Cyber Liability: Data, Privacy and the Perils of Social Networking

What Exactly Is Cyber Liability?

Challenges of Cyber Liability

Stupendous growth of electronic data storage and communication has created new challenges for business entities.

Our Dependence on All Things Electronic 1.8 Billion people using the Internet Text, Email, Billing Systems, Payment

Systems, Business Operations, Blackberry, Smartphones

Two Challenging Types of Claims

Cyber-Privacy: Claims arising from a compromise of employee cyber-privacy

Data Breach: Claims arising from a breach of company data (first and third-party)

Response by Insurance Carriers

Carriers recognize that cyber-related claims require a new approach, including tailored policies and careful handling.

New Policies are Being Created

Enhanced Privacy Endorsements Technology and Media Coverage add-ons EPL enhancements

Employee Cyber-Privacy Claims

Employee Privacy and Discrimination Claims Employer makes employment decisions

from social networking site Employer accesses private email

Employer accesses text messages

Disparate application of employer policies

Emails and Social Networking—harassment claims

Legal Claims

From Employees--Negligence claims

Employer Action

Discrimination and Retaliation (Title VII, ADEA, etc

First Amendment speech Common law torts- privacy ECPA- wiretapping act SCPA- stored communications

Volatile Mix Leads to Potential Discrimination Claims

Potential employers are increasingly investigating those sites

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Adults with social networkingsites

Recruiters using internet inscreening process

Recruiters eliminatingcandidates based on internetinfo

Liability Risks Posed by Social Networking

Traditional EPL Claims: Hiring/Termination Claims--Title VII, ADA, ADEA

Disparate Treatment Claims --Inconsistent Application of Social Networking Policies

Newer EPL “Social Networking” Claims: Accessing personal email, texts,

social sites

Defamation, Libel, Breach of Privacy, Punitive Damages Due

To “Willful” Acts

Cyber Privacy Claims

City of Ontario v Quon

Does Fourth Amendment Protect Electronic Communications Employer audited City-owned Pager Discovered sexually explicit messages

(wife, girlfriend, buddy) All sued city and arch Ninth Circuit—Arch violated SCA and city

violated 4th amendment

Inquiring Employers…What are Employees Saying ?

Konop v. Hawaiian Airlines

Pilot maintained a private website where he criticized employer

Manager obtained password from employee who was a member

Ct Denied SJ—issue whether employee had authority to authorize mgt to access private website

Accessing MySpace

Pietrylo v Hillstone Restaurant Group Employees created password –protected

MySpace page to complain No managers allowed Manager got log-in from e’ee Employees fired; then sued NJ Fed Ct: e’ee coerced into giving p’wd Jury: SCA and state law violations Jury Verdict upheld

Accessing Private Account Emails

Van Alstyne v. Electronic Scriptorium Ltd.

Non-Compete case, e’er accessed private email accounts using info left on e’ee’s

computer: E’ee counter sued

SCA allows for statutory damages in the event any actual damages are proven-E’ee awarded 400k

SCA permits punitive damages and attorneys’ fees

Statutory damages --proof of actual damages

Accessing Personal Email left by Employee

Pure Power Boot Camp v Warrior Fitness Boot Camp Non-compete case, E’er accessed

personal email on e’er’s computer Handbook: E’ee no right of privacy..

Handbook did not expressly cover employee’s personal accounts

E’ee had right of privacy

Risk Management—Cyber Privacy Policies

Content of the policy --clear and appropriate

Specify all communications (not just work-related) are owned or will be monitored by the Insured

Policy should apply to both work e-mail accounts and private e-mails and accounts

SCA consent authorization Blogging– Restrict Comments about E’er

Data Breach Claims

Claim Examples – Data Breach Online retailer hacked and customer credit card

information is stolen: regulatory and class actions

Companies unknowingly spread a worm, facing liability from those parties based upon lost revenues caused by the virus.

Disgruntled employee deletes the company’s databases, causing business interruption

Computer hacker floods a company’s website, overwhelming the system and causing it to crash.

Private medical info is stolen or disclosed, leading to a suit for defamation and invasion of privacy.

Compromised Data

285 Million records were compromised in 2008

25% of Companies With IT Outage for 2-6 days go bankrupt immediately

Heartland Payment Systems: credit card numbers of clients

Cost: $12.5 Million in legal fees, costs and settlements

Credit Card Numbers are purchased by “information gangsters”

Dave & Busters: FTC Complaint Intruder exploited vulnerabilities in

systems 130,000 unique credit cards stolen Issuing Banks Claimed over $500,000

in unauthorized charges Settled

Before TJ Maxx, no recognized private

cause of action for data breach Judge let three theories survive:

Two theories of negligent misrepresentation regarding their cyber security

Lack of security measures amounted to Unfair and Deceptive Business Practice

Settled with Banks for $525,000 Total Cost over $40 million

Data Breach Claims

The potential claims are at least as varied as the potential claimants: Actual loss (theft) of customer, client or employee data Extortion based on a threatened loss of customer, client

or employee data Monitoring or repairing of credit reports for those

effected by a data breach Notices issued to those effected by a data breach Public relations activity necessitated by a data breach Remediation and repair of systems due to a data breach Lost profits caused by a data breach

Data Breach Claims Are on the Rise Depending on the type of breach, costs can vary significantly, from

$750,000 to $31,000,000 in 2009.

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Lowest Highest

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Data Breach Claims Are on the Rise The average per-customer cost of data-breach claims

has increased over the last year alone. Avg. Cost per Customer

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Avg. Cost per Customer

Data Breach Claims Are on the Rise The increased per-customer cost translates to large increases in

costs per breach.

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Avg. Cost per Breach

Avg. Cost per Breach

Data Breach – Sources of Loss

What are the sources of potential loss to the insured? While the most common (and most elusive) source of loss is a

civil action by the individual effected by the breach, there are other sources of potential liability for the insured: Violation of “Red Flag Rules” (requiring entities to implement an

identity theft prevention program) under the Fair and Accurate Credit Transactions Act, enforced by the Federal Trade Commission (“FTC”)

Health Information Technology for Economic and Clinical Health Act, enforced by the FTC and the Department of Health and Human Services

Children’s Online Privacy Protection Act CAN-SPAM Act Gramm-Leach-Bliley Act Fair Credit Reporting Act Computer Fraud and Abuse Act Federal Privacy Act State attorney general actions and consumer protection laws

Data Breach – Potential Damages

What are the potential damages to which the insured could be exposed? Depending on governmental involvement, the

strategy of the claimant, and the approach of the Insured, multiple damages are possible: Compensatory damages (although difficult to prove) Consequential damages Punitive damages Fines and fees (imposed by regulatory agencies) Remediation of hardware and software Lost profits and goodwill Notification of effected individuals/entities Monitoring of effected individuals/entities

Federal “Red Flags” Rules The “Red Flags Rules,” were

promulgated under the Fair and Accurate Credit Transactions Report Act. 16 CFR 681.1.

Any company holding credit data could be subject

Requires a Written Identify Theft Prevention Program

June 1, 2010 Implementation

Insurance For Cyber Claims

Gaps in Traditional Insurance Policies

Property Insurance policies – “Property” : Tangible vs. Intangible

D&O: Property exclusion; Professional services exclusion; not covered by insuring clauses

Crime/Fidelity policies –Tangible Property

CGL: Exclusions for losses associated with unauthorized access by third parties.

Errors & Omissions policies – Generally exclude security breaches or damages arising from unauthorized access.

EPL policies – Not covered by Insuring Clauses.

Cyber Liability – Covered Risks

Generally, cyber liability policies address two types of risks:

First Party: losses suffered directly by the Insured Third Party: losses associated with the Insured’s

liability for damages suffered by a third party

First Party Losses

Business interruption costs Crisis management and public relations

costs Privacy notifications and credit monitoring

costs Costs associated with theft or vandalism of

a company’s network or systems Upgrades in network security

Third Party Losses

Disclosure Injuries: unauthorized access to or dissemination of a third party’s private information

Content Injuries: copyright, trademark, trade secrets or other intellectual property claims

Reputation Injuries: libel, slander, defamation, invasion of privacy claims

System Injuries: security failures or virus transmissions that harm the computer systems of third parties

Impaired Access Injuries: customers cannot access their accounts or information

6 Separate Insuring Clauses!

1) Technology Security Wrongful Act 2) Privacy Wrongful Act 3) Private Information Breach 4) Web Media Services Wrongful Act 5) Extortion Loss from Technology

Threat 6) Data Restoration Loss from Breach

Cyber Liability Coverage by Endorsement Insurers have customized traditional

Policies to provide additional coverage for specific cyber risks by endorsements. For example: EPLI Policies – coverage for employee related theft or

third party unauthorized access to private information.

E&O Policies – coverage for e-commerce activities, security breaches, and unauthorized access

Property & Crime Policies – coverage for “intangible” property like data

Data Breach – Cause of the Breach What was the cause of the breach?

The cause of the breach can effect both potential liability and coverage: External hacking Wrongdoing internal to the insured Failure of controls or preventative measures Failure of hardware or software Wrongdoing or failure of a vendor or other

related third-party entity

Data Breach – Data Involved

What type of data was involved? Personally Identifiable Information (PII) is

the most common, and will be the focus here: First name or initial combined with a social

security number, driver’s license number, state ID number, or account number with access code or password

Other sources of potential concern include proprietary data of a vendor or internal proprietary data.

Data Breach – Risk Mitigation

What needs to be done to mitigate the effect of a data breach? Once a breach has occurred, the insured has

multiple options for mitigating the breach (some of which may impact coverage). Incident analysis (internal communication,

containment, harm determination) Incident disclosure (notice to effected

individuals, vendors, regulatory agencies) Loss mitigation (trending, benchmarking,

remediation)

Evaluating a Data Breach

When a data breach occurs, immediate and decisive action is required: Evaluate the potential scope of the loss, in

terms of individuals effected Identify the governmental and regulatory

agencies with whom communication is necessary

Understand how mitigation strategies effect costs and coverage

Handling a Data Breach Claim

Pro-Active: Hiring Counsel and Waiting for 90 day Report May Cost Insurer Millions

Immediate Retention of IT or Privacy Expert

Boots on the Ground Approach May be More Effective

Conclusion

Privacy and Data Breach Claims are Coming Your Way!

First Party Losses inThird Party Claims

Often a third party liability claim will involve direct losses by the Insured A third party cyber liability policy may

provide coverage for certain direct losses associated with a claim (or a potential claim) by a third party. These may include: Security breach notifications Credit monitoring costs Crisis management consultation

Data Breach Claims

A data breach can cost millions of dollars, based on the type and amount of data effected.

Any entity that stores third-party data can be at risk, including (but certainly not limited to): Retailers Financial institutions Health care providers

Data Breach Claims

While Employment Practices claims present a distinct challenge to Insured employers - and therefore Insurers - the loss, compromise, or misuse of electronic data presents a more nuanced, and potentially more severe, risk.

Cyber Privacy – What Is Simple?

Most employers would likely agree that the Facebook employee was rightly fired, with cause.

However, they (and we) need to think about the response. It was not necessary for the manager to

respond in a public forum. The mix of a public forum and use of

profane, disparaging phrases could create liability, even though the employee “clearly” asked for it.

It is never again going to be simple…

Claim Examples - Other Some claims do not fall neatly in the categories of

“employee privacy” or “data breach,” and relate more to traditional causes of action through new mediums (such as defamation, copyright infringement, and patent infringement): Online publisher allows defamatory postings about a local

public figure, causing the public official to lose his job. Company is sued for unauthorized use of a person’s photo

on its website. A small business creates a website and is sued by another

company alleging that their domain name violated trademark laws.