Countdown to the CCPA: Does cyber insurance cover a data breach?

Bryan Cave Leighton Paisner
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When the California Consumer Privacy Act (“CCPA”) takes effect in January 2020, California will become the first state to permit residents whose personal information is exposed in a data breach to seek statutory damages of between $100-$750 per incident, even in the absence of any actual harm.  The class actions that follow are not likely to be limited to California residents, but will also include non-California residents pursuing claims under common law theories.  A successful defense will depend on the ability of the breached business to establish that it implemented and maintained reasonable security procedures and practices appropriate to the nature of the personal information held.  The more prepared a business is to respond to a breach, the better prepared it will be to defend a breach lawsuit. To help our clients get ready for the CCPA, Bryan Cave Leighton Paisner is issuing a series of data security articles to empower organizations to focus on breach readiness.

Data Security Incident Preparedness

Many legal departments and information technology professionals have relied on the adage that the best way to prepare for a data security incident is to prevent one from happening in the first place.  As a result, the historical focus for many organizations has been on taking steps to protect data and to prevent a breach from occurring.  Such steps include instituting written information security programs that describe the security infrastructure of the organization, investing in defensive information technology resources, installing monitoring systems and training employees on good security practices.  As the number of attacks from third parties that exploit previously unknown software vulnerabilities (sometimes referred to as “zero-day exploits”) has risen dramatically, most organizations now realize that even the best security cannot prevent a breach.  From that vantage point, preparing in advance for how your organization will respond when a security incident or breach occurs is essential.

Your organization will almost certainly survive a data breach, but how well it survives depends primarily on two factors directly within the control of the incident response team: (1) how quickly it responds to investigate and notify when a breach is discovered; and (2) how effectively it communicates about the breach to stakeholders (e.g., customers, employees, shareholders, regulators, the media, etc.).

Data security incident preparedness is a process that involves management, information technology, public relations, legal, and human resources.  It typically includes the creation of a plan for how an organization will respond to an incident or a breach, as well as continual cross-staff and cross-department training to teach personnel about the plan and how to implement it.  Each training exercise inevitably identifies areas in which an organization can improve its plan or provide additional training to improve its response.

In addition to supporting the organization’s planning and training efforts, in-house counsel have a special role in terms of data security incident preparation.  When a security breach occurs, there are several core legal documents that are typically implicated during, or after, the breach.  In-house counsel should ensure that these documents are easily accessible and have a general awareness of the legal obligations or liabilities that these documents create.  In-house counsel also should review the incident response plan to make sure it incorporates those same legal documents.  Evaluating and understanding any applicable insurance policies should also be a part of the organization’s preparation for a possible breach.

Does Cyber Insurance Cover a Data Breach?

76% of U.S. companies have purchased insurance specifically designed to cover part, or all, of the costs of a data security breach (“cyber-insurance”).1  Cyber-insurance policies differ in terms of what they cover, what they exclude, and the amount of retentions (i.e., the amount of money for which the insured organization is responsible before the policy provides reimbursement to the organization).  If an organization has a cyber-insurance policy, in-house counsel should review it carefully before a security incident occurs so that the legal department understands the degree to which the policy protects (and does not protect) the organization from potential incident-related costs and liability.  Policies also may obligate an organization to take specific actions, such as notifying the insurer or using pre-approved data incident response resources (e.g., investigators, credit monitoring, mailing services, public relations firms, or outside counsel).  Because data security law is rapidly evolving and changing, the policy should be reviewed annually to ensure that the protections it affords continue to align with changes in the legal landscape, coverage trends, and the organization’s operations.  In addition, your organization should carefully analyze the amount of coverage, any applicable self-insured retention, and any sub-limits to ensure they align with the likely costs and risks to the organization. 

The following checklist provides a guide to evaluate a cyber-insurance policy.  Before completing the checklist, it is important to determine whether an organization’s goal in purchasing insurance is to help it handle typical data security incidents, to help it cope with catastrophic data security incidents/breaches, or both.

First Party Coverage:

The policy should cover the likely costs incurred by an organization in responding to a breach, including the following:

Forensic Investigators

  • Does the policy cover the cost of retaining a forensic investigator?
  • If the organization processes payment cards, does the policy cover the cost of retaining a payment card brand forensic investigator, known as a PCI-PFI, whose investigator results would be reported to the card brands?
  • If a PCI-PFI is required to be retained, does the policy permit hiring a private forensic investigator to challenge the results of a PCI-PFI’s investigation?  Tip: You generally will want to run parallel investigations as the PCI-PFI’s findings may guide the fines/fees assessed by the card brands. Thus, hiring your own private forensic investigator will be essential to any assessment challenge.

Legal Counsel

  • Does the policy cover legal expenses associated with retaining experienced breach counsel to lead the investigation and advise on legal requirements?
  • Can the organization retain counsel of its choosing, or is it limited to a panel of providers pre-selected by the insurance company?  Tip: You may be able to get your choice of counsel approved regardless of a panel limitation; your best shot at doing so will be when you are negotiating the purchase of the policy.

Consumer Notifications

  • Does the policy cover the cost of issuing notices to consumers?
  • Does the policy permit the organization to choose how it wishes to make notification (e.g., substitute notice where available for large breaches vs. mailing letters to individuals)?
  • Does the policy cover the cost of voluntary notification, or must notification be required by law?  Tip: Given the variations between what data elements warrant notification under the 50 state laws, a best practice is to follow the mantra “what you do for one, you do for all.” For example, in a 50 state breach, not all states require notification if online account usernames and passwords are exposed.  However, since the risk to all individuals is the same, generally an organization will wish to voluntarily notify individuals in states where it is not legally required.

Credit Monitoring Services

  • Does the policy cover the cost of credit monitoring and identity theft protection services?
  • Will the policy pay for a minimum of two years of such services?  Tip: A small number of states have begun requiring credit monitoring services in certain circumstances (e.g., where Social Security numbers have been exposed).  Massachusetts currently has the strictest legal requirement of two years.  Following the mantra, “what you do for one you do for all,” the organization should ensure coverage for a minimum of the strictest state law triggered by a breach.

Public Relations

  • Does the policy cover the retaining of a public relations expert to assist with communications arising from a breach?
  • Does the policy permit the organization to use its preferred PR firm?  Tip: You generally want to retain a PR company that specializes in data breach incident response.  While the PR company you use to promote a new product, for example, may have a longstanding relationship with your organization, incident response management is different.

Business Interruption

  • Does the policy provide coverage for costs associated with an interruption or suspension of the insured’s business as well as a service provider’s business?
  • Does the coverage apply even where the insured voluntarily and intentionally shuts down its network to minimize the effects of a breach?

Software and Hardware Replacement

  • Does the policy replace software and hardware damaged by a breach (sometimes called “bricking” coverage)?

Ransomware

  • Does the policy pay for first dollar coverage of ransom payments?
  • Does the policy cover costs associated with hiring a vendor to facilitate a bitcoin payment?  Tip: Since most companies don’t have their own bitcoin wallets, and obtaining one can be time consuming, a cottage industry has cropped up of vendors who, for a fee, will let you use their wallets to facilitate a ransom payment.

Third Party Coverage:

The policy also should cover any claims the insured may face from third parties, like individuals, regulators, and business partners.

Regulatory Proceedings

  • Does the policy cover regulatory proceedings that may result from a breach, including legal fees?
  • Does the policy also cover the fines or civil penalties that may be assessed as a result of a proceeding where insurable by the law of the most favorable jurisdiction?  Tip: It may be unclear whether certain regulatory penalties/fines are insurable as a matter of law, but the policy should provide for coverage where possible.

Consumer Litigation

  • Does the policy pay for the cost of both defense and indemnification for consumer data breach lawsuits?
  • Does the policy exclude any potential causes of action that the organization may face in consumer lawsuits?  Tip: Many breach lawsuits will allege violation of a state consumer protection law.  You should ensure that such claims will not be excluded under a policy’s exclusion for state unfair and deceptive practices act claims (UDAP).
  • Can the insured select their own defense counsel or must they use defense counsel pre-selected by the insurer?
  • Does the insurance policy exclude lawsuits brought for violations of the California Consumer Privacy Act (“CCPA”)?

Contractual Liabilities

  • Does the policy cover contractual liabilities that result from a data security breach?  Tip: Many policies will exclude contractual liabilities unless the liability also arises independent of the contract.
  • If the organization accepts credit cards, does the policy cover contractual liabilities that may be owed to the organization’s payment processor or merchant bank, sometimes referred to as Payment Card Industry (“PCI”) fines or assessments?
  • Does the policy exclude any type of contractual liability such as PCI fines or contracts that the organization may have with end-use consumers?  Tip: There are a variety of charges that can be assessed pursuant to the card brand rules.  The policy should provide for coverage for all such charges.

For more information and resources about the CCPA visit http://www.CCPA-info.com. 

1. FICO Decisions: USA Views From The C-Suite Survey 2018, available at https://www.fico.com/en/resource-download-file/6341

[View source.]

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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