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New York Court to Sony: No Personal Injury Coverage for You!

As many of us have been saying since the advent of cyber insurance coverage, cyber policies potentially cover privacy risks and exposures, not Commercial General Liability policies, be it under a property damage or a personal/advertising injury insuring agreement.  In other words, policyholders and their brokers would be mistaken if they deluded themselves into thinking that a standard base CGL policy’s personal injury/advertising injury coverage applies to a typical cyber breach where personally identifiable information is extracted.  Sadly, my good friend Scott Godes falls into this category.

On February 21, 2014, , Judge Jeffrey K. Oing, of the New York Supreme Court, Manhattan Commercial Division ratified this maxim by denying personal injury coverage to Sony for the 2011 breach and theft of personal information from its PS3 gaming platform, among other databases.  Zurich American Insurance Company v. Sony Corporation of America, Index No. 651982/2011 (N.Y. Supreme, filed 7/20/2011). See Complaint here.

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Cyber class-action litigation: Insurers’ next significant spend?

The following article was first published by my friends at Advisen for their new Cyber Risk Network. For those who haven’t already done so, check it out.

Rick

Virtually every reader is well aware of the decision from the US Court of Appeals for the First Circuit finding that claims by class-action plaintiffs for “mitigation damages” arising from a cyber breach were viable. Anderson v. Hannaford Brothers Co., 659 F.3d 151 (1st Cir. 2011).

There, the court held under Maine law that, in the abstract, certain claimants whose financial information was stolen could recover certain costs incurred in a reasonable effort to mitigate.

Hannaford Brothers is an extreme outlier in the world of cyber class-action litigation. And—as it should have in my view—the case effectively ended when the District Court, on remand, declined to certify the putative class in light of the claimants’ failure to establish that common issues of law and fact “predominate” over individual issues, a predicate to class certification.

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The Target Breach: Show Me The Insurance

The following article was first published by the Advisen Cyber Risk Network. If you haven’t checked it out, you should. Its extremely informative. And I’ll be a regular contributor.

Cheers.

Rick

By now, almost everyone has read or heard about – or even been directly impacted by – the theft of financial data relating to over 40 million credit and debit cards used at Target stores in November and December last year.

However, the insurance coverage aspects of the breach have generally flown under the radar.

To a company like Target (or whoever is affected by the next breach), the availability of insurance coverage is an important component of crisis management and remediation, litigation and regulatory investigation strategies, and reputational/brand/lost income protection.

So assuming Target has purchased potentially applicable insurance products, what coverages might apply?  And how might they respond?

At a minimum, it can be expected that Target will investigate the availability of coverage under four separate lines of insurance: Cyber, privacy and technology (CPT); general liability; crime/fidelity and; directors and officers liability policies.

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Cyber Security and Data Breaches: Why Directors and Officers Should Be Concerned

Following is an excerpt from the leading chapter in Willis London’s Executive Risks: A Boardroom Guide 2012/2013. If you would like to read the entire chapter, please contact me at rbortnick@cpmy.com. A complete copy will be emailed upon request. Cheers. Rick

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Cyber insurance has become a necessity. Every company that maintains, houses or moves sensitive information is at risk of a data breach, primarily due to the growth and increased sophistication of hackers, malicious software and, most recently, ‘hacktavists’. Even mere employee negligence can lead to a data breach. High-profile companies such as Sony can attest that cyber-intrusions can lead to hundreds of millions, if not billions, of dollars in legal exposure.

Equally troublesome, our expanding online society has introduced new financial risks and exposures that may not be covered under general and professional liability insurance products, including standard directors’ and officers’ (D&O) policies. As such, corporate directors and officers, and their risk-management professionals, must ensure that they buy appropriately tailored policies that provide protection against the rapidly expanding risks to which they could be vulnerable, both personally and professionally.

The risks and costs of a data breach

It has become known as the Year of the Breach: in 2011, companies of all sizes experienced malicious intrusions or employee negligence that affected their operations and/or businesses. For example, in April 2011, computer hacktavists unlawfully accessed the Sony PlayStation Network (PSN) and obtained the personal and financial information of roughly 77 million PSN users. Since then, Sony and its insurers likely have spent tens, if not hundreds, of millions of dollars to remedy and mitigate the resulting security and commercial crises — an amount that grows by the day as lawyers prosecute class action lawsuits on behalf of allegedly affected users whose personal and financial information was improperly accessed.

Equally problematic for Sony, it has been sued by its commercial general liability (CGL) insurer, which sought to avoid coverage by arguing that its general liability policies do not and never were intended to cover data breaches.

The TJX Companies also fell victim to a cyber intrusion that security experts predict will have long-term costs of between US$4 billion and US$8 billion in fines, legal fees, notification expenses and brand impairment. In the TJX case, the retail group reported that 45.6 million credit and debit card numbers were stolen from one of its systems during the period July 2005 to January 2007. Of critical import, the January 2007 intrusion occurred after TJX already had knowledge of the initial breaches.

Of course, big corporations are not the only entities that are vulnerable to hackers and hacktavisits; indeed, half of all companies that have experienced data breaches have fewer than 1,000 employees.

 

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Cyber Liability Insurance: The Value of an Educated Broker in the Age of E-Commerce

Introduction: Insurance Products for Cyber Risks

Media reports of cyber intrusions, data thefts and computer system malfunctions involving large, high-profile companies such as Sony PlayStation, Citigroup and Lockheed’s Security Vendor, RSA, have led a rapidly growing number of companies to consider the necessity of insurance coverage for technology and cyber privacy risks. As these businesses become more reliant on electronic communication and data storage, they are also developing a heightened awareness that an unauthorized intrusion could endanger their tangible and intangible assets (including their intellectual property) and, in many cases, their reputations and abilities to conduct business. Consequently, prospective policyholders are becoming more cognizant of the necessity for insurance covering these exposures.

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Protecting Our Children from Internet Predators, Marketers and Information Aggregators: The Need for Aggressive Government Intervention

As everyone knows, the Internet has dramatically altered (read: simplified) the way we communicate, do business and satisfy our intellectual and social curiosities. Indeed, Internet-based sales topped the trillion dollar mark for the first time in 2012 and are projected to increase 18.3% to 1.298 trillion in 2013. I’d take that rate of growth any day, particularly in the current world economy.

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Canadians More Exposed Than One Would Think

canada-flag-stereotypesOkay. Let’s start with the obvious. No, this has nothing to do with Canadian citizens and immigrants behaving badly, although that may be a topic for a future post.

What we’re talking about is the prevalence of cyber-related incidents and the resulting fallout among Canadian-based companies. And the numbers may surprise you.

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State Privacy Laws Evolve While Congress Campaigns

New legislation governing data breaches and privacy issues is popping up in states across the country. Most recently, Connecticut, Vermont, and Illinois have enacted new laws in these areas.

Connecticut

At long last, the proposed legislation requiring a data breach to be reported has become law in Connecticut. Section 369-701b was unable to move its way through the 2012 General Session of the Connecticut Legislature, but it was recently passed as part of the Connecticut General Assembly’s Special Session as an attachment of the Budget Bill.

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Data Privacy and Unauthorized Non-Hackers: the Rise and Risk of Accountability and Breach Notifications in Canada

Recent unauthorized access to British Columbia Institute of Technology’s computer network, which contained personal medical information of approximately 12,680 individuals, is yet another reminder of risks of exposure to data breaches. That none of the data on BCIT’s computer network was compromised or misused is reflective of a low-profile non-hacker intrusion, and of the ease with which computer networks can be infiltrated. Indeed, a sophisticated hacker would know better than to leave massive amounts of data, rightly labeled by some as the “oil” of the 21st century, uncompromised. More curious than uncompromised data, however, is BCIT’s notification in the absence of an actual data breach, and mandatory breach notification provisions under B.C. privacy law.

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First Circuit Court of Appeals Holds Bank’s Online Security Measures “Commercially Unreasonable” in Landmark Decision

In a landmark decision, the First Circuit Court of Appeals held in Patco Construction Company, Inc. v. People’s United Bank, No. 11-2031 (1st Cir. July 3, 2012) that People’s United Bank (d/b/a Ocean Bank) was required to reimburse its customer, PATCO Construction Co., for approximately $580,000 which had been stolen from PATCO’S bank account. In so doing, the Court reversed the decision of the United States District Court for the District of Maine which had granted summary judgment in the bank’s favor.

The dispute arose when Ocean Bank authorized six fraudulent withdrawals over seven days from an online account held by PATCO. While the bank’s security system flagged each one of the transactions as “high risk” because they were inconsistent with the timing, value, and geographic location of PATCO’s regular payment orders, the bank’s security system did not notify PATCO of this information and allowed the payments to go through. In light of this omission, PATCO sued, alleging that Ocean Bank should bear responsibility for the loss because its security system was not “commercially reasonable” under the Uniform Commercial Code, as codified under Maine Law.

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Cyberstalkers Beware: You’re Not Anonymous

A quick google search will reveal thousands of hundreds of thousands of hits for the term cyberstalking. Indeed, as of today, there are over 900,000 posts where the word is used. Perhaps not surprisingly, many of the listings involve teen cyberbullying and child protection issues. There are also large numbers of celebrities who are cyberstalked or otherwise harassed. Beyond juveniles and celebrities, the most frequently stalked demographic are 18-32 year old females, a cohort to which some of our own bloggers (and co-publishers) belong. Curiously, reports indicate that more and more women are also the cyberstalkers, not just the victims. Anecdotal stories suggest many of these women are married but unhappy with their lives.

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Cyber-security in a Hyperconnected World

The cyber-attacks recently launched by six individuals from the group Anonymous, an international hacktivist collective, against 13 Quebec government and police websites are but a fleeting glimpse of a much broader problem associated with the cyber world, most of which remains largely unseen. Succinctly stated, the cyber-attacks were a response to the Quebec Liberal party’s constitutionally questionable Bill 78 that was recently passed as a response to the student crisis sparked three months ago over the government’s planned 75% tuition increase. That six individual were arrested by law enforcement agencies and charged with mischief, conspiracy, and unlawful use of a computer should hardly be reassuring.

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Insurers: Assert Your Subrogation Rights

The following column was first published in the second issue of Advisen’s Cyber Liability Journal (here). I will republish my future columns in coming months. In the meantime, you can subscribe to the Journal at http://corner.advisen.com/journals.html (here).

Rick

It is axiomatic to say that insurance products evolve. Indeed, like virtually every organic structure, its development, growth and nimbleness are necessary to meet the progress of maturing, service-based economies. Hence, the advent of cyber/tech/privacy liability (CTP) insurance.

At present, there are over 25 markets selling some type of CTP coverage. Many insurers sell standalone products. Others bolt on new coverage parts to their existing products. Still others add endorsements that attempt to extend coverage to address an existing client’s business model.

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Will SEC Guidance Awaken Private Companies To Cyber Insurance Needs?

The following article was first published in Advisen’s inaugural Cyber Liability Journal (here) as my first regular column. The second Journal was published today and is available from Advisen at http://corner.advisen.com/journals.html (here). I will republish my second column in the coming days.

Rick

Many who underwrite or broker insurance, or practice law in the cyber/technology/privacy (“CTP”) realm migrated to this emerging area from the directors and officers liability regime. At the same time, it did not take a crystal ball to recognize that it was only a matter of time before CTP and D&O found a commonality. And that time is now.

Virtually every public and private company is reliant on computer networks and electronic data. It’s a way of life in the 21st Century. And there’s no going back. Yet with reliance comes risk. It seems we read about significant CTP breaches involving large, multinational companies almost on a weekly basis. CTP breaches have become a well-recognized risk of doing business. Estimates project that over 10 percent of us already have been hacked or had their identities stolen. I am among them.

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The Coverage Question

We are grateful to the rapidly-growing number of Cyberinquirer readers who continue to submit substantive content for publication. This truly is an industry blog, and we strive to present alternative points of view from all quarters.

The following article was authored by Gregg A. Rapoport, Esq., and David Lam, CISSP, CPP. Attorney Rapoport has represented policyholders in coverage litigation for over 20 years as part of a broad business litigation practice based in Pasadena, California. Mr. Lam is vice president of the Los Angeles Information Systems Security Association and has over 20 years of experience as an IT and information security professional and author. This article was first published by RIMS, and we appreciate Messrs. Rapoport and Lam offering it for republication here.

Rick Bortnick

As they confront the sobering question of whether their networks and the data they carry are fully secure, today’s “C-level” executives are becoming fluent in once-esoteric information security terms. Many have reached the conclusion that no matter the size of their IT and security budgets, there is no foolproof system for securing the confidentiality, integrity and availability of their data. Company networks remain vulnerable to attacks even if they adhere to industry best practices and run best-of-breed firewalls.

To address these security challenges, companies are relying on their risk managers to evaluate the applicability of existing insurance coverage to data breach incidents, and to assess the value of transferring some of the uncovered financial risk to one of the carriers now offering cyber-risk insurance policies. As the market for these products matures, premiums have come down significantly and policy limits have increased.

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An Insurer’s View: Examining the Rising Costs of Breaches

The following article, written by reknowned London Market underwriter Rick Welsh, was first published in the November 2011 Data Guidance newsletter. A shout out to Rick for passing it on to us for republication.

Rick Bortnick

Today, no company – even with comprehensive privacy policies and practices – can be safe from data breaches. Can companies effectively transfer the risk (and cost) of data breaches by way of insurance? What costs should the companies consider? Almost every reference to the cost of data breaches or ‘cyber crime’ identifies the actual cost of the breach notification as its common currency. In Part One of this analysis, Rick Welsh, Cyber Underwriting Director at ANV, explores this metric’s limitations and the true exposure and cost of data breaches.

The well-regarded Ponemon Institute is constantly measuring the cost of a data breach and is commonly referenced by many to express the rising cost of data breaches. The second annual ‘Cost of Cyber Crime Study’ issued by the Ponemon Institute in August 2011, found that the median annualised cost of cyber crime for the 50 companies in the study was $5.9 million, with a range being between $1.5 million to $36.5 million. The annualised average was up 56% from the previous year’s study.

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New Cybersecurity Disclosure Guidance for Public Companies: Focusing Attention, Raising Questions

As regular Cyberinquirer readers know, on October 12, 2011, the SEC’s Division of Corporate Finance published “suggested” Guidance on public companies’ disclosures of their cyber risks and exposures. I published a personal perspective on the implications of the Guidance in an October 29, 2011 post (here). Since then, our friend John Doernberg of William Gallagher Associates in Boston has written an excellent, thoughtful article which adopts a more technical approach. As many of you may know, John is a Vice President at William Gallagher and focuses on privacy, information security and risk management issues. Before becoming an insurance broker in 1995, John practiced law at leading firms in New York and Boston. The following article first appeared at John’s own site, http://blog.wgains.com/?s=Doernberg, and is being republished here with his permission. Thanks John!

Rick Bortnick

Increased corporate reliance on computer networks and electronic data has brought a corresponding increase in risks associated with breaches of their security. Such breaches have become more frequent and severe. With these Guidelines, the Division has indicated that public companies and their advisors should focus greater attention on how disclosure obligations under the federal securities laws may be affected by the potential financial and operational impact of cybersecurity breaches.

The Guidelines note that cybersecurity breaches (generically referred to as cyber incidents) can be malicious (cyber-attacks) or unintentional. The Guidelines provide something of a rogue’s gallery of cyber malice: the gaining of unauthorized access to steal or corrupt sensitive data or to disrupt operations, denial of service attacks, sophisticated electronic circumvention of network security, and social engineering techniques such as phishing to extract passwords or other information that will enable the gaining of access.

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The Hospitality Industry Revisited: Does Your Company Have Proper Coverage?


101387303-a0006-000338.530x298In a prior post (here), we discussed the frequency of cyber thefts in the hospitality industry in 2009. We have a decent idea of how many of you read that article. For those of you who haven’t, here’s my topic sentence: “38% of the credit card hacking events in 2009 involved the hospitality industry.” Yep. 38%.

And guess what? The hospitality industry remained a high-level target in 2010. Alright, if you’re connected to the hospitality industry, you probably knew that already. But what you might not realize is that you’re not out of the clear. And, things may be getting worse as the frequency of cyber criminality grows, and as the perpetrators become more sophisticated and cyber attacks propagate (more on that below).

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Securities Law and Cyber Disclosures… Perfect Together…Especially for Cyber and Tech Underwriters and Brokers. And Me

Its not often that worlds collide or that interests converge into one amorphous epiphany. But that’s exactly what happened to me recently, when the Division of Corporate Finance (DCF) of the U.S. Securities and Exchange Commission (SEC) issued a Disclosure Guidance identifying the types of information public companies should consider disclosing about cyber risks and events that could impact their financial statements. Now, the DCF has cautioned that the Disclosure Guidance only represents its own views and “is not a rule, regulation, or statement of the Securities and Exchange Commission.” The DCF also emphasizes right up front that “the Commission has neither approved nor disapproved its content.” Yeah, right. YOU be an officer or director or officer of a company that does not “comply” with the DCF’s “recommendations.”

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And Now, the Maine Event: Mitigation Costs Constitute Damages in Data-Breach Case

Businesses that necessarily require their customers to disclose credit card and personal information, beware. Just five days ago, the United States Court of Appeals for the First Circuit held that claims by class action plaintiffs for “mitigation damages” arising from alleged negligence and breach of contract were viable. Anderson v. Hannaford Brothers Co., Nos. 10–2384, 10–2450, 2011 U.S. App. LEXIS 21239 (1st Cir. Oct. 20, 2011).

In Anderson, the electronic payment processing system of a national grocery chain, Hannaford Brothers Co., was breached by hackers in 2007. This resulted in the dissemination of as many as 4.2 million credit card and debit card numbers, expiration dates, and security codes. Hannaford Brothers was not notified of the breach until February 27, 2008 and subsequently contained the breach on March 10, 2008. A week later, Hannaford released a statement regarding the breach and announced that over 1,800 cases of fraud resulting from the theft already had been reported.

Following Hannaford’s announcement, several financial institutions immediately cancelled customers’ debit and credit cards. Some financial institutions, which refrained from immediately canceling the credit card, monitored the accounts for unusual activity, cancelling the cards, in many cases, without notifying the customer. Customers who asked that their cards be cancelled incurred fees from issuing banks for the replacement cards.

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What is Corporate and Business Identity Theft and What Are the Risks and Damages Associated with It?

The yellow fever outbreak of summer 1798 was the worst in Philadelphia’s history. Over 5,000 residents were infected, and nearly 1,300 died, causing even President Washington to flee. On the night of September 1st, 1798, the vault at Carpenter Hall was breached and the then-massive amount of $162,821 went missing. This first bank robbery in the United States, attributed as an “inside job”, ushered in an era of robberies that turned criminals into celebrities. Jesse James, Bonnie and Clyde, and John Dillinger have become legends. At present, the risk of yellow fever has been mitigated due to vaccines. The risk of bank vaults being physically robbed similarly has been reduced.

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Cyber Liability Insurance for Universities: Incentivizing Best Practices as a Condition to Coverage (a.k.a “Reverse Underwriting”)

Computer hacking is a constantly evolving and growing threat. While recent high-profile network security breaches at companies such as Epsilon and Sony (with crisis management and other costs estimated to range from $1 billion to multiples thereof in the case of Sony) have helped raise awareness about the need to adequately protect personal identifiable information, the problem has existed for decades.

Yet the situation has only recently begun to receive proper attention from the media, government officials, businesses, and certain segments of the insurance industry. Of course, the cost of a security breach may have something to do with that. According to a study from Marsh and the Ponemon Institute, the typical data breach in FY 2010 resulted in companies and their insurers have to pay an average of $7.2 million to deal with and remedy the situation.

One particularly alluring target for hackers has been educational institutions. While schools and universities may not immediately appear to be obvious targets, the statistics confirm that attacks against educational institutions are on the rise.

In 2007, educational institutions accounted for 25% of all reported data breaches. This number jumped to 33% in 2008. See Sarah Stephens & Shannan Fort, Cyber Liability & Higher Education, Aon Professional Risk Solutions White Paper (December 2008) Read the rest of this entry »

Cyber Security On President Obama’s Agenda

Faced with revitalizing a deteriorated economy, formulating a national budget, and the aftermath of Osama Bin Laden’s death, President Barack Obama has his hands full. Yet, in the midst of all the issues commanding the White House’s attention, the Obama Administration somehow has found time to address the threats to our nation’s cyber security.

According to Business Insurance, on Thursday, May 12, 2011, the Obama Administration proposed cyber security legislation to improve protection for individuals and the federal government’s computer and network systems. The proposed legislation would address national data breach reporting by creating simpler and standardized reporting requirements for the 47 states that contain such requirements. The proposal would also synchronize penalties for computer crimes with other crimes. Additionally, the government, through the Department of Homeland Security, would become directly involved in assisting the industry as well as state and local governments in policing and enforcing cyber security. The proposed legislation encourages the state and local governments to share information with the Department of Homeland Security about cyber threats or related incidents by providing them with immunity for doing so.

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Cyber Crime and Securities Fraud Litigation: The Next Wave?

Following the publication of our original post on the implications of a cyber attack on investors’ securities portfolios (see here), we have been asked by scores of readers whether securities fraud litigation arising from cyber crime has ensued. Not surprisingly, the answer is “yes.”

Indeed, we have located at least two such cases, one a putative securities fraud class action against a payment processing company and the second an SEC initiated action against a private investor. The results may (or may not) surprise you, depending on your perspective of trial courts’ levels of judicial activism and willingness to render substantive decisions at early stages of litigation.

In re: Heartland Payment Systems, No. 09-1043 (D.N.J. Dec. 07, 2009) remains the paradigm for such litigation. To facilitate its payment processing services, Heartland Payment Systems (“Heartland”) stored millions of credit and debit card numbers on its internal computer network. In December 2007, hackers launched a Structured Query Language Attack (“SQL attack”) on Heartland’s payroll management system. To its credit, Heartland was able to successfully avert the attack before any personally identifiable information was stolen. At the same time, however, the company failed to detect malicious software (“malware”) which had been placed on the network by the SQL attack. The malware infected Heartland’s payment processing system, ultimately enabling the hackers to steal 130 million consumer credit and debit card numbers. Heartland did not discover the breach until January 2009, at which time it notified government authorities and publicly disclosed the event. Over the course of the following month, Heartland’s stock price dropped over $15 per share. Perhaps not surprisingly, shareholder class actions ensued.

In their complaint, plaintiffs alleged that Heartland and its officers and directors had made material misrepresentations and omissions about the December 2007 SQL attack. Specifically, plaintiffs claimed that the defendants concealed the SQL attack and misrepresented the general state of Heartland’s data security. Plaintiffs further alleged that the defendants’ conduct was fraudulent because they were aware that Heartland’s network had been breached, yet they had not fully remedied the problem Read the rest of this entry »