On January 2, 2013 The Department of Health and Human Services (“HHS”) announced that it had entered into a Resolution Agreement with Hospice of North Idaho (“HONI”) to settle alleged HIPAA violations resulting from the theft of an unencrypted laptop computer containing the electronic personal health information of 441 patients.  This is the first HHS settlement involving the breach of protected health information (“PHI”) involving fewer than 500 individuals. 

After being notified by HONI of the stolen laptop, the HHS Office Civil Rights (“OCR”) conducted an investigation and concluded the following: 

• HONI did not conduct an accurate and thorough risk analysis as required by the HIPAA Security Rule, especially with respect to an evaluation of the likelihood and impact of potential risks to the confidentiality of electronic PHI maintained in and transmitted by portable devices.  
• HONI did not have in place police or procedures to address the security of PHI stored or transmitted in portable electronic devices. 

 In entering into the Resolution Agreement, HONI agreed to pay $50,000 and enter into two-year corrective action plan with HHS.  A copy of the Resolution Agreement can be found at:  http://www.hhs.gov.privacy/hipaa/enforcement/examples/honi-agreement.pdf.

 Although this case is unique in that it is the first settlement by HHS of a data breach involving fewer than 500 individuals, the facts that gave rise to the action by HHS are all too familiar.  The breach resulted from the theft of an unencrypted laptop and HHS was troubled by the provider’s alleged lack of a risk analysis and appropriate policies and procedures to protect PHI stored in or transmitted by portable electronic devices.  In this era of increased HIPAA enforcement, covered entities and business associates must remain vigilant in their HIPAA compliance efforts.  This includes, without limitation, (i) conducting thorough risk assessments, (ii) developing and updating robust HIPAA policies and procedures, and (iii) conducting ongoing HIPAA training and awareness programs with all staff.   In essence, affected entities must create what OCR has often referred to as a “culture of compliance.”  Moreover, emphasis should be placed on the use and safeguards of portable electronic devices, which, as in this case, are frequently at the center of a data breach.

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Regular Cyberinquirer readers may recall the following holiday poem by Amanda Lorenz. Like the Yule Log, we here at Cyberinquirer Central have decided to republish Amanda’s poem on an annual basis at holiday time, barring extenuating circumstances. Hope you agree that it remains fresh and timely. In any event, enjoy! And happy holiday season from your friends at Cyberinquirer.

Twas the month before Christmas and all through the house,
All the children were networking with the click of a mouse.
Cyber thieves were nestled all snug in their chairs,
Waiting for shoppers to unknowingly share.

 As I shopped for him and he shopped for me,
The thieves stole our money and our financial history.
We did not even realize that this information was taken,
And we thought the denial of our credit card was mistaken.
Using Phishing or SMiShing and hacking the links,
Our private information was retrieved in a blink.

 Perhaps we should have shopped on a network that was secure,
Or at least checked our credit reports monthly to be sure,
That thieves were not using our names and our faces
To purchase plane tickets to tropical places.
So to all of the shoppers who like to avoid the crowd,

Protect your info this season and make CyberInquirer proud!

Happy Holidays from CyberInquirer!

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Following is a guest post by Doug Pollack, CIPP/US, chief strategy officer at ID Experts, a leading provider of healthcare privacy and data breach solutions. The article explores the thorny issue of “ownership” as it applies to patient data stored in and shared by electronic health record systems.

Cheers.

Rick

 I recently began exploring the question of who, or what entity, owns the data that is incorporated in our patient electronic health records (EHRs). I originally began thinking about this because I was imagining that the “owner” would be responsible under circumstances where there was an unauthorized disclosure of such protected health information (PHI), in other words a data breach. It seemed like such a simple question, I had assumed I would find the answer to be just as straightforward. As it turns out, many have pondered this question and suggest that the question of “ownership” of medical data may be a misplaced one, an unanswerable question, and that the more relevant question is what control the patient, and other members of the health ecosystem, have relative to accessing, modifying, appending and transmission of this data. In other words, how is patient privacy provided for within the new EHR universe?

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We would like to thank our colleague, Jordan Fox for his invaluable assistance in researching and drafting this article. Jordan is an associate in Cozen O’Connor’s Commercial Litigation Department in Philadelphia and can be reached at jfox@cozen.com. In turn, Tom Wilkinson currently serves as President of the Pennsylvania Bar Association and is co-editor of the Pennsylvania Ethics Handbook, a comprehensive review of the rules of conduct governing lawyers, with extensive citations to case decisions and ethics opinions addressing all aspects of lawyer-client relationships. Tom can be reached at twilkinson@cozen.com.

Thanks guys!

Rick

As users constantly update their Facebook and other social networking profiles, they may be unwittingly doing something else as well: creating a cache of evidence for a future adversary to use against them in discovery and at trial.  Trial courts have increasingly allowed parties to discover the private portions of social networking sites when doing so would likely lead to the disclosure of admissible evidence.[1]  In the common scenario, a party observes information on the public portion of their adversary’s profiles that tends to undercut that adversary’s claims—such as pictures of a plaintiff skiing after claiming to have devastating injuries—and present such information to the court as the “factual predicate” that establishes the potential relevance of the private profile.[2]  While most courts will not allow a party to simply conduct a “fishing expedition” into their adversary’s private digital lives, nor will they declare such information categorically undiscoverable.[3]

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For those captivated by recent events in astronomy, parallels can be drawn between the recent landing of NASA’s rover Curiosity on planet Mars and the public discourse on data security in Canada. With the distinction that one is effectively equipped with the right budget and tools to achieve its actual objective, both have come a very long way, both have managed to blaze through layers of clouds, both seek to secure ingredients essential to life, and both are now aimlessly wandering about unchartered territories.

A decisive factor in Barrack Obama’s 2008 political campaign was the extensive use of individual, thin sliced consumer data to send highly tailored messages to gain political support. Within 13 years, Google has become the most valuable brand in the world through the aggregation of vast amounts of data including search data, or data held in Gmail accounts. This information is then used to create an advertising cruise missile, which is much more efficient than the old method of pattern bombing.

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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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Whether discussing data encryption, network security, or internal data privacy management practices and policies, the most sophisticated IT security protocols, the most learned team of specialists, and the most compliant of data management practices and policies cannot escape, prevent, or remedy what many businesses and organizations have rightly labeled as the root cause of data security failures: human error. While they tend to possess greater network security than smaller organizations, the risk of human error should be of particular a concern to medium and large size organizations whose internal controls over data and employees are inevitably diluted by their size and numbers.

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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 21^st 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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The following article was co-written with my colleague Gary Klinger for a Cozen O’Connor client Alert. Gary turned it around in one-day. Then I got it… Hence the delay.

Please let us know if you would like to be added to the Alert e-blast list and receive articles on a variety of cutting-edge professional liability and general liability topics.  Also, be sure to see the Dark Knight Rises. The ending was perfect.

Rick

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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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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The US and Australia have a longstanding agreement to back each other up in case of physical enemy attack, but now have moved that agreement to the arena of cyber-attack as well. With Australia’s history of cyber-attacks well known, such as an attack two years ago that brought down Australia’s Parliament’s website, the country cannot afford to ignore cyber security any longer.

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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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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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Thanks to my colleague Mike Schmidt, who published the following post on his own blog, Social Media Employment Law Blog.

Rick

It is amazing how fast a legislative body can act when it wants to. Just last week, Governor Martin O’Malley of Maryland signed the country’s first law restricting employers’ ability to demand social media account information from applicants and employees. Maryland was the first to propose this type of law, and is now the first to enact it.

The Maryland law takes effect on October 12, 2012, and contains the following highlights:

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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 the “Risks” section of its 2009 10-K, the company disclosed in a tersely worded statement that its networks had been the victims of “sophisticated” attacks. Kudos to Intel for making this disclosure, which predated the October 2011 publication of the SEC Guidance addressing public companies’ cyber risks and exposures (discussed here and elsewhere, including in the March 2012 edition of the Advisen Cyber Journal. Please feel free to contact me for details on how to obtain this must-read issue and subscribe. Advisen has done a masterful job, as it does with all of its publications). As will be discussed in my next post, a significant number of public companies still have not complied with their cyber risk and cyber exposure reporting “obligations” under the SEC Guidance.

As to Intel, the subject 10-K listed several noteworthy risks. The most intriguing 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.”

The adverse economic impact of a cyber-related disclosure is not theoretical, either. Indeed, in the immediate wake of the News Corp./News of the World cell phone hacking scandal in mid-2011, News Corp’s market cap reportedly fell by over 15%, valued at approximately $7 billion, in less than a week. Not surprisingly, News Corp was sued shortly thereafter in a series of securities fraud class actions, which remain pending.

While cyber risks and exposures may or may not have an impact on a stock’s trading price, their potential impact can not be ignored. Google (GOOG) is another 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 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. By April 25, 2010 Google’s shares were 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 cyber event can be wide ranging, from the simple cost of fixing a security gap to a major hit to a brands’ reputation (remember News of the World? After 168 years of tremendous success globally, it ceased publishing on July 10, 2011 as a direct result of the hacking scandal), 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.

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.

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The occurrence and frequency of cyber breaches are not as transparent as one might expect.  Or hope, for that matter.  To the contrary, the FBI’s chief cyber crimes investigator recently admitted that “thousands” of cyber crimes have gone unreported due to companies’ fears about the impact of adverse publicity on their reputations and bottom lines.

According to Shawn Henry, assistant director of the FBI’s Cyber Division, hackers regularly access computer security systems and steal millions of dollars and credit card numbers without such incidents ever being publicly reported.  Indeed, Mr. Henry has acknowledged that “[o]f the thousands of cases that we’ve investigated, the public knows about a handful…There are million-dollar cases that nobody knows about.”

And the problem is not limited to Fortune 500 and other large companies such as TJX and Heartland, which have voluntarily disclosed cyber intrusions.  Indeed, the incidence of cyber attacks on such companies is growing marginally or even shrinking, as these entities implement more complex security systems.  The more frequent target has become medium-sized and small companies which do not have the resources or perhaps the ability or interest to enhance their cyber protections.  The same goes for private citizens whose personal wealth and, equally troublesome, personal secrets may be at risk as their personally identifiable information is wrongfully retrieved and then used to access their bank and other investment accounts.  Needless to say, no one wants to admit they’ve been hit or that their resources have been stolen.  The stigma alone is a major deterrent to such public disclosures. (“Hey Joe… guess what… I was just robbed of $10 million!! And, they learned that I’ve been cheating on my spouse for the past ten years… How about that!!!”).

For cyber insurers, a prospective policyholder’s unwillingness to disclose such intrusions can be a major problem, both from an underwriting and claims perspective.  As always, the key is proper detailed due diligence up-front.  Underwriters can not take for granted that they would or should know about an intrusion at a potential account.  They must ask the right questions, require the proper warranties, and “pull back the curtain” to ensure that the risks they take on are just that – risks – rather than cyber intrusions waiting to happen.  “Penny-wise, pound foolish” is particularly apt.  Spend the time and money to vet your proposed accounts.  The cost of a claim or related coverage litigation will dwarf the expense of a thorough underwriting investigation.  Unlike the availability of insurance, that is a guarantee.

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Cloud computing is the storage of data on remote computer servers and the sharing and transmittal of such information by way of the internet.  Use of the cloud enables both businesses and casual users to maintain as much or as little electronic data as they wish on a third party’s mainframes without the need for or the expense of having to buy and maintain their own hardware systems.

The cloud’s economic benefits are clear.  Still, clouds can be a legal minefield for companies and their counsel. Data breaches, hosting of illegal content and inaccessibility of critical business information are just a few examples of turbulent situations cloud users can face.

Given the risks and potential rewards of the cloud, consider the following guide before entering into a cloud provider contract:

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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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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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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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In 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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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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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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I. Overview

Canada’s privacy regime can be described as a web of legislation at both the federal and provincial/territorial level. Some commentators express concern that this web has become tangled, lacks uniformity and actually undermines the predictability and consistency that, in their view, would exist under a single (federal) privacy regime. Canada has two primary privacy statutes: the Privacy Act and the Personal Information Protection and Electronic Documents Act (“PIPEDA”). The Privacy Act, R.S.C. 1985, c. P-21 (Can.), took effect on July 1, 1983, and imposed certain privacy rights obligations on approximately 250 federal government departments and agencies by limiting the use and disclosure of personal information. The Privacy Act also gives individuals the right to access and, if necessary, correct personal information held by governmental organizations subject to the Act.

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I.                    Introduction

The Internet facilitates the widespread and instantaneous flow of information across international borders.  While the advent of this method of transnational communication has truly created a “global economy,” at the same time, it has engendered problems for companies and their insurers which seek to assess risk and implement information safeguards, particularly in the face of divergent data privacy laws which vary from region to region or may not even exist in certain jurisdictions.  The Asia-Pacific region typifies such a lack of uniformity.  At the same time, the emerging economies in this rapidly growing part of the world have generated promising targets for computer hackers. 

75% of Asia-Pacific enterprises have experienced cyber attacks in the past 12 months.  Perhaps not surprisingly, a 2010 study by Symantec reported that almost half of all Asia-Pacific-based businesses (and 67% in Singapore) ranked cyber risk and information security as their top concern—more so than natural disasters, terrorism, and traditional crime combined.  Cyber attacks and data breaches are on the radar of CEOs and risk managers for good reason: the average cost for a large company to remediate a data breach in Australia increased to nearly $2 million in 2010, which is slightly up from 2009.  See Ponemon Institute/Symantec 2010 Annual Study: Australian Cost of a Data Breach (May 2011).  Notwithstanding the prevalence of such attacks, it is far more likely that a cyber security program is managed as a part of a company’s traditional business risks, with traditional coverages being contorted to cover various components of cyber risk (i.e. property loss, liability to third-parties, business interruption, etc.), rather than by way of a dedicated cyber-specific insurance program.  Still, in light of recent developments, it is virtually certain that companies soon will begin looking to transfer such risk via more efficient and targeted technology insurance forms and policies.   

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Doug Pollack of IDExperts recently published a blog post on cyber insurance that caught my eye. Insofar as IDExperts is a respected provider of cyber breach response services, I assumed the article would address technical issues. Upon reading the piece, however, I was disappointed to find that the article addressed insurance-related matters, including criteria for the selection of insurance products and programs, a topic typically the province of risk managers, brokers, underwriters and lawyers. Hmmm…

At the outset, the article addresses technical issues, as the author correctly suggests that “privacy, compliance and legal officers should work closely with their risk manager to ensure that the organization is getting a policy that meets its needs.” Having hooked me with that truism, I was looking forward to reading on. But that is where the technical commentary (and our common perspective) ends. From there, the author moves on to express his views (and, in my counter-view, misconceptions) on cyber insurance products and how they should operate.

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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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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 »

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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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 »

Cyber crime is costing the United Kingdom more than £27  billion a year ($43.5 million), according to a recent study published by Britain’s Office of Cyber Security and Information Assurance.  The report, entitled “The Cost of Cyber Crime,” concluded that digital crime was a widespread, pervasive threat to U.K. businesses.

Theft of intellectual property, such as designs, formulas and other company secrets from businesses costs £9.2 billion, with firms specializing in pharmaceuticals, biotechnology, electronics, IT and chemicals being hit hardest.  The pharmaceutical industry loses about £1.8 billion a year in IP theft, followed by electronics and electrical equipment makers and the software sector.  In terms of non-IP industrial espionage, financial services are the biggest loser, with yearly losses of more than 2 billion, followed by mining and aerospace. 

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We wrote to Google and asked what information was required to subpoena Gmail in order to determine the identity of an email customer. Google’s response is below:

Dear Ms. Pengelley:

The information requested relates to services offered by Google Inc., a U.S. company organized and operating in the U.S., and governed by U.S. laws.  As such, we ask that your request be directed to Google Inc. – Attn: Legal Department, and communicated through the proper legal channel.  Please direct further communications to Google Inc. – Attn: Legal Department – at 1600 Amphitheatre Parkway, Mountain View, California, 94043, US, Fax: + 1 650.469.0622, or by email at lis-global@google.com.

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There have been a recent flurry of blog posts and media stories warning internet users about the potential dangers of posting their whereabouts on social networking sites, as such personal information is being used by opportunists to facilitate crimes. For example, just in the last month, three men in Nashua, New Hampshire allegedly used information they obtained from users’ Facebook status updates to learn when the users would not be home and thereupon broke into their vacant and vulnerable residences. Although Facebook has denied any link between its site and the crimes, the Nashua police believe that detailed information about the posters’ travel plans provided the thieves with sufficient information to know when the homes would be unoccupied.

Of course, the incidence of such crimes has not been widely disseminated through traditional media sources, such as newspapers, radio and television. As such, most Americans are unaware of this increasing phenomena. At the same time, internet users are more widely and more frequently publishing their personal information, including their travel and vacation plans, on social networking and other public sites. Moreover, beyond the routine “tweets” and run-of-the-mill social networking status updates, new applications for cellular phones and PDAs are being created to facilitate geographical updates. These applications such as “Foursquare,” “Gowalla” and “Facebook Places,” enable users to instantly identify their current physical location on the profiles they have created on social networking sites. Needless to say, allowing geographical information to freely be disclosed to the public can provide opportunists with even more accurate information about the whereabouts of their victims and their distance from an unoccupied and vulnerable residence.

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Fifty years ago, a superhero leaped tall buildings in a single bound and used x-ray vision to catch evil criminals.   Today, some of the world’s most threatening criminals are computer hackers.  Superman may not be able to save us from cataclysmic cyber attacks, but we can rest a little easier knowing seven cyber guardians are holding keys to one of society’s most valuable commodities—the internet.  

ICAAN, the Internet Corporation for Assigned Names and Numbers, has provided “keys” to the internet to seven members of the global community. As discussed in prior posts, ICAAN is a non-profit watchdog group that helped establish Domain Name System Security Extensions,  or DNSSEC.   The DNSSEC—which just became enabled this year— is a critical security technology that lies at the core of the internet’s global addressing system.  It protects the very heart of the internet by ensuring that users reach the intended web address.

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On July 23, 2010, the United States Court of Appeals for the Eighth Circuit issued an important decision in Eyeblaster, Inc. v. Federal Ins. Co., 2010, U.S. App. LEXIS 15152, No. Civ. A. 08-3640, finding concurrent coverage under both a General Liability (“CGL”) insurance policy and a separate Information and Network Technology Errors and Omissions Liability (“E&O”) policy in circumstances where an online marketing company installed software on a consumer’s computer system, allegedly corrupting the computer’s software operating system.

Eyeblaster Inc. (“Eyeblaster”), the policyholder, is a company that creates, delivers and manages online interactive advertising. For the period December 5, 2006, to December 5, 2007, it was insured under two concurrent policies issued by Federal Insurance Company (“Federal”): (1) a CGL policy covering occurrences which cause damage to tangible property, and (2) an E&O policy which covered claims for financial loss caused by a wrongful act in connection with a product’s failure to perform its intended function or serve its intended purpose, resulting in damage to intangible property. As to the latter policy, intangible property included software, data and other electronic information. Both policies were “duty to defend” forms.

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Interviewing for your first job as a teenager is as exciting as it is intimidating. Thoughts of what to do with your first paycheck consume your mind as you rehearse your best “do-you-want-fries-with-that” smile. The interview proceeds flawlessly and you start to count the dollar signs as you await the job offer. But imagine your surprise when you are informed that you did not get the job because your background check revealed that you are over $75,000 in debt and five years behind in your child support payments for your eleven year old child…a terrifying thought considering you are only 16 years old.

Adults aren’t the only victims of identity theft. Child identity theft is an increasing and understated crime. A child’s Social Security Number (“SSN”) is the perfect target, as the theft typically goes undetected until years after the crime has taken place. Indeed, the crime might not be discovered until the rightful owner/victim uses his or her SSN for the first time years later. This revelation often occurs when the victim applies for his or her first job or financial aid before college.

The scheme works as follows: businesses are using various techniques to search the Internet for dormant SSNs. These numbers often belong to long-term inmates, dead people or children. Obtaining them is not as difficult as one may think, as SSNs are distributed systematically depending on age, geographical location and when the number is issued. Once it has been determined that no one is actively using the number to obtain credit, the numbers are offered for sale.

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Lest one question the severity of the evolving challenges in our rapidly growing cyber world, President Obama has crystallized it succinctly: (1) “cyber threat is one of the most serious economic and national security challenges we face as a nation;” and (2) “America’s economic prosperity in the 21st century will depend on cybersecurity.” In other words, President Obama has declared cybersecurity to be a national security priority.

While that’s obviously good news, the follow-up question is “how are we doing in meeting the associated demands?” Regrettably, not so well, it seems.

Speaking before cybersecurity and privacy experts from government, law enforcement, the private sector, academia and privacy and civil liberties groups, President Obama, Homeland Security Secretary Janet Napolitano, Commerce Secretary Gary Locke, Cyber Coordinator Howard Schmidt and other Administration officials uniformly acknowledged that far more work needs to be done to protect digital communications and information infrastructure and make it more difficult and costly for cybercrimimals.

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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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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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Who would have thought a comment as innocent as “Just walked into work at Cozen O’Connor-Toronto…so much work to get done” could potentially cause you so much trouble? 

I came across an article this weekend by Tracy Staedter, titled “I’m Not Home: Please Rob Me”. Ready to become paranoid?  Read the article – it’s short and to the point.  Ever send out Evites?  How about prior tweets, MySpace posts, etc. inviting people to your place and including an address?   Bingo!  Better pack up and move quick! 

The website causing havoc is www.PleaseRobMe.com.  Check it out…make sure you aren’t on the site…then check again after every time you tweet, post, etc.  Do you have the time to constantly check?  Probably not.  Should you?  Probably.  It may make you paranoid, but then again, shouldn’t you be?  But should the creators of the website be blamed – legally, morally, ethically?  Should they be held accountable for what you put out into the public realm?  Can you sue for violation of your privacy rights?  Do you really have an expectation of privacy in any of those posts?  In an age where MySpace, Friendster and other social networking sites regularly have their records subpoenaed, why should anyone think that anything they post will be “private”?  What piqued my curiosity even more was how this website could apply in the criminal or tort law application.  Can this website be used to substantiate or corroborate an accused’s alibi – “Your Honor, look!  I have proof that I wasn’t in the city when the crime occurred…I tweeted that I would be in Los Angeles!”  Look, my knowledge of Canadian (or U.S., for that matter) Criminal Law/Procedure does not extend further than the 800 or so pages of textbooks I read while in law school.  But surely this website can be put to more use than just what the creators intended.  So long as a proper foundation is laid, and the purported evidence is relevant, it may be admitted, right?  Something to definitely consider as a defense attorney. 

The creators of the website claim the site is supposed to help us…to open our eyes to the evil out in the world.  Call me crazy, but perhaps a simple email addressed to me would have been more appreciated…though it leaves one wondering if such a logical course of action would have been as effective.

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Never underestimate the value of a good domain name! As any website owner will tell you, http://www.rose.com, by any other name, is likely to lose customers.

About a week ago, my colleague’s nephew, Kevin Bortnick, found himself in a domain name predicament. His plight is interesting and he has graciously permitted us to blog about his situation, which provides some useful context for a discussion about domain name disputes.   

Kevin is a talented website developer who used the name “KBortnick” or “KB” for his internet business. In November of 2005, he registered the domain name kbortnick.com for a period of four years, at a cost of about $10 per year. Although the domain name expired in November, 2009, he explained that “I was moving out & had a bit of a money crunch, so I figured I’d renew it in about a month, because it really wasn’t worth anything & I figured it would be fine….”   

A couple of weeks ago, he attempted to re-register the name, only to discover that someone else had purchased it. That unknown ‘someone’ had immediately put it up for sale on a website that auctions off domain names, http://seto.com, subject to a minimum bid of $480. As you can imagine, Kevin was livid. “The highest I’ve ever seen my domain name appraised at was about $30”, he exclaimed, “and most places didn’t even give it that!”   

(I empathized with Kevin’s situation. Over Canadian Thanksgiving, while I was sitting before the computer in a state of turkey-induced lethargy, I was suddenly roused from my stupor by the discovery that the domain name “pamelapengelley.com” could be registered for the low, low price of just $10 a year. I may soon write a post that is entitled “How I learned the hard way that just because you can make a hideously tacky personal flash website dedicated to your glorious self doesn’t mean that you should make one.” But I digress…)   

Kevin’s dilemma got me thinking –  is this what is known as “cybersquatting”?  Is there any remedy for this sort of thing? Does Kevin have any recourse?

In fact, there are a couple of different mechanisms for resolving a cybersquatting dispute, and my understanding of them was greatly assisted by some basic knowledge about the development of the Internet and some tech-related acronyms like “DNS”, “IP” and “ccTLD”. If these terms are unfamiliar to you, then I ask for your indulgence while I lay out some of the basic IT background. It’s a bit lengthy so if you are computer-savvy, you may just want to skip part 1. Read the rest of this entry »

The risk of cyberattacks is real and growing. While many of us theorize and speak in hypotheticals about the possibility of a major and potentially devastating cyberattack (or twenty), those considered most “in the know” are taking these risks seriously. And for good reason.

A January 29, 2010 study commissioned by McAfee, Inc and authored by the Center for Strategic and International Studies (CSIS) reports that over one-third (37%) of the IT security executives surveyed believe that critical infrastructure such as electrical grids, oil and gas production, water supply, telecommunications and transportation networks has become increasingly vulnerable to a cyberattack. Moreover, 40% of the 600 executives from 14 countries who responded predict a major security incident in their sector within the next year. Only 20% believe their sector is secure and will successfully avoid a serious cyberattack over the next five years.

The respondents work in critical infrastructure enterprises across seven sectors in 14 countries (including the US, UK, Japan, China, Germany, France, Italy, Russia, Spain, Brazil, Mexico, Australia and Saudi Arabia). Most problematic, over half of the respondents admitted that their concerns are not without foundation. Indeed, 54% acknowledged that their companies already have experienced infiltrations or large-scale cyberattacks from terrorists, organized crime gangs, and/or nation-states. The average cost of resultant downtime is estimated to be $6.3 million per day. Not chump-change by any means.

The recent cyberattack on Google is just one example. According to CSIS’s report, however, there have been scores more. With additional attacks to come. Of most concern, perhaps, over half of those surveyed believe that the U.S., China and Russia as the three most vulnerable countries.

The report, entitled “In the Crossfire: Critical Infrastructure in the Age of Cyberwar,” goes on to state that more than one-third of the executives who responded feel their respective sectors are unprepared for a major attack and that two-thirds believe the ongoing recession has caused companies to reduce resources devoted to cyber protection.

This situation harkens back to the adage “one man’s suffering is another man’s gain.” The opportunities for cyber/tech underwriters are there. Go get ‘em, ladies and gentlemen.

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As recognized below in Pamela’s post discussing whether the loss of computer data is “property damage” in the eye of tort law, the issues surrounding cyber/tech/privacy liability and the attendant insurance coverages are not the exclusive province of the United States or U.S. courts.

To the contrary, virtually every country worldwide is increasingly faced with the problem of having to deal with the hard social and legal issues presented by a rapidly evolving cyber world.  So too, policyholders and the insurers who typically grant worldwide coverage under their policies must recognize that the risks faced are not exclusive to the U.S. or our Canadian cousins. The risks are global in nature and policyholders and insurers alike need to stay current with what’s happening outside our cocoon of the Western Hemisphere.

I am certain every reader is aware of the socio-political dispute whereby Google has threatened to withdraw from China amid claims that the Chinese government has hacked into Google’s and other third-parties’ databases, spied on Google email accounts, and tightened blocks on tens of thousands of internet sites, including Facebook, Twitter and YouTube. U.S. Secretary of State Hillary Clinton has spoken on the subject, advocating that companies such as Google refuse to support “politically motivated censorship.” Secretary Clinton also accused China, Tunisia and Uzbekistan of boosting censorship and called on Beijing to investigate the recent cyber attacks on Google and others. (On a side note, just last week, Europe’s principal security and human rights watchdog accused Turkey of blocking 3700 internet sites for “arbitrary and political reasons.”).

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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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Let us say, speaking hypothetically, that a grossly negligent individual (who, since we are speaking hypothetically, is named…”Mr. X”) has accidentally uninstalled my favorite computer game, “Sid Meyers Civilization IV” (for which, by the way, I paid good money and patiently waited three whole hypothetical hours to legally download onto my computer).

 Let us further hypothesize that I was twelve hours into a very successful game which has now gone the way of the passenger pigeon. Is the loss of my computer software considered “damage to property” for the purpose of a negligence action, or is it just a form of pure economic loss? “Of course it’s property damage!” I thought to myself, “and a most egregious form at that!”

Yet, in law, as in life, few things are certain. I was compelled to learn more, and so I conducted a brief review of the case law from Canada, the United States and Australia to satisfy my curiosity. What I have learned is that, notwithstanding that we live in the age of the internet, it is far from clear whether we can sue for the loss of electronic data in a negligence action.

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Emailing. Instant messaging. Texting. On-line gaming. Ten years ago, even five years ago, such words and concepts were alien to the typical luddite. Now, these terms are not just parts of the common parlance; a vast majority of us actually use these resources on a daily basis (in some cases, with our childrens’ guidance and assistance).

Consider, then, the relatively new concept of “cloud computing.” In lay terms, cloud computing is the on-line or internet-based use of a third-party vendors’ or service providers’ off-site (and hopefully secure) servers for data storage and/or management. Hotmail, Facebook, LinkedIn, YouTube and Google all use cloud computing to serve their members, often at no cost. At the same time, there are a growing number of vendors (like Apple) which “host” or “back-up” at-home and business computer systems by storing a consumer’s data or facilitating their use of cost-effective business solutions for a monthly or annual fee. Users typically do not have to incur fixed costs or purchase hardware or even software programs. All they need is access to a computer and the internet. And with that, voila! Cloud computing is just a click away.

Needless to say, the advent of cloud computing has opened up a world of opportunity for entrepreneurial software developers, hardware providers, and data storage companies around the globe. At the same time, it has created new business segments with a keen need for insurance products. Cyber insurance. Tech insurance. Property/All-Risk insurance. Business Interruption insurance. Professional Services/E&O insurance. Fidelity/Crime insurance. And, in some cases, personal injury/advertising injury coverage.

The potential third-party exposures are endless. Consider, for example, the legal (and regulatory) implications (and concomitant need for insurance) when an unauthorized user hacks into a “cloud” database storing personally identifiable or proprietary business information. Or think about the possibility of liability for a software developer or data storage vendor who has a customer that uses the cloud to host viruses or illegal content. Or who simply release information about their clients to marketers, advertisers or other third-parties without considering the impact or legal ramifications of their doing so. And how about power outages or other crises or service interruptions that prevent customers from accessing their accounts or critical business information that may be the key to closing an all-important business deal (resulting in privacy claims, claims of lost income, lost profits and business interruption expense and other alleged third-party injury).

So too, first-party cyber/tech risks are well known in other contexts and would apply with equal force and effect to cloud computing. The threat of service interruptions, data corruption and the like all necessitate the need for insurance.

The bottom line, as always, is that underwriters need to constantly stay ahead of the curve and tailor their products (and marketing strategies) to address the ever-changing landscape of new and innovative technology resources. Today cloud computing. Tomorrow? Ask me tomorrow night….

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Cyber breaches occur on a daily basis. Or at least it seems like they do…but consider the  breaches that we don’t hear about.

Companies’ fears that their brands could be adversely impacted by reports of cyber breaches mean that we rarely hear about them when they happen. What we do hear about are the very widespread, high profile breaches at large companies where there has been a failure protect a customer’s personal information.

What we often fail to consider is that any entity, commercial or non-profit, public or private, can fall victim to a cyber breach. Certainly, commercial businesses would be expected to insure against such risks. But what about governmental entities? Here’s one example.

The state of Oregon is investigating whether two state agencies violated the Oregon Consumer Identity Theft Protection Act. Each year thousands of Oregonians become victims of identity theft. According to the Federal Trade Commission, Oregon is ranked 13th in the nation for this crime. In response,  both Oregon businesses and government have clear direction and expectations under the Act to ensure the safety of the personal identifying information they maintain. Personal information includes a consumer’s name in combination with a Social Security number, Oregon drivers license number or Oregon identification card, financial, credit or debit card number along with a security or access code or password that would allow someone access to a consumer’s financial account. Specific protections under the Act are detailed on the website of Oregon government’s Division of Finance and Corporate Securities (DFCS) , and include the following:

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The roads traveled by non-profit entities have never been easy ones to negotiate. Indeed, the time, expense and, dare I say, risk of doing good deeds and raising capital has been fraught with potholes and impediments from the get-go. Now, that road has become even more treacherous for non-profits and their cyber/tech insurers alike.

1.  An Overview of Massachusetts’ New Data Security Law

Effective March 1, 2010, a new data security breach law will become effective in the Commonwealth of Massachusetts. Described by some as the toughest data security law in the U.S., the law and corresponding regulations applies to all entities, including non-profits, that employ or serve Massachusetts residents and which store, own or license “personal information” about a Massachusetts resident. Here is the Press Release from the Office of Consumer Affairs and Business Regulation. Here is the Final Version of The Regulations.

2.  What is Meant by “Personal Information”?

The term “personal information is defined in the law to mean a Massachusetts resident’s first and last name, or first initial and last name, together with:

1. The resident’s driver’s license number or state identification card;
2. Bank/financial account or credit/debit account number; or
3. Social Security number.

In other words, personal information will, generally speaking, include anything uniquely identifiable about a Massachusetts resident.

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In the security industry there is a generally accepted philosophy that no system or network is completely secure – a competent attacker with enough time, patience and resources will eventually find a way into a target.

We may have gotten a good chuckle out of the various messages that were left on the Twitter accounts for Barack Obama, Britney Spears, and Bill O’Reilly, but the implications are serious; with every new technology comes new risk. Viruses can permanently erase an entire system, sensitive system files can be accessed and altered by intruders, computer networks can be infiltrated and used to attack others and credit card information can be absconded and used to make unauthorized purchases.

“Cybersecurity” refers to the protection of that information by preventing, detecting and responding to attacks. Although there may be a tendency to consider cybersecurity to be a technical issue with technical solutions, it may also be useful to think of cybersecurity as an economic issue…with economic solutions.

This is the message that the Internet Security Alliance (“ISA”) has made in a landmark report issued earlier today, December 3, 2009.  The ISA is a trade association which represents a gamut of corporate interests ranging from Defence and Aerospace, Banking & Financial, Food Service, Entertainment, Telecommunications and Manufacturing industries. In its report, entitled “Implementing the Obama Cyber Security Strategy via the ISA Social Contract Model,” the ISA emphasizes that cybersecurity is an economic rather than a technical issue and that both the U.S. government and private industry need to revisit their assessments of cybersecurity by creating economic incentives and other programs to foster broader, and more enhanced, cybersecurity efforts and systems.

At present, the government has been relying on regulations to ostensibly improve cybersecurity.  The ISA suggests that this method is not only outdated, but also ineffective in dealing with a 21^st Century problem.  The report sets forth a number of proposed economic solutions, many of which focus on encouraging companies to educate their executives about the economic and social benefits of cybersecurity. Key among these proposals is the suggestion that businesses should create risk management programs that educate their executives about the growing problem of cyber theft and abuse, and assist them incorporating cybersecurity solutions in their corporate business plans (rather than ceding such responsibilities to computer “geeks” in their IS or IT, as is typically the case today).

The report concludes that most companies underfund their investments in cybersecurity, and suggests that economic and other incentives are needed to prompt businesses to improve their cybersecurity.  ISA’s report also suggests that the insurance industry become actively involved in providing a methodology by which returns on securities investments are quantified.

Among the ISA’s recommendations designed to encourage investment is a proposal that cyber insurance be used to promote the development of standards and practices and assist companies in quantifying and managing their cyber risks. At the same time, the ISA proposes that the government create limited liability protections for certified products and processes and recognized industry best practices. Alternatively, liability might be assigned on a sliding scale (comparative liability) such as limiting punitive damages while allowing actual damages and providing affirmative defenses with reduced standards (preponderance of evidence vs. clear and convincing etc.).

The report is long (over 70 pages) and quite detailed.  For those interested in reading it, the report can be found here. Irrespective of whether readers choose to take the time to read the entire report, they should familiarize themselves with its purpose and intent, as it is a major step forward in promoting dialogue on the ever-growing problem of cyber crime.  At a minimum, insurance underwriters and cyber professionals should study the report and perhaps incorporate some of the ISA’s recommendations in their own due diligence processes to compliment, for example, their existing NetDiligence® cyber risk assessment service (used by many leading US & UK insurers).  Only through joint and collaborative efforts can the billion dollar problem of cyber crime be mitigated.  It is incumbent on the insurance industry to be among the leaders in these efforts.  We can begin by collecting comments on the ISA’s proposal and submitting them to its members, including those representing the insurance industry.  Please feel free to comment below.  As appropriate, we will forward them to the ISA with the author’s name and contact information, if so authorized.

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