Cyber Risks

Analyzing Cyber Risk Coverage

Unlike other types of insurance, there is no standard form on which the insurance industry as a whole underwrites cyber coverage.
By: | March 13, 2015

Many companies are now taking a close look at the protections provided by cyber risk insurance policies — some for the first time — as data breach incidents and related cyber risks continue to increase and gain publicity, and as government agencies become more actively involved in policing the corporate response.

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Although cyber coverage is a relatively new product in the insurance marketplace, there are now roughly 50 insurance carriers that offer it (although the amounts of coverage available often are limited).

These policies are sold under a number of different names, including “cyber risk,” “information security,” “privacy,” and “media liability” coverage.  Unlike other types of insurance, there is no standard form on which the insurance industry as a whole underwrites cyber coverage.

These policies are sold under a number of different names, including “cyber risk,” “information security,” “privacy,” and “media liability” coverage.

While this provides some challenges to buying coverage, especially for the uninitiated, it often provides more room for negotiation of the terms of cyber policies than many other types of coverage.

Most cyber policies currently in the marketplace offer some combination of traditional liability coverage protecting against claims by third parties, and first-party coverage protecting against losses suffered by the insured.

There also are important terms and conditions of cyber policies that can have a significant impact on available coverage.  While no company can reasonably expect to secure every available component of coverage, awareness of differences among the policies being offered is critical to maximizing premium dollars spent.

While not exhaustive, some of the important features to be mindful of when shopping for cyber coverage include:

Third-Party (Liability) Coverages

Privacy liability coverage. This includes liability to the insured’s customers, clients and employees for breaches of their private information which can be a major component of liability in the case of a data breach.

Seeking trigger language that focuses on the insured’s failure to protect confidential information, regardless of the cause (e.g., “any failure to protect”), rather than language requiring an intentional breach, is advisable.

Also, some (but not all) cyber policies also provide coverage for the insured’s failure to disclose a breach in accordance with privacy laws.

Policies that include defense from the earliest stages of an investigation, typically including a civil investigative demand or similar request for information, are preferable.

Regulatory actions. There is substantial variance among cyber policies regarding whether and to what extent they provide coverage for regulatory and other governmental actions. Even where covered, some policies require that the action be initiated by a formal “suit” in order to trigger the defense obligation.

This limitation typically would preclude defense of the investigative stage of government actions — which often is the most expensive stage for the entity being investigated.

Policies that include defense from the earliest stages of an investigation, typically including a civil investigative demand or similar request for information, are preferable.

It also bears noting that civil fines and penalties are covered under many cyber policies, and companies should be mindful of this if an insurer seeks to exclude such coverage.

Notification costs. This coverage includes the costs of notifying third parties potentially affected by a data breach. There is an ever-increasing and constantly evolving landscape of breach notification laws on a state-by-state basis.

This coverage is included in most cyber policies.  However, many policies, often by endorsement, limit the number of individuals that must be notified and the method(s) of notification.  Some policies also may vest some control over the notification process (which is often sensitive to the insured) with the insurer.

These limitations could leave a company absorbing at least some of the notification costs if a breach occurs, and may require it to relinquish some control over the notification process.

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Crisis management. This coverage includes the costs of managing the public relations outfall from most data breach scenarios. Most, but not all, cyber policies contain some form of this coverage.

The insured sometimes is required to choose from a pre-determined list of vendors.  In most cases, if the insured chooses another vendor, the insurer is not required to pay for the services.  However, this restriction may be negotiable.

Call centers. This coverage may be included within the notification and crisis management coverages, may be a stand-alone coverage, or may not be provided at all.

Because this tends to be one of the higher costs associated with data breaches, it is important to identify whether this coverage is expressly provided and any applicable limitations (including the number of affected persons who are eligible to receive call center services, the hours and locations of the call center, and the specific services the call center staff will provide).

Credit/identity monitoring. This coverage is included in most cyber policies, but again, may be limited for the number of affected individuals that can receive the services and the prescribed vendors that are available.

Transmission of viruses/malicious code. As its name suggests, this coverage protects against liability claims alleging damages from transmission of viruses and other malicious code or data. Not all cyber policies have this coverage.

However, before making it a priority, a company should consider the extent to which its operating systems realistically have the potential to be a source of this type of liability.

First-Party Coverages

Theft and fraud coverage. Covers certain of the costs of theft or destruction of the insured’s data and theft of the insured’s funds.

Forensic investigation. Covers the costs of determining the cause of a loss of data.

Network/business interruption. Covers the costs of business lost and additional expense due to an interruption of the insured’s computer systems. Some cyber policies require that the interruption be caused by an intentional cyber attack and some do not.

There typically are limitations to this coverage, including a requirement that the interruption last a minimal length of time before coverage incepts, and the total length of an interruption that will be covered.  This coverage may also include contingent business expenses.

Extortion. Covers the costs of “ransom” if a third party demands payment to refrain from publicly disclosing or causing damage to the insured’s confidential electronic data.

Data loss and restoration. This component — included in some but not all cyber policies — covers the costs of restoring data if it is lost, and in some cases, diagnosing and repairing the cause of the loss. It typically is subject to a substantial retention, and may be limited in terms of the cause of the data loss at issue.

The claims-made type polices typically are more restrictive in terms of the events that can trigger coverage, and the timing of resulting claims in relation to the loss may limit or preclude available coverage.

Other Key Provisions

Trigger — loss or claim. Cyber policies typically are triggered either by an event that results in the loss of data, or a “claim” arising from the event that is made against the insured (or made against the insured and reported to the insurer) during the policy period.

The claims-made type polices typically are more restrictive in terms of the events that can trigger coverage, and the timing of resulting claims in relation to the loss may limit or preclude available coverage.  Thus, the loss type policy is preferable, even though this coverage may be more expensive.

Trigger — defense. In some cyber policies, the defense obligation is triggered by a “suit,” which requires a lawsuit or written demand against the insured. This definition may preclude defense of a claim that has yet to ripen into a lawsuit or written demand (where much of the defense costs on a particular matter may be spent).

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If available, less restrictive defense language is preferable.  As noted above, in some cyber policies, the “suit” limitation does not apply to governmental actions (such as investigations), which make this language somewhat more acceptable to some companies.

Defense — choice of counsel. In some cyber policies, defense costs are covered only to the extent that the insured chooses from the insurer’s (sometimes short) list of “panel” law firms. If the insured chooses a different firm, its defense costs probably will not be covered.

Given the substantial costs likely to be associated with a significant data breach (which could exceed the limits of the policy), the insured ideally will have substantive input in the choice of counsel.

Accordingly, policies with more balanced choice of counsel language (e.g., the insured and the insurer shall mutually agree on defense counsel and if they cannot agree, the insured shall choose counsel for which the insurer shall pay up to a set hourly rate) are preferable.

Retroactive coverage. Cyber policies often contain a “retroactive date.” Losses arising from events prior to the retroactive date will not be covered.  Insurers often fix the retroactive date at the initial date of coverage by the insurer, although the insured may be able to negotiate a retroactive date further back in time.

Acts and omissions of third parties. Acts or omissions of third parties may not be covered expressly, or even may be excluded, under some cyber policies.

By way of example, if a company uses the services of a third-party vendor to maintain its confidential customer or employee information in the “cloud” and the vendor experiences a data breach, the company could be sued by its customers or employees, and may not have any coverage.

Some cyber policies provide coverage for breaches of data maintained by third parties as long as there is a written agreement between the insured and the vendor to provide such services.  If a company relies on any third parties to maintain any of its confidential information, it should consider seeking a policy that expressly covers breaches of data maintained by third parties.

Moreover, any self-insured retention language applicable to this coverage should be clear that any payments made by the third party indemnifying the company for loss sustained by the breach count toward satisfaction of the retention.

Coverage for unencrypted devices. Many cyber policies exclude coverage for data lost from unencrypted devices. Cyber coverage without this limitation is preferable.

Coverage for corporations and other entities. Many cyber policies define covered persons, for liability purposes, to include only natural persons. However, entities affected by data breaches may include corporations and other business entities.

Companies should consider seeking coverage that appropriately defines the scope of entities potentially affected by a data breach.

Policy territory – occurrences outside the United States. Even if a purchaser does not operate outside the Unites States, its employees may lose their laptops, PDAs and other electronic devices containing confidential information (or have them stolen) while traveling abroad.

Many cyber policies restrict the applicable coverage territory to the United States and its territories.  Companies should ensure that its cyber policy provides coverage even if the loss or theft of confidential information at issue occurs outside the United States.

Breaches not related to electronic records. Some cyber liability policies restrict coverage to loss or theft of electronic data. However, many breaches occur as a result of loss or theft of paper (or other non-electronic) records.  Cyber policies covering both are preferable.

Location of security failure. Coverage under some cyber policies is limited to physical theft of data from company premises. This could be problematic in a number of situations, including theft of a laptop, PDA or external drive from an airport or an employee’s home.

Other policies limit coverage for data breaches resulting from password theft to situations where the theft occurs by non-electronic means.  Companies purchasing cyber policies should be wary of these types of limitations, which may not seem particularly pernicious on initial review but could be extremely costly.

Exclusions for generalized acts or omissions. Some cyber policies exclude coverage for losses arising from: (i) shortcomings in security of which the insured was aware prior to the inception of coverage; (ii) the insured’s failure to take reasonable steps to design, maintain and upgrade its security; and (iii) certain failures of security software.

Because this type of exclusionary language at least arguably is overly broad, lacking in adequate definition, and potentially subjective in application, it should be limited appropriately by negotiation or avoided altogether.

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Exclusions for acts of terrorism or war. This is a common type of exclusion in cyber policies. It is unclear to what extent insurers will rely on these exclusions when data breach result from an organized attack by a foreign nation or hostile organization.

Again, the scope of these exclusions should be negotiated appropriately or, if that is not feasible, the company should consider purchasing alternative coverage.

Steve Raptis is a partner in the Washington, D.C. office of Manatt, Phelps & Phillips LLP. He counsels corporate policyholders nationwide on a broad range of insurance-related issues and represents them in complex insurance disputes. He can be reached at [email protected] or 202.585.6550.

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

The Betrayal of Elizabeth

In this Risk Scenario, Risk & Insurance explores what might happen in the event a telemedicine or similar home health visit violates a patient's privacy. What consequences await when a young girl's tele visit goes viral?
By: | October 12, 2020
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: CRACKS IN THE FOUNDATION

Elizabeth Cunningham seemingly had it all. The daughter of two well-established professionals — her father was a personal injury attorney, her mother, also an attorney, had her own estate planning practice — she grew up in a house in Maryland horse country with lots of love and the financial security that can iron out at least some of life’s problems.

Tall, good-looking and talented, Elizabeth was moving through her junior year at the University of Pennsylvania in seemingly good order; check that, very good order, by all appearances.

Her pre-med grades were outstanding. Despite the heavy load of her course work, she’d even managed to place in the Penn Relays in the mile, in the spring of her sophomore season, in May of 2019.

But the winter of 2019/2020 brought challenges, challenges that festered below the surface, known only to her and a couple of close friends.

First came betrayal at the hands of her boyfriend, Tom, right around Thanksgiving. She saw a message pop up on his phone from Rebecca, a young woman she thought was their friend. As it turned out, Rebecca and Tom had been intimate together, and both seemed game to do it again.

Reeling, her holiday mood shattered and her relationship with Tom fractured, Elizabeth was beset by deep feelings of anxiety. As the winter gray became more dense and forbidding, the anxiety grew.

Fed up, she broke up with Tom just after Christmas. What looked like a promising start to 2020 now didn’t feel as joyous.

Right around the end of the year, she plucked a copy of her father’s New York Times from the table in his study. A budding physician, her eyes were drawn to a piece about an outbreak of a highly contagious virus in Wuhan, China.

“Sounds dreadful,” she said to herself.

Within three months, anxiety gnawed at Elizabeth daily as she sat cloistered in her family’s house in Bel Air, Maryland.

It didn’t help matters that her brother, Billy, a high school senior and a constant thorn in her side, was cloistered with her.

She felt like she was suffocating.

One night in early May, feeling shutdown and unable to bring herself to tell her parents about her true condition, Elizabeth reached out to her family physician for help.

Dr. Johnson had been Elizabeth’s doctor for a number of years and, being from a small town, Elizabeth had grown up and gone to school with Dr. Johnson’s son Evan. In fact, back in high school, Evan had asked Elizabeth out once. Not interested, Elizabeth had declined Evan’s advances and did not give this a second thought.

Dr. Johnson’s practice had recently been acquired by a Virginia-based hospital system, Medwell, so when Elizabeth called the office, she was first patched through to Medwell’s receptionist/scheduling service. Within 30 minutes, an online Telehealth consult had been arranged for her to speak directly with Dr. Johnson.

Due to the pandemic, Dr. Johnson called from the office in her home. The doctor was kind. She was practiced.

“So can you tell me what’s going on?” she said.

Elizabeth took a deep breath. She tried to fight what was happening. But she could not. Tears started streaming down her face.

“It’s just… It’s just…” she managed to stammer.

The doctor waited patiently. “It’s okay,” she said. “Just take your time.”

Elizabeth took a deep breath. “It’s like I can’t manage my own mind anymore. It’s nonstop. It won’t turn off…”

More tears streamed down her face.

Patiently, with compassion, the doctor walked Elizabeth through what she might be experiencing. The doctor recommended a follow-up with Medwell’s psychology department.

“Okay,” Elizabeth said, some semblance of relief passing through her.

Unbeknownst to Dr. Johnson, her office door had not been completely closed. During the telehealth call, Evan stopped by his mother’s office to ask her a question. Before knocking he overheard Elizabeth talking and decided to listen in.

PART TWO: BETRAYAL

As Elizabeth was finding the courage to open up to Dr. Johnson about her psychological condition, Evan was recording her with his smartphone through a crack in the doorway.

Spurred by who knows what — his attraction to her, his irritation at being rejected, the idleness of the COVID quarantine — it really didn’t matter. Evan posted his recording of Elizabeth to his Instagram feed.

#CantManageMyMind, #CrazyGirl, #HelpMeDoctorImBeautiful is just some of what followed.

Elizabeth and Evan were both well-liked and very well connected on social media. The posts, shares and reactions that followed Evan’s digital betrayal numbered in the hundreds. Each one of them a knife into the already troubled soul of Elizabeth Cunningham.

By noon of the following day, her well-connected father unleashed the dogs of war.

Rand Davis, the risk manager for the Medwell Health System, a 15-hospital health care company based in Alexandria, Virginia was just finishing lunch when he got a call from the company’s general counsel, Emily Vittorio.

“Yes?” Rand said. He and Emily were accustomed to being quick and blunt with each other. They didn’t have time for much else.

“I just picked up a notice of intent to sue from a personal injury attorney in Bel Air, Maryland. It seems his daughter was in a teleconference with one of our docs. She was experiencing anxiety, the daughter that is. The doctor’s son recorded the call and posted it to social media.”

“Great. Thanks, kid,” Rand said.

“His attorneys want to initiate a discovery dialogue on Monday,” Emily said.

It was Thursday. Rand’s dreams of slipping onto his fishing boat over the weekend evaporated, just like that. He closed his eyes and tilted his face up to the heavens.

Wasn’t it enough that he and the other members of the C-suite fought tooth and nail to keep thousands of people safe and treat them during the COVID-crisis?

He’d watched the explosion in the use of telemedicine with a mixture of awe and alarm. On the one hand, they were saving lives. On the other hand, they were opening themselves to exposures under the Health Insurance Portability and Accountability Act. He just knew it.

He and his colleagues tried to do the right thing. But what they were doing, overwhelmed as they were, was simply not enough.

PART THREE: FALLING DOMINOES

Within the space of two weeks, the torture suffered by Elizabeth Cunningham grew into a class action against Medwell.

In addition to the violation of her privacy, the investigation by Mr. Cunningham’s attorneys revealed the following:

Medwell’s telemedicine component, as needed and well-intended as it was, lacked a viable informed consent protocol.

The consultation with Elizabeth, and as it turned out, hundreds of additional patients in Maryland, Pennsylvania and West Virginia, violated telemedicine regulations in all three states.

Numerous practitioners in the system took part in teleconferences with patients in states in which they were not credentialed to provide that service.

Even if Evan hadn’t cracked open Dr. Johnson’s door and surreptitiously recorded her conversation with Elizabeth, the Medwell telehealth system was found to be insecure — yet another violation of HIPAA.

The amount sought in the class action was $100 million. In an era of social inflation, with jury awards that were once unthinkable becoming commonplace, Medwell was standing squarely in the crosshairs of a liability jury decision that was going to devour entire towers of its insurance program.

Adding another layer of certain pain to the equation was that the case would be heard in Baltimore, a jurisdiction where plaintiffs’ attorneys tended to dance out of courtrooms with millions in their pockets.

That fall, Rand sat with his broker on a call with a specialty insurer, talking about renewals of the group’s general liability, cyber and professional liability programs.

“Yeah, we were kind of hoping to keep the increases on all three at less than 25%,” the broker said breezily.

There was a long silence from the underwriters at the other end of the phone.

“To be honest, we’re borderline about being able to offer you any cover at all,” one of the lead underwriters said.

Rand just sat silently and waited for another shoe to drop.

“Well, what can you do?” the broker said, with hope draining from his voice.

The conversation that followed would propel Rand and his broker on the difficult, next to impossible path of trying to find coverage, with general liability underwriters in full retreat, professional liability underwriters looking for double digit increases and cyber underwriters asking very pointed questions about the health system’s risk management.

Elizabeth, a strong young woman with a good support network, would eventually recover from the damage done to her.

Medwell’s relationships with the insurance markets looked like it almost never would. &

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

Risk & Insurance® partnered with Allied World to produce this scenario. Below are Allied World’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

The use of telehealth has exponentially accelerated with the advent of COVID-19. Few health care providers were prepared for this shift. Health care organizations should confirm that Telehealth coverage is included in their Medical Professional, General Liability and Cyber policies, and to what extent. Concerns around Telehealth focus on HIPAA compliance and the internal policies in place to meet the federal and state standards and best practices for privacy and quality care. As states open businesses and the crisis abates, will pre-COVID-19 telehealth policies and regulations once again be enforced?

Risk Management Considerations:

The same ethical and standard of care issues around caring for patients face-to-face in an office apply in telehealth settings:

  • maintain a strong patient-physician relationship;
  • protect patient privacy; and
  • seek the best possible outcome.

Telehealth can create challenges around “informed consent.” It is critical to inform patients of the potential benefits and risks of telehealth (including privacy and security), ensure the use of HIPAA compliant platforms and make sure there is a good level of understanding of the scope of telehealth. Providers must be aware of the regulatory and licensure requirements in the state where the patient is located, as well as those of the state in which they are licensed.

A professional and private environment should be maintained for patient privacy and confidentiality. Best practices must be in place and followed. Medical professionals who engage in telehealth should be fully trained in operating the technology. Patients must also be instructed in its use and provided instructions on what to do if there are technical difficulties.

This case study is for illustrative purposes only and is not intended to be a summary of, and does not in any way vary, the actual coverage available to a policyholder under any insurance policy. Actual coverage for specific claims will be determined by the actual policy language and will be based on the specific facts and circumstances of the claim. Consult your insurance advisors or legal counsel for guidance on your organization’s policies and coverage matters and other issues specific to your organization.

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, Ltd, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. Risk management services are provided or arranged through AWAC Services Company, a member company of Allied World. © 2020 Allied World Assurance Company Holdings, Ltd. All rights reserved.




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