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

I first published this article in 2010. Surprisingly, its as relevant today – perhaps even more relevant – than it was four years ago.

Rick

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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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, Privacy and Technology Best Practices and Reputational Harm: Why Legal Professionals Need a Lawyer’s Advice, Counsel and Privileges

BabyB_LPlate_improvedIntroduction

Lawyers, like other professionals, often have access to their clients’ personal and financial details. At the same time, they may possess comparable information about their clients’ clients (such as when a lawyer represents a healthcare company). As a result, lawyers are at risk for being sued if and when something happens to that information – such as when a laptop or cell phone is misplaced or stolen or a hacker breaches a law firm or client’s systems and accesses the client’s personally identifiable, health care, and/or confidential information.
The most prudent way to avoid such lawsuits and minimize their impact is to create and implement cyber, privacy and technology (“CPT”) best practices before something goes wrong. In most cases, this would include best practices training and education as well as the purchase of dedicated CPT-specific insurance. This article discusses why lawyers are at risk, how to create and implement best practices, and the advantages of CBT insurance coverage rather than (mistakenly) relying on professional errors and omissions and/or general liability coverage in the event of a CPT incident.

Executive Summary

An attorney’s reputation is his and her lifeblood. Indeed, reputation translates to the bottom line. For better or worse.
And, of course, reputation is, in large part, predicated on the quality, timeliness and cost-effectiveness of the services being provided. So too, it is incumbent that an attorney avoid negative commentary (or embarrassing revelations) through the pervasive and ubiquitous medium of social media. As a corollary, attorneys, like others, must be sensitive to the loss of customer goodwill, whether measured by turnover, client retention or other intangible assets.

Regardless of whether your clients are the Fortune 500, middle-market companies or small entrepreneurs, an attorneys’ clients – and by extension, the attorney himself and herself (to the extent the attorney holds personal, health or commercial information) – are at risk of losing personally identifiable information (“PII”), personal health information (“PHI”) and/or confidential commercial information (“CCI”). It doesn’t matter whether the harm is attributable to malicious activity or simple employee or third-party negligence. It’s the effect that is the focus, not necessarily the cause (although that too factors into the analysis).

In many cases, the effect of a cyber incident could be devastating, if not fatal, to an attorney’s reputation. And, by extension, his or her practice’s economic viability.
It is almost axiomatic to say that “best practices” are among the most important strategies employed by attorneys and other professionals. Just as we counsel clients to use best practices with respect to their operations, so too, we, as professionals, should be well-trained on the scope and extent of best practices in the subject matter presented, including, in particular, CPT risks and exposures, which, to no surprise, are palpable and potentially devastating.

In the CPT context, among others, best practices counseling should be provided by an attorney. Unlike non-lawyers, attorneys bring with them the attorney-client privilege and work product protection. Although vendors and IT specialists can promote themselves as having the appropriate knowledge and training to teach and implement best practices, they do possess the critical protections afforded by the attorney-client relationship. In a relatively new space like CPT, where the law is uncertain and developing, the privileges become even more important, as many attorneys are just at the start of the learning curve.

To continue reading, please contact me at rbortnick@cpmy.com. A complete copy will be emailed upon request. Cheers. Rick

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Power to the People: Social Media Technologies Mediating Corporate Social Governance

The measure of effectiveness of a CEO and its executive board has always been the degree to which the business is achieving its purpose. Whether in Canada, the U.S., Europe or Asia, an executive board’s purpose should be to increase shareholder value, a purpose that is best accomplished by serving the needs of various stakeholders. Somewhere in the pyramid of stakeholders is the consumer or client, whose likes, favorites, and preferences must be met with quality personalized products and services that deliver high competitive value. In an interconnected global knowledge economy, this has meant listening to what consumers are saying online through social media platforms like Facebook and Twitter, and engaging in two-way conversations to respond in real-time to consumer demands.

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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 Implications of a Cyberattack on Your Securities Portfolio: You May Want to Read Your Holdings’ 10-Ks

falling moneySo, 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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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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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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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 »