Cyber-Security Issues Receiving Ever-Increasing Attention, Including From Congress and Governmental Agencies

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[authors: Barry Buchman and Adrian Azer]

On the heels of a recent survey that found that cyber-security is becoming the primary concern of corporate general counsels and directors, see C. Dunn, Cybersecurity Becoming No. 1 Concern for GCs and Directors, Corporate Counsel, Aug. 15, 2012, the United States government is increasingly taking an active role in addressing cyber-security issues.

On September 19, 2012, Senator John D. Rockefeller IV – Chairman of the U.S. Senate Committee on Commerce, Science and Transportation – sent a letter to the chief executive officers of all Fortune 500 companies addressing the need for better cyber-security measures and requesting their active involvement in developing such measures.  Senator Rockefeller stated that “the cyber threats we face are real and immediate, and Congress’s failure to pass legislation this year leaves the country increasingly vulnerable to a catastrophic cyber attack.”  Moreover, Senator Rockefeller noted that most executives “recognize the gravity of this threat and that their companies would benefit from deeper collaboration with the government.”

Senator Rockefeller’s letter comes on the heels of litigation commenced by the Federal Trade Commission (“FTC”) against various companies based on their alleged failure to maintain appropriate cyber-security measures.  The letter also follows guidance by the U.S. Securities and Exchange Commission (“SEC”) regarding the disclosure requirements for public companies regarding cyber-security risks and breaches.

On June 12, 2012, the FTC commenced a declaratory judgment proceeding against, among others, Wyndham Worldwide Corporation (“Wyndham”), seeking injunctive relief against Wyndham for its failure to “maintain reasonable and appropriate data security for consumers’ sensitive personal information.”  In its complaint, the FTC alleged that Wyndham’s “failure to maintain reasonable security allowed intruders to obtain unauthorized access to the computer networks of Wyndham Hotels and Resorts, LLC, and several hotels franchised and managed by Defendants on three separate occasions in less than two years.”  This lack of adequate cyber-security measures led to “fraudulent charges on consumers’ accounts, more than $10.6 million in fraud loss, and the export of hundreds of thousands of consumers’ payment card account information to a domain registered in Russia.”

Moreover, the FTC commenced enforcement actions against two businesses – EPN, Inc. and Franklin’s Budget Car Sales, Inc. (“Franklin”) – alleging that the businesses illegally exposed “sensitive personal information of thousands of consumers by allowing peer to peer file-sharing software to be installed on their corporate computer systems.”  Specifically, the businesses’ failure to adopt adequate cyber-security measures subjected personal information, such as social-security numbers, to disclosure.  The FTC entered into settlements with both businesses, whereby “both companies must establish and maintain comprehensive information security programs.”  The settlements also bar “misrepresentations about the privacy, security, confidentiality, and integrity of personal information collected from consumers.”

Further, as previously addressed in our article on the availability of insurance coverage for cyber-security incidents, on October 13, 2011, the SEC issued guidance regarding the disclosure requirements for public companies arising from cyber-security risks and breaches.  See Importance Of Procuring Cybersecurity Insurance Coverage, Law360, June 29, 2012.[1]  The SEC noted that, in disclosing cyber-security risks, it would be prudent for companies to include a “[d]escription of relevant insurance coverage.”  See id. (citation omitted).

This increased involvement by the federal government further evidences the importance of cyber-security and protecting against cyber risk through, among other things, adequate insurance coverage.  As noted in our recent article, companies may have several avenues to coverage for losses associated with cyber-security incidents.  Indeed, since we published that article, the Sixth Circuit has issued a pro-policyholder decision regarding coverage for such losses, holding that losses resulting from the theft of customers’ banking information are covered under a commercial crime policy’s computer fraud endorsement.  See Retailer Ventures, Inc. v. Nat’l Union Fire Ins. Co., — F.3d –, 2012 WL 3608432 (6th Cir. Aug. 23, 2012).  This ruling further illustrates that the coverage provided by commercial insurance policies can be an extremely valuable corporate asset to companies dealing with cyber-security issues. Companies can maximize the benefits of this asset by acting proactively to analyze their insurance portfolio now and by being willing to question, and challenge where appropriate, coverage denials from their insurers.