Do You Even Know What a Puni-Wrap Is? Hint — It Could Protect You From GDPR Fines
When GDPR, the EU’s General Data Protection Regulation, went into effect May 25 of last year, with it came widespread hand-wringing over the size of the potential fines companies could face: The larger of $20 million or 4 percent of annual top line revenues.
Just shy of a year later, many are still asking the question: Are those fines insurable? The best answer, still, is “it depends.” Questions surrounding insurability are complex, and there is as yet no case law to provide guidance.
That hasn’t been a major problem so far. Despite more than 95,000 complaints received by data protection authorities, only around 90 fines have been levied, most of them moderately sized, with the exception of a $57 million fine levied against Google in January.
But that’s expected to change. In its February 2019 GDPR Data Breach survey, global law firm DLA Piper noted: “We anticipate that 2019 will see more fines for tens and potentially even hundreds of millions of Euros as regulators deal with the backlog of GDPR data breach notifications.”
Location, Location, Location
The obvious question on risk managers’ minds: “Is coverage available?” The fact is some cyber policies already out there could likely respond to a GDPR fine. Many do contain language that allows for coverage of regulatory fines and penalties. But there are significant caveats, and risk managers should be cognizant of their own policy language.
Some policy language requires a data breach to trigger coverage. However, GDPR fines can be levied in the absence of a breach, meaning that such coverage could not respond.
Some policies contain the phrase “to the extent insurable by law.” And that’s where things start to get sticky. If French regulators assess a $50,000 fine but such fines aren’t insurable under French law, sorry — no coverage.
Also, that obstacle isn’t necessarily removed if that phrase isn’t written into the policy terms. Few domestic insurers would be comfortable trying to pay a claim into a country that considered such payments unlawful — a point that is the crux of many coverage questions related to GDPR fines.
“EU countries have not taken a position on the insurability of fines, that I’m aware of,” said Bill Boeck, insurance & claims counsel for Lockton Financial Services.
“So there has been a lot of speculation based on decisions in other contexts — either by courts or regulators in the various countries — and people are trying to read the tea leaves about whether GDPR fines will be insurable. There is a report out there that hypothesizes that fines would be insurable in a couple of different countries. But at this point that’s no better than informed speculation.”
And of course, even in those countries where fines would be insurable, any direct wrongdoing or gross negligence on the part of the insured would shut down any questions of insurability.
What’s Available Now
With so much uncertainty on how questions of insurability will shake out, insurers are being cautious, said Boeck.
Nevertheless, some carriers and brokers have been working to develop options for insureds.
“Right now, insurers are kind of all over the place on thinking on what they can do and how they can pay,” said a brokerage executive familiar with the Bermuda market who requested anonymity.
One existing option is a twist on a punitive damages wrap (puni-wrap). A carrier will write a domestic cyber policy, and an offshore affiliate will pair it with a punitive wraparound policy.
Such wraparounds have been in use for at least two decades for other liability risks including EPL, D&O and E&O. Puni-wraps are typically used to insure against punitive damages awards in states where such awards are not payable with insurance. Some of these are now in play to cover GDPR fines.
“They took that same concept and came up with a couple of … variations,” he explained.
“One market, Chubb, will issue a GDPR wrap that’ll only wrap Chubb’s domestic policy. Now that is only good if Chubb is on the primary.”
Another alternative, he explained, is an AXA XL product that’s sometimes called a wrap even though it’s not.
“They have a difference in conditions (DIC) option,” the executive said.
“[AXA] XL has to sit on the tower as a regular excess player and they will issue a DIC endorsement that will drop down [and provide affirmative coverage] in the event that the primary is unable to pay it due to insurability reasons.”
The DIC product is more flexible, because while it was designed to pay GDPR fines and penalties, it’s not GDPR-specific and can be used to respond to similar regulations that come down the pike.
Notably, the executive said, the first primary cyber policy will be available out of Bermuda soon, and it will automatically give affirmative coverage for fines and penalties.
For now, he said, it’s important to remember the existing solutions do have certain limitations.
“You have to remember too that the primary policy has to cover GDPR already. So, the DIC or the wraps are no broader than the primary policy. They are just giving affirmative coverage in the event that it cannot be paid.”
“People are trying to read the tea leaves about whether GDPR fines will be insurable. There is a report out there that hypothesizes that fines would be insurable in a couple of different countries. But at this point that’s no better than informed speculation.” — Bill Boeck, insurance & claims counsel, Lockton Financial Services
On whether there is enough capacity in the market to handle the coming fines, Lockton’s Boeck is pragmatic.
“If you’re a very large company with tremendous revenues, and some data protection authority in the EU decides to throw the book at you and nick you for 4 percent, there just isn’t insurance for that. You can’t hope to cobble together enough capacity to cover what could be billions of dollars in fines.
“The better question is, is there enough capacity to cover the fines that are likely to be assessed,” he said.
“You’re only looking at [limits] right now of 50 to 75 million, but that is really pushing it a little bit as far as limits,” said the unnamed executive.
It’s worth noting, he added, that a wrap doesn’t add any additional capacity to the tower.
“So if the wrap pays, then the primary limit is eroded, presuming the wrap is on the primary or whatever layer its wrapping, the limit in that layer is eroded if the wrap pays out, whereas if the DIC drops down and pays out, it’ll only erode the excess layer that it sits in, that it’s dropping down from.”
Experts said that while insureds are asking questions and brokers and carriers are actively talking about it, the lack of case law will remain an obstacle for the near-term.
“This is an issue, which is holding up insurers, and it’s holding up clients buying or analyzing whether they need to buy or not buy,” said the executive. “I think [in the case of the products being sold out of Bermuda right now] it’s the clients taking the perspective that it’s safer to buy than to wait.” &