Legal/Regulatory

The GDPR and US Companies

The EU's cyber regs will impact U.S. companies that handle the data of EU customers.
By: | July 17, 2017 • 4 min read

The final countdown is on for U.S. companies to meet a new set of data privacy rules or face heavy fines.

The General Data Protection Regulation, GDPR, which kicks in on May 25, 2018, will be implemented by the European Union, but it also touches companies from other countries, including the United States, that access data from EU-based users.

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According to experts, the GDPR brings challenges to U.S. companies as its approach to data privacy is considerably different from the view taken by American legislation.

Umair Javed, an associate in the Washington, D.C. office of Wiley Rein, pointed out that European governments put a strong focus on the rights of individuals to have their privacy protected, which includes the right to request that data collected by companies is erased from their databases.

In the U.S., however, the emphasis skews toward freedom of speech, and authorities have adopted a looser approach to the monetization of consumer data by companies.

“It could all mean a balancing act for U.S. companies,” Javed said.

The GDPR has significantly expanded the definition of personal data. — Matthew McCabe, U.S. Critical Infrastructure Cyber Leader, Marsh

The GDPR mandates that firms which collect or process data from EU-based users report any breaches in a timely manner and establish a Data Privacy Officer charged with making sure that the organization complies with the rules.

Experts said that the DPO function can be assigned to a dedicated manager, added to the responsibilities of a risk manager, data security officer or other function within the company, or delegated to a third party, depending on the size of the organization and the volume of data it processes.

The GDPR applies not only to companies who are based or have offices in a member of the European Union, but also to those that are headquartered elsewhere, but have access to data from EU-based customers, suppliers or business partners.

Matthew McCabe, US Critical Infrastructure Cyber Leader at Marsh

According to Javed, the application of the law takes into account mostly the location where the data is collected, rather than the place of origin of the company that collected or processed the data.

The new rules also considerably broaden the scope of user information whose privacy must be protected by companies. Data to be encompassed by the GDPR includes personal banking information, biometric data, geo-location data from mobile phones, medical information and several other data categories.

Under the new regulations, a company that is based in the U.S. could be fined by an EU government for a breach of the GDPR even if, for example, it does not have an office in the EU, but sells goods via a website that is accessible in Europe, and where there is an option to pay in Euros or British Pounds.

“The GDPR has significantly expanded the definition of personal data,” said Matthew McCabe, U.S. Critical Infrastructure Cyber Leader at Marsh.

Failure to meet GDPR requirements may result in fines of up to $23 million or 4 percent of a company’s annual worldwide turnover. Consult Hyperion estimates that European banks alone could be hit with $5.4 billion in fines in the first three years after the implementation of the directive, with penalties approaching $300 million per breach.

In a global survey released in April by Veritas, one out of every five companies expressed fears that GDPR fines could put them out of business.

Considering the stakes involved, it should not come as a surprise that many companies have started to prepare themselves in anticipation of the arrival of GDPR. According to a survey released in January by PwC, 92 percent of U.S. organizations interviewed deemed GDPR compliance a top priority in 2017. Three out of four planned to spend $1 million or more in the process.

Michael Born, a vice president at the Global Technology and Privacy Practice at Lockton, said that many companies are not there yet, and could be caught shorthanded by the May 2018 deadline.

In any case, the arrival of GDPR should provide a further boost to demand for cyber insurance, as many such policies are designed to cover the liabilities created by the new regulation.

“Coverages included in cyber policies are designed to cover the kinds of exposures created by the GDPR,” Born said.

“But buyers must make sure that wordings are broad enough to cover not only GDPR exposures, but also those created by data privacy legislation in the U.S. and elsewhere.”

“The data breach response and notification requirements imply a very mature role to be played by cyber insurance,” McCabe said.

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“Cyber insurance can also work as a point of assessment of how companies are complying with the GDPR, and the insurance market can also provide expert advice to companies. The big question will be whether fines and punishment issued by the authorities under the GDPR will be insurable.”

“If a global company gets a maximum fine, they will not have enough cyber insurance to cover it,” Born added.

“Should companies be considering buying enough cyber insurance to cover a 4 percent annual turnover fine?  I do not think that is appropriate to all the companies that might be subject to it. A lot of companies may adopt a wait-and-see attitude to check what the regulatory bodies actually do when it comes to issuing fines and penalties for violations before they make a final deliberation.”

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at riskletters@lrp.com.

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

A Recall Nightmare: Food Product Contamination Kills Three Unborn Children

A failure to purchase product contamination insurance results in a crushing blow, not just in dollars but in lives.
By: | October 15, 2018 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: THE HEAT IS ON

Reilly Sheehan, the Bethlehem, Pa., plant manager for Shamrock Foods, looks up in annoyance when he hears a tap on his office window.

Reilly has nothing against him, but seeing the face of his assistant plant operator Peter Soto right then is just a case of bad timing.

Sheehan, whose company manufactures ice cream treats for convenience stores and ice cream trucks, just got through digesting an email from his CFO, pushing for more cost cutting, when Soto knocked.

Sheehan gestures impatiently, and Soto steps in with a degree of caution.

“What?” Sheehan says.

“I’m not sure how much of an issue this will be, but I just got some safety reports back and we got a positive swipe for Listeria in one of the Market Streetside refrigeration units.”

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Sheehan gestures again, and Soto shuts the office door.

“How much of a positive?” Sheehan says more quietly.

Soto shrugs.

“I mean it’s not a big hit and that’s the only place we saw it, so, hard to know what to make of it.”

Sheehan looks out to the production floor, more as a way to focus his thoughts than for any other reason.

Sheehan is jammed. It’s April, the time of year when Shamrock begins to ramp up production for the summer season. Shamrock, which operates three plants in the Middle Atlantic, is holding its own at around $240 million in annual sales.

But the pressure is building on Sheehan. In previous cost-cutting measures, Shamrock cut risk management and safety staff.

Now there is this email from the CFO and a possible safety issue. Not much time to think; too much going on.

Sheehan takes just another moment to deliberate: It’s not a heavy hit, and Shamrock hasn’t had a product recall in more than 15 years.

“Okay, thanks for letting me know,” Sheehan says to Soto.

“Do another swipe next week and tell me what you pick up. I bet you twenty bucks there’s nothing in the product. That swipe was nowhere near the production line.”

Soto departs, closing the office door gingerly.

Then Sheehan lingers over his keyboard. He waits. So much pressure; what to do?

“Very well then,” he says to himself, and gets to work crafting an email.

His subject line to the chief risk officer and the company vice president: “Possible safety issue: Positive test for Listeria in one of the refrigeration units.”

That night, Sheehan can’t sleep. Part of Shamrock’s cost-cutting meant that Sheehan has responsibility for environmental, health and safety in addition to his operations responsibilities.

Every possible thing that could bring harmful bacteria into the plant runs through his mind.

Trucks carrying raw eggs, milk and sugar into the plant. The hoses used to shoot the main ingredients into Shamrock’s metal storage vats. On and on it goes…

In his mind’s eye, Sheehan can picture the inside of a refrigeration unit. Ice cream is chilled, never really frozen. He can almost feel the dank chill. Salmonella and Listeria love that kind of environment.

Sheehan tosses and turns. Then another thought occurs to him. He recalls a conversation, just one question at a meeting really, when one of the departed risk management staff brought up the issue of contaminated product insurance.

Sheehan’s memory is hazy, stress shortened, but he can’t remember it being mentioned again. He pushes his memory again, but nothing.

“I don’t need this,” he says to himself through clenched teeth. He punches up his pillow in an effort to find a path to sleep.

PART TWO: STRICKEN FAMILIES

“Toot toot, tuuuuurrrrreeeeeeeeettt!”

The whistles of the three lifeguards at the Bradford Community Pool in Allentown, Pa., go off in unison, two staccato notes, then a dip in pitch, then ratcheting back up together.

For Cheryl Brick, 34, the mother of two and six-months pregnant with a third, that signal for the kids to clear the pool for the adult swim is just part of a typical summer day. Right on cue, her son Henry, 8, and his sister Siobhan, 5, come running back to where she’s set up the family pool camp.

Henry, wet and shivering and reaching for a towel, eyes that big bag.

“Mom, can I?”

And Cheryl knows exactly where he’s going.

“Yes. But this time, can you please bring your mother a mint-chip ice cream bar along with whatever you get for you and Siobhan?”

Henry grabs the money, drops his towel and tears off; Siobhan drops hers just as quickly, not wanting to be left behind.

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“Wait for me!” Siobhan yells as Henry sprints for the ice cream truck parked just outside of the pool entrance.

It’s the dead of night, 3 am, two weeks later when Cheryl, slumbering deeply beside her husband Danny, is pulled from her rest by the sound of Siobhan crying in their bedroom doorway.

“Mom, dad!” says Henry, who is standing, pale and stricken, in the hallway behind Siobhan.

“What?” says Danny, sitting up in bed, but Cheryl’s pregnancy sharpened sense of smell knows the answer.

Siobhan, wailing and shivering, has soiled her pajamas, the victim of a severe case of diarrhea.

“I just barfed is what,” says Henry, who has to turn and run right back to the bathroom.

Cheryl steps out of bed to help Siobhan, but the room spins as she does so.

“Oh God,” she says, feeling the impact of her own attack of nausea.

A quick, grim cleanup and the entire family is off to a walk-up urgent care center.

A bolt of fear runs through Cheryl as the nurse gives her the horrible news.

“Listeriosis,” says the nurse. Sickening for children and adults but potentially fatal for the weak, especially the unborn.

And very sadly, Cheryl loses her third child. Two other mothers in the Middle Atlantic suffer the same fate and dozens more are sickened.

Product recall notices from state regulators and the FDA go out immediately.

Ice cream bars and sandwiches disappear from store coolers and vending machines on corporate campuses. The tinkly sound of “Pop Goes the Weasel” emanating from mobile ice cream vendor trucks falls silent.

Notices of intent to sue hit every link in the supply chain, from dairy cooperatives in New York State to the corporate offices of grocery store chains in Atlanta, Philadelphia and Baltimore.

The three major contract manufacturers that make ice cream bars distributed in the eight states where residents were sickened are shut down, pending a further investigation.

FDA inspectors eventually tie the outbreak to Shamrock.

Evidence exists that a good faith effort was underway internally to determine if any of Shamrock’s products were contaminated. Shamrock had still not produced a positive hit on any of its products when the summer tragedy struck. They just weren’t looking in the right place.

PART THREE: AN INSURANCE TANGLE

Banking on rock-solid relationships with its carrier and brokers, Shamrock, through its attorneys, is able to salvage indemnification on its general liability policy that affords it $20 million to defray the business losses of its retail customers.

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But that one comment from a risk manager that went unheeded many months ago comes back to haunt the company.

All three of Shamrock’s plants were shuttered from August 2017 until March 2018, until the source of the contamination could be run down and the federal and state inspectors were assured the company put into place the necessary protocols to avoid a repeat of the disaster that killed 3 unborn children and sickened dozens more.

Shamrock carried no contaminated product coverage, which is known as product recall coverage outside of the food business. The production shutdown of all three of its plants cost Shamrock $120 million. As a result of the shutdown, Shamrock also lost customers.

The $20 million payout from Shamrock’s general liability policy is welcome and was well-earned by a good history with its carrier and brokers. Without the backstop of contaminated products insurance, though, Shamrock blew a hole in its bottom line that forces the company to change, perhaps forever, the way it does business.

Management has a gun to its head. Two of Shamrock’s plants, including Bethlehem, are permanently shuttered, as the company shrinks in an effort to stave off bankruptcy.

Reilly Sheehan is among those terminated. In the end, he was the wrong person in the wrong place at the wrong time.

Burdened by the guilt, rational or not, over the fatalities and the horrendous damage to Shamrock’s business. Reilly Sheehan is a broken man. Leaning on the compassion of a cousin, he takes a job as a maintenance worker at the Bethlehem sewage treatment plant.

“Maybe I can keep this place clean,” he mutters to himself one night, as he swabs a sewage overflow with a mop in the early morning hours of a dark, cold February.

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are their recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

Shamrock Food’s story is not an isolated incident. Contaminations happen, and when they do they can cause a domino effect of loss and disruption for vendors and suppliers. Without Product Recall Insurance, Shamrock sustained large monetary losses, lost customers and ultimately two of their facilities. While the company’s liability coverage helped with the business losses of their retail customers, the lack of Product Recall and Contamination Insurance left them exposed to a litany of risks.

Risk Managers in the Food & Beverage industry should consider Product Recall Insurance because it can protect your company from:

  • Accidental contamination
  • Malicious product tampering
  • Government recall
  • Product extortion
  • Adverse publicity
  • Intentionally impaired ingredients
  • Product refusal
  • First and third party recall costs

Ultimately, choosing the right partner is key. Finding an insurer who offers comprehensive coverage and claims support will be of the utmost importance should disaster strike. Not only is cover needed to provide balance sheet protection for lost revenues, extra expense, cleaning, disposal, storage and replacing the contaminated products, but coverage should go even further in providing the following additional services:

  • Pre-incident risk mitigation advocacy
  • Incident investigation
  • Brand rehabilitation
  • Third party advisory services

A strong contamination insurance program can fill gaps between other P&C lines, but more importantly it can provide needed risk management resources when companies need them most: during a crisis.



Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at dreynolds@lrp.com.