A Look Back: NetDiligence 2014 Cyber Claims Study

by Traub Lieberman Straus & Shrewsberry LLP
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The NetDiligence 2014 Cyber Claims Study relies on data voluntarily provided by insurers about amounts paid out on cyber claims occurring from 2011 through 2013. Since the Study only accounts cyber claims reported to larger insurers, NetDiligence believes its study only accounts for 5-10% of the total number of all cyber claims handled in those years.

Among the highlights, the Study found that the predominant type of information exposed in any cyber claim remains personally identifiable information (“PII”). Under a definition of PII expanded to include email addresses and passwords, 97% of the information exposed constitutes PII. The remaining data exposed included protected health information (“PHI”) under HIPPA and payment card information (“PCI”).

While PII constituted most of the information exposed, NetDiligence notes that payouts for PHI related breaches were the most costly. The payout on PHI claims was 41% higher than those for PCI related-claims and 66% higher than those for PII related-claims.

The primary cause of data losses remains hackers who were responsible for 29% of the cyber claims. Collectively though, employees accounted for almost as many breaches as hackers.   Employee mistakes accounted for 13% of all claims and employee dishonesty accounted for 11% of all claims. T

The industries most affected by cyber breaches remain Healthcare and Financial Services. Both accounted for 22% of the total claims reported. Retail and the Professional Services Industry each accounted for only 10% of the claims. On the other hand, the Entertainment Industry and Tech Sector were responsible for the most individual records leaked. The Entertainment Sector accounted for 52% of all records exposed, and the Tech Sector was responsible for 39% of all records released. The

Healthcare industry was responsible for the most costly cyber incident with a claim payout totaling $13,700,000.00. Retail accounted for the second highest payout at $11,750,000. The Study reports that the costs of these claims were driven by the resulting legal and regulatory actions and did not necessarily correlate to the number of records lost.  In contrast, the highest payout in the Financial Services Sector was $1,363,895.00. The NetDiligence Study further found that small businesses were responsible for most of the cyber claims (62% of all claims); however, they were only responsible for 1% of all records exposed. The study opines that this indicates small businesses continue to have the weakest security controls but also store the least amount of data.

For the first time, the NetDiligence Study analyzed whether the data breaches were caused by third party vendors. The Study reports that 20% of all reported claims arose from breaches attributed to third party vendors. Hackers caused the most third party vendor breaches; however, 23% of the third party vendor breaches arose from paper records not being properly secured. The Study found though that the payouts for third party vendor breaches were significantly less and that the total number of records exposed was also less.

The Study further noted that while most claims included a combination of third party (e.g. exposed PII) and first party losses (business interruption, damaged software), a small subset of claims consisted solely of first party losses. Notably, there were three claims filed for business interruption caused by “distributed denial of service” (DDoS) attacks, in which persons flood a website with traffic disrupting its services. No data was exposed in these claims, but the business interruption resulted in payouts of $1.5 million to $5 million. Reported DDoS attacks and the resulting costs, however, are down from previous years. In 2011, ten DDoS attacks resulted in $1.22 billion in lost income.

The Study made several conclusions from the data provided.

The number of records exposed in the reported claims varied from 0 to 109,000,000. The median number of records exposed was 3,500, which is down from 45,000 in 2011. The Study concludes that companies are increasingly reporting data breaches, including relatively minor breaches.

The average cost per record lost was $956.21. The Study concluded that the median cost per record more than tripled between 2013 and 2014.   The costs appear to be driven by damages and legal services as the payout for non-legal related crises services decreased by 50% from 2013.

There is no meaningful correlation between number of records exposed and the total payout. For example, the Study found that per record costs were significantly higher in the Healthcare Sector, because enforcement by State Attorneys General, but the number of records exposed in those high cost cases was relatively small.

Overall, the NetDiligence Study concluded that even though there has been a clear increase in both the number cyber incidents and awareness of cyber security, the costs relating to different types of breaches across the different types business sectors are still unpredictable and therefore difficult to assess.

- See more at: http://www.traublieberman.com/cyber-law/2015/0319/6152/#sthash.IQHYDZZN.dpuf

The NetDiligence 2014 Cyber Claims Study relies on data voluntarily provided by insurers about amounts paid out on cyber claims occurring from 2011 through 2013. Since the Study only accounts cyber claims reported to larger insurers, NetDiligence believes its study only accounts for 5-10% of the total number of all cyber claims handled in those years.

 

Among the highlights, the Study found that the predominant type of information exposed in any cyber claim remains personally identifiable information (“PII”). Under a definition of PII expanded to include email addresses and passwords, 97% of the information exposed constitutes PII. The remaining data exposed included protected health information (“PHI”) under HIPPA and payment card information (“PCI”).

 

While PII constituted most of the information exposed, NetDiligence notes that payouts for PHI related breaches were the most costly. The payout on PHI claims was 41% higher than those for PCI related-claims and 66% higher than those for PII related-claims.

 

The primary cause of data losses remains hackers who were responsible for 29% of the cyber claims. Collectively though, employees accounted for almost as many breaches as hackers.   Employee mistakes accounted for 13% of all claims and employee dishonesty accounted for 11% of all claims.

 

The industries most affected by cyber breaches remain Healthcare and Financial Services. Both accounted for 22% of the total claims reported. Retail and the Professional Services Industry each accounted for only 10% of the claims. On the other hand, the Entertainment Industry and Tech Sector were responsible for the most individual records leaked. The Entertainment Sector accounted for 52% of all records exposed, and the Tech Sector was responsible for 39% of all records released.

 

The Healthcare industry was responsible for the most costly cyber incident with a claim payout totaling $13,700,000.00. Retail accounted for the second highest payout at $11,750,000. The Study reports that the costs of these claims were driven by the resulting legal and regulatory actions and did not necessarily correlate to the number of records lost.  In contrast, the highest payout in the Financial Services Sector was $1,363,895.00. The NetDiligence Study further found that small businesses were responsible for most of the cyber claims (62% of all claims); however, they were only responsible for 1% of all records exposed. The study opines that this indicates small businesses continue to have the weakest security controls but also store the least amount of data.

 

For the first time, the NetDiligence Study analyzed whether the data breaches were caused by third party vendors. The Study reports that 20% of all reported claims arose from breaches attributed to third party vendors. Hackers caused the most third party vendor breaches; however, 23% of the third party vendor breaches arose from paper records not being properly secured. The Study found though that the payouts for third party vendor breaches were significantly less and that the total number of records exposed was also less.

 

The Study further noted that while most claims included a combination of third party (e.g. exposed PII) and first party losses (business interruption, damaged software), a small subset of claims consisted solely of first party losses. Notably, there were three claims filed for business interruption caused by “distributed denial of service” (DDoS) attacks, in which persons flood a website with traffic disrupting its services. No data was exposed in these claims, but the business interruption resulted in payouts of $1.5 million to $5 million. Reported DDoS attacks and the resulting costs, however, are down from previous years. In 2011, ten DDoS attacks resulted in $1.22 billion in lost income.

 

The Study made several conclusions from the data provided.

 

The number of records exposed in the reported claims varied from 0 to 109,000,000. The median number of records exposed was 3,500, which is down from 45,000 in 2011. The Study concludes that companies are increasingly reporting data breaches, including relatively minor breaches.

 

The average cost per record lost was $956.21. The Study concluded that the median cost per record more than tripled between 2013 and 2014.   The costs appear to be driven by damages and legal services as the payout for non-legal related crises services decreased by 50% from 2013.

 

There is no meaningful correlation between number of records exposed and the total payout. For example, the Study found that per record costs were significantly higher in the Healthcare Sector, because enforcement by State Attorneys General, but the number of records exposed in those high cost cases was relatively small.

 

Overall, the NetDiligence Study concluded that even though there has been a clear increase in both the number cyber incidents and awareness of cyber security, the costs relating to different types of breaches across the different types business sectors are still unpredictable and therefore difficult to assess.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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