ve said it before and I’ll say it again: Cybersecurity is an economic issue. See here.

Take, for example, Intel (INTC). In its 2009 10-K, released in late February, the company disclosed in a tersely worded statement that its networks had been the victims of “sophisticated” attacks. This revelation, contained in the “risk” section of Intel’s 10-K was intended to comply with U.S. Securities and Exchange Commission mandates which require public companies to disclose risks which could cause them to fall short of their profitability projections.

While Intel listed several such risks, the most intriguing was the one which stated that “We may be subject to intellectual property theft or misuse, which could result in third-party claims and harm our business and results of operations.” Intel’s disclosure continued that “[w]e regularly face attempts by others to gain unauthorized access through the Internet to our information technology systems by, for example, masquerading as authorized users or surreptitious introduction of software….These attempts, which might be the result of industrial or other espionage, or actions by hackers seeking to harm the company, its products, or end users, are sometimes successful. One recent and sophisticated incident occurred in January 2010 around the same time as the recently publicized security incident reported by Google.”

While such disclosed risks may or may not have an impact on a stock’s trading price, the potential impact can not be ignored. Google (GOOG) is a perfect example. As previously discussed here, Google has been the subject of cyberattacks which it claims were precipitated by the Chinese government. The import of this development can not be understated, as it created tensions between the U.S. and Chinese governments and even made it into Intel’s SEC filing. For private citizens, however, perhaps the greatest implication of the the Google cyberintrusions is the arguable effect that they had on Google’s price per share. On January 12, 2010, when the intrusion was publicly disclosed, Google shares fell 1.7% to $590.48. As of the date of this publication, April 25, Google’s shares are trading at $544.99, another roughly 8% price drop. Can these losses be directly linked to the breach of Google’s security systems? Put differently, can a possible link be dismissed? That’s for shareholders and others to decide.

So, what does this all mean? At a minimum, it suggests that the economic implications of a cyberbreach can be wide ranging, from the simple cost of fixing a security gap to a major hit to a brands’ reputation all the way to claims arising from the theft of consumer’s personal and financial information. Such an intrusion into the systems of retailer T.J. Maxx (TJX) lead TJX to settle with regulators, states, consumers and others and set a settlement/remediation reserve of over $100 million. At the same time, other well-known companies like Adobe, Juniper Networks and Rackspace have been hacked and had their information and technology compromised.

In the end, it is clear that just as consumers need to be vigilant about monitoring their personal and financial information to protect themselves from identity theft and the like, investors too must regularly track their holdings to protect their portfolios and assets. As to the companies whose information and systems are at risk, the need for both D&O and cyber insurance is patently obvious, and is as important as the protection of their intellectual property, consumer information and other non-public data. Risk management, information protection and insurance go hand in hand. And we’re here to make sure everyone recognizes the correlation.

Odd as it may seem to those of us who live and breathe cyber, tech and privacy insurance, I have heard anecdotally of municipal authorities who profess that their cities and towns do not need to incur the expense of buying these products. “Why do we need them? We don’t operate on the internet,” they reportedly have said.

Well, my response is “why don’t you think you need them?” Do you maintain a bank account? Do you store personally identifiable information about private citizens, whether in your property records, police files, tax databases or otherwise? Are your employees able to access your municipality’s computer systems remotely? Is it really possible that every single piece of information you maintain is recorded on paper and nothing is stored on a mainframe, whether located on- or off-site? Come on. Its 2010. That’s virtually impossible, isn’t it? Haven’t you read my December 23, 2009 post “No One is Immune. Even Government Entities Need Cyber/Tech Insurance?”

Since that posting, additional municipalities have suffered cyber attacks and been the subject of cyber lawsuits.

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With the report of another data security-related lawsuit involving online banking (another 2009 lawsuit referenced here involved an alleged loss of over $500,000), and a recent victory for a plaintiff on a summary judgment motion in a similar online banking data security breach case, the question arises whether online banking breaches will yield some substantive case law on the issue of “reasonable” security procedures as a matter of law. 

Ironically, this question may be answered by reference to a 20 year old model code (UCC 4A) originally drafted to address technological advances from that era. This post explores two complaints recently filed against banks for online banking  (Patco Construction Co. v. People’s United Bank (“PATCO”) and JM Test Systems, Inc. v. Capital One Bank (“JMT”)) and a court’s ruling on a motion for summary judgment in similar lawsuit (Shames-Yeakel v. Citizens Bank Memo and Memo Order on Motion for Summary Judgment – “Shames-Yeakel” case).  In short, since the Shames-Yeakel case proceeded past the “damages” pleading phase, it (and possibly these other online breach suits) reveals how some courts view security “standards” and approach the question of whether a company has achieved “reasonable security.”  I also believe they demonstrate the difficulty defendants face if they have to defend their security measures in a litigation context after a security breach.

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