Risk Scenario + Webinar

The Curse of the Black Adder

A supposed data breach sends a regional grocer scrambling to do damage control.
By: | December 11, 2013 • 8 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.

One Fine Fall Day

Aaron Scott watched with pride as his German shorthaired pointer Sadie bulled her way through the switchgrass. Sadie was six, an age when most hunting dogs started to show signs of aging. But Sadie was as heavy in the chest and shoulders as some males, and just as tough.

Scenario_BlackAdder

Then suddenly Sadie was on point, her stub of a tail twitching frenetically. Seconds later, the male bird exploded out of the brush. Aaron swung his grandfather’s over and under Remington up and dropped the bird cleanly. Aaron smiled. It didn’t get any better than this.

Then his phone rang. He had to get it. As the CFO for Pinecrest Food Markets, which had 44 stores in four states, it was part of his job to take calls, all calls.

“This is Aaron,” he said.

“Aaron, it’s Christine.” Christine was Aaron’s older sister and the CEO of the company. Aaron knew that tone in her voice. The news wasn’t good.

“We just got a letter from Spendex that they’ve been hit by malware. It looks like we may have lost credit card numbers for about 600,000 customers.”

Aaron paused and again looked at the scenery and savored the diminishing scent of spent gunpowder. He wished he could turn back the clock to one minute ago, but all that was gone.

“You there?” Christine said.

“I’m here,” Aaron said.

“Can you please get those dogs in the truck and get back to the office? We got work to do.”

Christine preferred jumping horses to bird-hunting. On a fox hunt, she could ride with anyone in the state.

Aaron loved his sister, but he also bore a scar over his right eyebrow where she’d clocked him with a rock when they were preteens.

“I’m comin’. Be there in 30,” Aaron said.

Pinecrest had been founded by Aaron’s grandfather William in an 800-square-foot shop in Johnstown, Pa. It had grown to where it had stores in eastern Ohio, its native western Pennsylvania, West Virginia and the Maryland panhandle.

Scenario Partner

Scenario Partner

Aaron and Christine ran it now. The phrase “three generations — shirt sleeves to shirt sleeves,” was how old-timers described how quickly an inherited family business could fall apart. Aaron and Christine had vowed they would prove that old saying wrong.

Back at the office, Aaron read the letter from the credit card transaction processing vendor Spendex. Spendex was reporting that as many as 26 of its regional retail customers lost credit card numbers to The Black Adder, a malware that strips names, credit card numbers and expiration dates from the magnetic stripes of credit cards.

“Now what?” said Christine.

“Well, we’ve got to tell every affected customer what happened and we need to do it soon,” Aaron said.

“How much is that going to cost?” Christine said.

“Quite a bit, but we’ve got insurance for it,” Aaron said as calmly as he could as he looked down at his iPhone and started scrolling through his contacts.

Aaron was playing possum with his cool tone. He was the family peacekeeper and he knew that his role at times like these was to keep a lid on the much more volatile Christine.

Christine exhaled, and Aaron kept his eyes on his iPhone.

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False Start

Part of the Pinecrest brand came from where it was based and who founded it.

Based as it was in a state that was home to almost a million military veterans, Pinecrest aligned itself with traditional values like patriotism, community, faith and family.

There was a picture of a local veteran who had given his life in armed conflict in every Pinecrest store.

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So when it came to the data breach notification, Christine Scott — in what she felt was full alignment with the brand — didn’t shrink from responsibility.

In addition to letters and emails sent to Pinecrest’s 600,000 affected customers, Christine called local news stations to broadcast news of the breach and her promises to make good. She didn’t bother to ask Aaron whether he thought that was a good idea.

“Every one of our customers will be reimbursed for their time and trouble, including a year’s worth of multi-bureau credit monitoring services,” Christine said while the TV cameras recorded her.

“Well that’s what the policy says, doesn’t it?” Christine said when Aaron told her later that she probably shouldn’t have said that on television.

The very next day, a phone call from Pinecrest’s insurance broker was the second bad call Aaron got that month.

“Multi-bureau? No. The policy will cover services from a single credit monitoring bureau,” the broker, Robert Franz, told Aaron.

As Aaron spoke with Robert, he was multitasking and monitoring his emails. He saw an email marked “urgent” from Spendex. It was about the data breach.

“Hey Robert, can I call you back in a few minutes? I’ve got something hopping here,” Aaron said.

“Sure,“ Robert said, but in a tone that implied, “What could be more important than this?”

As it turned out, the email from Spendex was plenty important.

The notice from Spendex explained that although it was obligated to inform all of its customers that there had been a breach, in reality, only 14 of its 26 retail customers had been impacted. The clincher? Pinecrest wasn’t one of them.

Aaron pushed back from his desk and ran his hands through his hair.

“What the … ?” he said as loudly as he would say anything.

“What is it?” said Christine, popping her head into his office. She knew from the volume of Aaron’s voice that it was something big.

“We didn’t lose any data. We didn’t lose any data at all,” Aaron said.

“Great,” Christine said.

“No, not great,” Aaron said. “We just told about a million people that we did.”

“Now what do we do?” Christine asked.

Aaron felt that Christine had burned him before by going on television without seeking his counsel. That experience caused him to dig in his heels with Christine over what to do next.

“Slow down, just slow down,” Aaron said when the siblings met to go over strategy.

“I don’t know that we need to come out with an announcement just yet.”

Aaron’s reaction to his sister’s outspokenness had caused him to miscalculate. A full week went by until Pinecrest announced on its website and with another email blast that its customers had, after all, not been impacted by the Black Adder strike.

The company’s pause in making that announcement was as toxic as a rattlesnake bite.

The local media reacted negatively to the company’s week-long silence. News that the company sat on the knowledge that customers hadn’t lost data made the front pages of the Johnstown Tribune-Democrat and the Wheeling News-Register.

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Pinecrest’s Pain

For the first time in its history, Pinecrest was dealing with the full brunt of a hit to its reputation.

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The traditional print media was one thing, and no small thing in the markets Pinecrest served. But online commentary, ungoverned by journalistic ethics, pulled no punches. Commentators ridiculed the company for banking on the military sacrifices of previous generations, when it “didn’t have the guts,” in one poster’s vernacular, to tell people the truth.

The company’s broker, Robert Franz, phoned Aaron with even more bad news.

“You’re not covered for any of your breach notification expenses, or for any credit monitoring services,” Robert told Aaron.

“Please tell me why,” Aaron said, keeping his voice low because he was just not in the mood for any spontaneous crisis communications with his older sister.

“Under your policy, you’re only covered for notification and credit monitoring if there was an actual breach,” Robert said.

“No breach, no coverage,” he said.

“So we’re out about a million dollars,” Aaron said flatly. In the regional grocery business, where margins could sometimes be measured in the low single digits, a million dollars was a very big hit.

“I’m afraid so,” Robert said.

Sales at Pinecrest Food Markets were down around 10 percent in all four states that it operated in.

“Might as well shop at Supermart,”a grizzled Korean War veteran told Channel 11 in Charles Town, West Virginia.

With the company down a million out of pocket and with revenue hamstrung, Christine Scott and the rest of the Pinecrest team had some very difficult and expensive decisions to make.

Should they sue Spendex for its shoddy forensics? And what coverage did they have for the costs of that?

Rumors began to circulate in several state capitals that class action lawsuits were being prepared on behalf of the tens of thousands of Pinecrest customers who felt they were caused needless expense and worry because of the bad information Pinecrest put out to begin with.

Grandstanding attorneys general were probably not far behind. Pinecrest was possibly facing legal action on several fronts and it was unclear whether it had the coverage to pay for its defense.

*****

With the world seemingly against them, Christine and Aaron took a day in late November and went to their grandfather’s hunting cabin in Somerset County.

The grouse were out there, but the two of them just sat staring at the fire in the cabin’s stone fireplace, with Aaron’s two bird dogs stretched out in front of the fireplace.

Sadie looked up hopefully as Aaron got up to throw another log on the fire.

“No huntin’ today, Sadie girl. Daddy is not in the mood,” Aaron said as Christine nursed a bottle of local craft-distilled rye.

“May I have some of that, please?” Aaron asked.

“Get your own bottle,” said Christine.

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Summary

A regional grocery chain gets into hot water after it loses customer financial data. Making matters worse is that the company does not have a good grasp on the language in its cyber coverage policy. The company also suffers reputational damage when it notifies customers based on bad information.

1. Know your partners: Pinecrest sees its problems go from bad to worse because the company it uses to process credit card transactions has shoddy forensics and reports data breaches for customers that in the end had no data breach.

2. Know your coverage: Pinecrest suffers needless losses because key executives don’t understand its insurance policy when it comes to services available under the coverage for data breach notification and credit monitoring.

3. Be as transparent as possible: When it comes to notifying customers of substantial issues that could impact their expenditures, getting out quickly with the best information is extremely important. Pinecrest actually has good news to report midway through this story, but sits on it due to internal friction. The good of the team must clearly win out here.

4. Create realistic expectations: Coverage existed for Pinecrest officials to put together a reasonable response when customer data was lost. But a key executive broadcast inflated statements about what Pinecrest would be able to do, creating equally inflated expectations.

5. Hold vendors accountable: Given the volatile expansion of cyber risk, it makes good sense to require vendors contractually to indemnify you if they lose your crucial customer data.

The Webinar

The issues covered in this scenario center around crisis management and insurance pitfalls associated with loss from a cyber breach. This follow-up webinar focused on specific loss trends and cyber exposures, as well as presented steps to take to strengthen your crisis risk management program.

Presenters

Webinar_Data_Breach_Aon

Download a copy of the slide presentation here.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

2017 RIMS

RIMS Conference Opens in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.
By: | April 21, 2017 • 4 min read

As RIMS begins its annual conference in Philadelphia, it’s worth remembering that the City of Brotherly Love is not just the birthplace of liberty, but it is the birthplace of insurance in the United States as well.

In 1751, Benjamin Franklin and members of Philadelphia’s first volunteer fire brigade conceived of an insurance company, eventually named The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

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For the first time in America — but certainly not for the last time – insurers became instrumental in protecting businesses by requiring safety inspections before agreeing to issue policies.

“That included fire brigades and the knowledge that a brick house was less susceptible to fire than a wood house,” said Martin Frappolli, director of knowledge resources at The Institutes.

It also included good hygiene habits, such as not placing oily rags next to a furnace and having a trap door to the roof to help the fire brigade fight roof and chimney blazes.

Businesses with high risk of fire, such as apothecary shops and brewers, were either denied policies or insured at significantly higher rates, according to the Independence Hall Association.

Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business, University of South Carolina

Before that, fire was generally “not considered an insurable risk because it was so common and so destructive,” Frappolli said.

“Over the years, we have developed a lot of really good hygiene habits regarding the risk of fire and a lot of those were prompted by the insurance considerations,” he said. “There are parallels in a lot of other areas.”

Insurance companies were instrumental in the creation of Underwriters Laboratories (UL), which helps create standards for electrical devices, and the Insurance Institute for Highway Safety, which works to improve the safety of vehicles and highways, said Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina and former president of the Insurance Information Institute.

Insurers have also been active through the years in strengthening building codes and promoting wiser land use and zoning rules, he said.

When shipping was the predominant mode of commercial transport, insurers were active in ports, making sure vessels were seaworthy, captains were experienced and cargoes were stored safety, particularly since it was the common, but hazardous, practice to transport oil in barrels, Hartwig said.

Some underwriters refused to insure ships that carried oil, he said.

When commercial enterprises engaged in hazardous activities and were charged more for insurance, “insurers were sending a message about risk,” he said.

In the industrial area, the common risk of boiler and machinery explosions led insurers to insist on inspections. “The idea was to prevent an accident from occurring,” Hartwig said. Insurers of the day – and some like FM Global and Hartford Steam Boiler continue to exist today — “took a very active and early role in prevention and risk management.”

Whenever insurance gets involved in business, the emphasis on safety, loss control and risk mitigation takes on a higher priority, Frappolli said.

“It’s a really good example of how consideration for insurance has driven the nature of what needs to be insured and leads to better and safer habits,” he said.

Workers’ compensation insurance prompted the same response, he said. When workers’ compensation laws were passed in the early 1900s, employee injuries were frequent and costly, especially in factories and for other physical types of work.

Because insurers wanted to reduce losses and employers wanted reduced insurance premiums, safety procedures were introduced.

“Employers knew insurance would cost a lot more if they didn’t do the things necessary to reduce employee injury,” Frappolli said.

Martin J. Frappolli, senior director of knowledge resources, The Institutes

Cyber risk, he said, is another example where insurance companies are helping employers reduce their risk of loss by increasing cyber hygiene.

Cyber risk is immature now, Frappolli said, but it’s similar in some ways to boiler and machinery explosions. “That was once horribly damaging, unpredictable and expensive,” he said. “With prompting from risk management and insurance, people were educated about it and learned how to mitigate that risk.

“Insurance is just one tool in the toolbox. A true risk manager appreciates and cares about mitigating the risk and not just securing a lower insurance rate.

“Someone looking at managing risk for the long term will take a longer view, and as a byproduct, that will lead to lower insurance rates.”

Whenever technology has evolved, Hartwig said, insurance has been instrumental in increasing safety, whether it was when railroads eclipsed sailing ships for commerce, or when trucking and aviation took precedence.

The risks of terrorism and cyber attacks have led insurance companies and brokers to partner with outside companies with expertise in prevention and reduction of potential losses, he said. That knowledge is transmitted to insureds, who are provided insurance coverage that results in financial resources even when the risk management methods fail to prevent a cyber attack.

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This year’s RIMS Conference in Philadelphia shares with risk managers much of the knowledge that has been developed on so many critical exposures. Interestingly enough, the opening reception is at The Franklin Institute, which celebrates some of Ben Franklin’s innovations.

But in-depth sessions on a variety of industry sectors as well as presentations on emerging risks, cyber risk management, risk finance, technology and claims management, as well as other issues of concern help risk managers prepare their organizations to face continuing disruption, and take advantage of successful mitigation techniques.

“This is just the next iteration of the insurance world,” Hartwig said. “The insurance industry constantly reinvents itself. It is always on the cutting edge of insuring new and different risks and that will never change.” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]