“If you don’t know where you are going, you might wind up someplace else.”
— Attributed to Yogi Berra
Massachusetts has one of the country’s most stringent statutory and regulatory schemes relating to data privacy and security. The complexity and scope of available insurance products dealing with “cyber” exposures, in Massachusetts and throughout the business world, has dramatically increased over the past several years and is now as fractured and complicated as is the law, which differs from state to state and from country to country. Insurance underwriters, insurance brokers, technologists, security professionals, pundits and others offer conflicting advice about how to best move through this maze of insurance policies, technology, and the many potentially applicable state and federal regulations that often conflict. Imagine that there is growing apprehension that a company is at risk. At some point, a lawyer is called to advise on insurance protection. What is that lawyer to do?
The first step is to establish a team of professionals and client representatives who will, together, work through the issues that will allow the development of a meaningful strategy. The team should include the lawyer, an insurance professional, a technology resource (internal to the client’s business operations or external), and a representative of the client who is sufficiently vested with authority so that access to required information will be facilitated. Once the team is in place, the following should happen, in more or less this sequence:
1. The team should develop a realistic understanding of the client’s cyber/privacy and data risk profile. It is important to analyze not just electronic exposures, but traditional paper-based exposures as well. Among the many factors to consider are the following:
A. The type and location of protected information that is procured, handled, managed and stored by the client. Protected information includes, but is not limited to, private personal information (which is defined differently in various jurisdictions and under different regulatory schemes but often consists of an individual’s first name, last name, and either a social security number, bank account number or other similar data point), and confidential business information.
B. The federal, state, and local statutory and regulatory schemes that impact the client’s obligations with respect to protected information. Most states have adopted data privacy regimes that are grounded in statutes (in Massachusetts the applicable statute is Mass. Gen. Laws ch. 93H) and implemented through a series of regulations. Several federal agencies, including the FTC and the SEC, are focused in meaningful ways on the security of personal and other confidential information that is handled by businesses. Courts are, in most instances, finding statutory and regulatory support for robust enforcement actions by these agencies. It is important to keep in mind that many states, Massachusetts among them, have taken the position that their privacy schemes are meant to be protective of their citizens wherever those citizens conduct commerce.
C. The commercial obligations that have been assumed by the client by contract or otherwise in connection with data security and privacy. These should be charted, and compliance measured.
D. The security of non-electronic records that contain protected information.
E. The client’s network and electronic information storage infrastructure. As with non-electronic records, this infrastructure should be assessed by qualified professionals, and a plan should be established for correction of deficiencies.
2. Next, insurance coverage that is already in place should be reviewed. Among the policies to be reviewed are:
A. General Liability policies
B. Directors and Officers Liability policies
C. Errors and Omissions policies
D. Fiduciary policies
E. Crime policies
F. Professional Liability policies
G. Commercial Property policies
The risk profile that has been developed should be reviewed in the context of the insurance coverage that is present in these policies (there are no true “standard forms” and careful, term-specific analysis is required). The insurance professional who is part of the team should assist in identifying potential exposures that are not within the scope of the existing coverage.
3. Having established a risk profile, assessed the protection afforded by the insurance coverage in place and begun the process of correcting deficiencies, the team should next consider whether existing coverage should be supplemented, including whether stand-alone cyber/privacy coverage should be procured. The policy wordings that might be employed to supplement existing policies, and the policy forms that are available as stand-alone products, are not standard forms of insurance. Nearly all wordings can and should be specially negotiated.
As the stand-alone cyber/privacy insurance market has evolved, these general coverage types have become “standard” in most offerings (with the caveat that while the coverage “type” may be standard, the implementation varies from insurer to insurer, and from product to product, in meaningful ways):
A. Third party coverage against claims asserting a “data privacy wrongful act,” a “network security wrongful act,” or other similar coverage grant. This coverage affords the cyber/privacy equivalent of general liability coverage. A client purchases this coverage to protect against third party claims alleging damages due to the client’s handling of protected information.
B. Third party coverage for claims relating to violation of intellectual property rights or copyright.
C. Various types of first party coverages (coverage that will pay an insured for loss that the insured suffers itself, rather than indemnifying an insured for claims asserted by others), such as:
1. Notification and related expense coverage;
2. Coverage for regulatory fines and penalties;
3. Coverage for the expense of recreating information that is damaged, compromised or destroyed as the result of a data security incident, or other covered occurrence;
4. Coverage for the expense resulting from the inability to use a network or other asset as the result of a covered event; and
5. Coverage for fines and penalties payable as the result of a failure to maintain appropriate levels of Payment Card Industry compliance in connection with credit or payment card exposures (this is not as generally available).
There are, of course, additional issues that will arise in the course of developing an appropriate mitigation strategy and insurance structure. For example, it may be necessary to allow an insurer, or several insurers, to independently audit a client’s infrastructure. It may be that an insurer adds exclusions to a policy that render otherwise appropriate coverage difficult to accept – for example, adding an exclusion that would allow an insurer to avoid payment obligations in the event that there is a change in network structure, levels of security protection, or the like. These types of potentially devastating exclusions, sometimes based on ambiguous terms that are difficult to either understand in an operational sense or manage, can make otherwise meaningful protection unacceptable.
So, dealing with the structure of an effective cyber/privacy insurance program requires knowing what you’ve got, knowing what’s lacking, and filling gaps in a targeted way. Know where you’re starting, understand the potential end points, and you’ll get where you’re going and not someplace unexpected.
Alan M. Reisch is a Director in the Litigation Group at Goulston & Storrs, as well as a Founder of the firm’s risk management affiliate Fort Hill Risk Management, and counsels clients in connection with insurance coverage and portfolio analysis, risk assessment and management, fraud, data privacy and other related issues.