In brief - General liability policies may not cover cybersecurity risks adequately
The media attention given to Sony's cyber attacks is a timely reminder of the risk of information security breaches. All businesses, large and small, should check that their insurance policies provide adequate coverage for cybersecurity risks and ensure that they have proper risk management processes in place.
Be aware of over reliance on commercial general liability policies
The cyber attack on Sony Pictures in November 2014 highlights the risks companies face in respect of information security breaches, and the need for companies to consider cybersecurity insurance. The cyber attacks on Sony Playstation in April 2011 provide a clear example of the way in which various insurance polices will respond to information security breaches, and raise concerns that many entities may be overly reliant on inadequate commercial general liability policies.
In our October 2014 article How should directors and officers protect their company from security data breaches, we explored various risks associated with information security breaches and discussed the considerations that companies should put in place. We now examine the ability to manage and transfer the economic risk of an information security breach through cybersercurity insurance.
Does your insurance cover liabilities and risks of an information breach?
The liabilities and risks of an information breach are numerous and losses can be significant. The Ponemon Institute's 2014 Cost of Data Breach: Australia report found that the average cost of a data breach experienced by 22 Australian companies in 2013 was $2.8 million.
Potential liabilities and risks of an information breach include:
- reputational risk
- investigation by regulators (e.g. Office of the Australian Information Commissioner and Office of the Privacy Commissioner)
- fines following breaches of privacy
- misleading and deceptive conduct
- breaches of continuous disclosure obligations
- breaches of fiduciary duty
- breaches of the duty of confidence
- breach of contract
- breach of the duty of care (negligence)
- infringement of intellectual property rights.
It is important for companies to consider to what extent, if at all, these risks are covered under their current insurance program.
Cybersecurity risks: coverage under traditional insurance policies
Various "traditional" insurance policies may provide limited cover for information security breaches, including:
Commercial general liability (CGL) policies: The terms and exclusions under a Commercial GL Policy will vary widely in respect of information breaches and may even exclude cybersecurity cover. Most CGL policies will include some type of cover for personal and advertising injury, but it is unlikely that this will extend to most information breaches.
Commercial property (business interruption) policies: Commercial property policies have traditionally focused on physical losses. It is possible that cover may be provided for loss of information systems where the loss is caused by a physical event, for example, due to theft.
Directors' and officers' (D&O) liability policies: D&O policies may respond to actions brought against directors and officers that flow from an information breach.
Errors and omissions (E&O) policies: E&O policies provide protection from negligence arising from the provision of services. E&O may protect you as a consumer of technological services - for example, if your data storage provider corrupts your data - but are unlikely to cover you for your own information breach.
The difficulty with traditional policies is that they do not specifically consider the information breaches and the losses that ensue. Some policies even specifically exclude cybersecurity risks.
Cybersecurity breaches: coverage under a cybersecurity policy
Given that information security risks are numerous and varied, it will not be uncommon for an entity to find that their traditional forms of insurance may not adequately respond in the event of an information security breach.
A cybersecurity policy is designed to cover specifically the liabilities that arise from information security breaches The coverages found under a cybersecurity policy are as follows:
First party loss
- Remediation / crisis management costs
- Information asset coverage
- Network interruption and extra expense
- Cover for business interruption and extra expenses caused by malicious code (i.e. viruses, worms, Trojans and other malware)
Third party loss
- Liability for claims by third parties for data breaches, transmission of malicious code, denial of third party access to insured's network and other security threats
The Sony cyber attacks illustrate the contrasts in cover that is offered under traditional insurance policies as opposed to a dedicated cybersecurity insurance.
Playstation cyber attack not covered by commercial general liability policy
In 2011, hackers breached Sony's Playstation Network and gained access to approximately 77 million user accounts which held personal information, including credit card details.
Sony estimated their losses from the 2011 information breach to be USD $170 million and sought indemnity under the personal and advertising injury aspect of their CGL policy. The CGL insurer denied Sony's indemnity claim, which was challenged in the New York Supreme Court.
In 2014, the New York Supreme Court held that the CGL insurer was only required to indemnify Sony for a loss that had been occasioned by "some kind of act or conduct by the policy holder". The court went on to say that the theft of the data by a third party, being the hackers, was not an "act or conduct" by Sony and, therefore, did not fall within the scope of the policy. Sony was denied cover. Sony has since appealed this decision, which remains pending.
Sony Pictures hack may be covered by cybersecurity policy
In contrast, there was a far more pleasing outcome for Sony in respect of the November 2014 information breach. After the 2011 incident, Sony is reported to have taken out a dedicated cybersecurity policy. It is understood that the cybersecurity policy will respond to the loss and Sony will suffer minimal, if any, financial loss.
Sony's experience provides a very strong example of the difficulties a company can face if it seeks to rely on a corporate general liability policy for information breaches. An appropriate cybersecurity policy will provide peace of mind and ensure that a company is not exposed to an unexpected economic risk.
No company is immune from information breaches
The Sony Pictures cyber attack should serve as a reminder that even the most sophisticated companies and computer systems are not immune from information breaches - just as the best alarm system will not always provide immunity to burglary, even the best information systems are not failsafe.
Despite media attention concerning information breaches at large corporations, it is a misconception that small to medium enterprises (SMEs) are not at equal risk of information breaches. A large number of cyber attacks are targeted at SMEs as they may be perceived as an easy target with vulnerable security systems by the opportunistic cybercriminal.
There are numerous external and internal risks for small businesses that may lead to data breaches. (See our July 2014 article entitled Computer hacking and data breaches: risks for small businesses.) The reality is that most SMEs have neither the resources nor the expertise to identify and respond to potential information breaches. This risk can be offset by appropriate insurance.
Understand your risk and determine whether you need cybersecurity insurance
The decision to take out a dedicated cybersecurity policy will depend on a company's risk profile and existing forms of insurance. This is something your broker or insurer should be able to assist you with. Your insurer may even assist you in identifying and minimising risks.
Some useful questions to ask yourself are:
- How reliant is your business on computer systems? What would the cost of a computer outage be and how quickly would that cost materialise?
- How is your data sent, stored and used? Can the data be accessed by third parties, stolen or lost?
- How sensitive is the data held? E.g. Are you a healthcare provider who holds Medicare, health insurance and sensitive personal information about your clients?
- What would the reputational cost be to your business in the event of an information breach?
Insurance is not a substitute for proper risk management
While insurance may transfer the economic risk of an information breach, insurance cannot be expected to substitute adequate protection measures.
Given the increased risk profile and large potential losses associated with cyber attacks, insurers are continuously revising their underwriting processes and policy terms. When considering what cover will be offered, the insurer will take into account your company's information security processes.
It is important to ensure that your information security policies are up to date and applied in practice. If you do not have adequate information security measures in place, insurers may decline to provide you with insurance, place exclusions, terms, conditions and limits on cover, or apply a higher premium or deductible to the policy.
Check the exclusions, terms, conditions and limits of your policy
Cybersecurity is still a relatively new form of insurance and policies vary widely. It is possible that a cybersecurity policy may overlap with some aspects of your existing general insurance policies.
Prior to purchasing a cybersecurity policy, discuss your existing and required insurance arrangements with your broker or insurer. It may be possible to integrate all of your insurance requirements, including cybersecurity, into a single umbrella policy. Alternatively, a standalone cybersecurity policy may present better value.
As with all insurance policies, it is important to look beyond the premium and determine what cover is actually provided. Be sure to carefully review the exclusions, terms, conditions and limits of the policy to ensure that it will respond if a risk materialises.