For the first time, online retail sales exceeded $1 billion on Black Friday and reached nearly $1.5 billion on Cyber Monday this year. Analysts expect this increase in e-commerce to continue, and Forrester Research estimates that online sales this holiday season will exceed $68.4 billion—a 15 percent increase over 2011.
With a steady upsurge every year in retailers suffering network intrusions leading to data and privacy breaches during the holidays, the question is not whether retailers will be targets of intrusions, but instead which retailers will be victims this holiday season and the size and scope of the intrusions and breaches.
Retailers who suffer a network intrusion leading to a data or privacy breach during the holidays may have a valuable asset in their insurance policies. Insurance can play an important role for retailers in minimizing the financial impacts associated with a breach. Retailers may have coverage for some or all of the following losses associated with data security breaches:
legal expenses incurred as a result of the breach;
third-party lawsuits by people whose data has been compromised;
business interruption losses (i.e., coverage for profits lost due to a breach);
damage to online systems or data losses;
statutory violations, government investigations and/or fines;
costs of complying with consumer notification laws;
costs associated with investigating a breach;
breach of contract and negligence claims arising out of a disclosure of credit card information, including coverage for a breach of a merchant agreement and coverage for PCI DSS fines;
costs of providing credit monitoring, including postage and advertising costs; and
loss of intellectual property.
In this article we set out six initial steps retailers should take if they find themselves a victim of a data or privacy breach this holiday season.
Step One: Gather and Review All Potentially Applicable Insurance Policies
The first step in determining whether insurance coverage is available is to gather and review all of the company’s insurance policies. Data breach losses can trigger many types of coverage, and a company’s entire insurance portfolio should be reviewed, including but not limited to the following policies:
Cyber Risk/Privacy Policies
Cyber risk/privacy policies are specialized policies that may provide both first-party and third-party coverage for data and privacy breaches, depending on the coverage modules that the company purchased. For example, first-party coverage under cyber risk/privacy policies may include loss of digital assets coverage, non-physical business interruption and extra expense coverage, cyber extortion coverage, cyber terrorism coverage and security event costs. Third-party coverage under these specialized policies can include privacy liability coverage, coverage for unauthorized disclosure of personal information and investigation coverage.
Directors and Officers Policies
Directors and officers (D&O) policies may be implicated when a suit is brought against the directors and officers of a company (or against the company itself), alleging that they committed wrongful acts in their capacity as directors and officers (i.e., failed to protect computer systems from a breach). Such policies may also apply if a government agency initiates an investigation.
Errors and Omissions Policies
Errors and omissions (E&O) policies apply when a claimant alleges that the policyholder was negligent in providing services. E&O policies may apply to data breaches where there is a claim that the retailer failed to properly protect the confidential information of its corporate partners, vendors or customers.
Fidelity and crime policies generally insure against losses of money, securities or inventory due to “employee dishonesty” and also typically include related coverages for forgery, computer fraud, computer theft, data extraction and investigation costs. Earlier this year, DSW Shoe Warehouse won a coverage dispute against Chartis concerning a data breach in which transaction information involving 1.4 million credit cards had been stolen. The Sixth Circuit U.S. Court of Appeals found that a computer fraud endorsement to a blanket crime policy “provided coverage for loss that the insured sustained ‘resulting from’ the ‘theft of any insured property by computer fraud’ which includes the ‘wrongful conversion of assets under the direct or indirect control of a computer system by means of … fraudulent accessing of such computer system.’" Crime policies may also apply where an employee was responsible for the breach. Issues that arise as to who is an “employee” under these policies are particularly important given the number of temporary workers and contractors employed by retailers during the holiday season. Credit card thefts are often an issue, and the extent to which activated gift cards are considered securities can impact coverage.
Commercial General Liability Policies
Commercial general liability (CGL) policies provide coverage for third-party claims for bodily injury, property damage, and personal and advertising injury, and courts have found insurance coverage for data breaches under these policies. The most recent changes to ISO form policies exclude cyber-related losses, but it is prudent for a policyholder to check its actual policy language because older policy forms are still being sold.
Property policies provide coverage for lost or damaged property. Some property policies also include coverage for direct physical loss of or damage to computer data. In addition, property policies may also provide coverage for economic losses resulting from the interruption of a business due to physical loss of or damage to the business’s property or to the property of the business’s buyers or suppliers.
Accordingly, under some policies there may be an argument that the servers were actually damaged during an intrusion. So, for example, if the servers were physically damaged during an intrusion and that disrupts connections between retail outlets and servers, resulting in lost profits, these policies may provide coverage.
Policies Under Which a Company May Be an Additional Insured
In assessing policies that may apply to a loss, retailers should not forget to look for potential coverage they may have as additional insureds under insurance policies purchased by other companies. Vendors and contractors employed by a company likely will be contractually obligated to add the company as an additional insured to their liability policies. If customer data loss is caused by vendor negligence, then coverage for the eventual liability claims may be found in these policies. Issues such as scope of coverage, who pays the deductible and control of any joint defense often arise. Policies have different coverage terms, exclusions and conditions. Policyholders should not be discouraged because policy exclusions appear to preclude coverage, especially when dealing with data loss and privacy issues. Case law in this area is in its infancy and already differs throughout the country. While an insurance company may assert an exclusion, viable arguments and supporting case law in particular jurisdictions may indicate that the exclusion does not apply.
Step Two: Evaluate Actual and Potential Claims
Policyholders must determine whether the claims or potential claims they face are covered by their insurance policies. Whether a data breach or privacy violation qualifies as a “claim” under certain policies may be a matter of state law interpretation and require more than just a review of the policy. “Claims” are not necessarily limited to traditional lawsuits under the language of many of the policies discussed above. Instead, a claim may include a complaint from a customer or vendor, a demand for non-monetary relief (i.e., credit monitoring), a notice of an investigation or inquiry by a government agency, or a subpoena. Further, some policies provide coverage for impending claims in the aftermath of a breach that may include advertising and notification costs to affected consumers.
Even if a policyholder is not currently facing a claim, the policyholder should evaluate the potential for future claims. While many claims-made policies purchased by retailers require that a claim be both made and reported during the policy period, certain claims-made policies may allow the retailer to provide the insurance company with a “notice of circumstances” detailing the data breach or privacy violation and thus lock any future claims based on the data breach or privacy violation into the coverage year when the notice of circumstances was reported. If a policyholder has this opportunity, it is a business decision that needs to considered carefully. In determining whether to file a notice of circumstances, at a minimum a retailer should consider the following: (i) the amount of coverage limits still available under the current policy versus what it expects to purchase under the next policy, (ii) whether the next policy will have the same coverage available or more restrictive coverage, and (iii) whether potential claims not reported under the notice of circumstances would indeed be covered by future policies. In some cases the decision to provide a notice of circumstances is not optional; rather, if a policyholder fails to provide notice of circumstances that may give rise to future claims during the policy period when the data breach took place, the next policy may exclude coverage for the breach.
Step Three: Watch Your Words
What you say to whom and how you say it may make the difference between a covered and an uncovered claim. Policyholders should be careful in the initial stages when characterizing their claims or discussing coverage with their insurance companies, their brokers or any outside consultants. There are a number of issues that can significantly affect the existence or amount of an insurance recovery. For example, a policy may contain a “batch clause” requiring that similar claims be treated as a single occurrence. Whether a claim is “similar,” however, may not be obvious and may require a legal judgment call that should not be made until the policyholder understands how an occurrence determination affects the amount and scope of the insurance coverage it may collect and from which policies. This involves many layers of analysis, including the law on occurrences in all potentially relevant jurisdictions, the relevant deductibles, limits under the policies, and how certain facts are developing in the underlying actions. Outside coverage counsel can work with risk managers and in-house legal counsel to ensure that a policyholder meets its reporting obligations. To maintain a single cohesive message with insurers, a retailer should identify one point of contact in the company who will communicate with the insurance companies along with outside counsel throughout the life of the claim. The policyholder should avoid being bullied into making premature calls.
In addition to carefully watching what they say to their insurance companies, retailers should also be careful when discussing coverage issues with their brokers or any outside consultants. In many jurisdictions, communications with a broker or outside consultants are not subject to any privilege. Any unprotected communications may be discoverable if a coverage dispute ultimately arises.
Step Four: Provide Prompt Notice
Once all potentially applicable insurance policies, actual claims and potential claims are identified, the retailer should provide prompt notice or notice of circumstances to all relevant insurance carriers. Notice requirements vary by policy, and some policies may require notice in as little as 24 hours after the discovery of a data breach (i.e., media response and crisis management coverage). Generally, however, notice must be provided between 30 and 90 days after the discovery of a breach. Failure to abide by the policies’ specific notice provisions may bar coverage in some jurisdictions, especially for claims-made policies. However, in many jurisdictions, under occurrence-based policies, an insurance company has the burden to show that it was prejudiced as a result of the late notice. If a policyholder is denied coverage because of late notice, it is best served by having an experienced coverage counsel review its policies and determine whether a viable argument for coverage exists.
Step Five: Demand That Insurers Fulfill Their Coverage Obligations
Policyholders must demand that their insurance companies meet all contractual obligations. They should not accept any denial as final—instead, a denial is often the beginning of the dance with an insurance carrier. If policyholders eventually need to file suit or to arbitrate against their insurer, they should review the policies and determine what steps need to be taken. Some policies contain mandatory waiting periods and mediation or arbitration prior to bringing a coverage suit. Policies also may contain suit limitation clauses that limit the policyholders’ time to bring a suit or notice arbitration.
Policyholders should avoid letting an insurance company trick them into believing that they are still in negotiations. The time period for bringing a suit either under the language of a particular insurance policy or under the relevant statute of limitations is not automatically tolled while the policyholder is negotiating with the insurance carrier. In some circumstances the policyholder may want to enter into a formal tolling agreement signed by both parties upon receipt of a denial. In other circumstances, where coverage varies greatly depending on the jurisdiction, it may be in the policyholder’s best interest to file suit in the forum of its choice and then stay the proceeding while the parties attempt settlement. Regardless, policyholders should know what the policy requires so they can maintain the pressure on the insurance company and, if necessary, initiate coverage litigation.
Step Six: Follow Underlying Cases and All Criminal Investigations and Update the Insurance Carriers Regularly
Retailers should identify one individual in the legal or risk management department to follow all of the underlying cases and related criminal investigations; ideally it is the same person who is the point of contact with the insurers. As details about the breach emerge, coverage may become available under additional policies. Having a single point of contact also will allow the company to present the claim in the manner that maximizes coverage. The individual who is the point of contact should regularly update the carriers on the status of the underlying cases.
The holiday season is very likely the most important period of the year for retailers. The online channel is fast becoming the preferred channel of many consumers during this busy season. An unfortunate by-product of this growth is the increased cost and sophistication of data and privacy breaches. Coverage for a data breach or privacy claims may exist under a variety of policies. When in doubt, retailers should contact experienced coverage counsel when dealing with data breach/privacy issues, and they must be diligent about maximizing their coverage.
Perkins Coie’s interdisciplinary team of privacy and security lawyers includes litigators, transactional attorneys, and public policy and regulatory lawyers. We have substantial experience in handling privacy litigation, including defending class action lawsuits and government enforcement actions; licensing and business transactions; mergers and acquisitions involving the transfer or ownership of data; developing privacy and security policies, implementing fair information practices, and executing privacy and security audits; and responding to government and third party requests for information.