Crime (Policy) Does Pay – Sixth Circuit Holds That Endorsement of Crime Policy Covers Losses from Hacker's Data Breach

by Proskauer Rose LLP

Cyber hacking, data breaches and privacy concerns have become commonplace headlines. While not always front page news, one study reported on 1,700 instances of computer hacking, cyber terrorism, and other data breaches in the past seven years, resulting in some 900 million compromised records. Another study of 49 breaches in 2011 reported that the average cost of a data breach (including detection, internal response, notification, post-notification cost and lost customers) was $5.5 million. For businesses which have not yet purchased stand-alone cyber insurance policies, a recent federal appellate court case may provide the basis for coverage under other policies.

Providing policyholders with another method by which to receive data breach coverage, the Sixth Circuit Court of Appeals recently held that a computer fraud rider to a "Blanket Crime Policy" covered losses from a hacker's theft of customer credit card and checking account data. While most insurance companies have attempted to exclude cyber risks from many general liability and first-party property policies, this holding potentially adds crime policies to the list of policies that cover data breach costs, a list that, in addition to insurance-industry preferred cyber policies, also includes general liability, errors and omissions, media E&O and directors and officers policies.

In 2005, a hacker used the local wireless network at one of plaintiff DSW's stores to hack into its main computer system and download customer credit card and checking information, pertaining to over 1.4 million customers of 108 stores. The hacker used the credit card information to engage in fraudulent credit card transactions. Unsurprisingly, plaintiff incurred significant expenses as a result, paying over $5.3 million for customer communications; public relations efforts; customer claims and lawsuits; attorneys' fees in connection with state and federal investigations; and, most significantly, fines imposed by Visa and Mastercard. Plaintiffs paid the two credit card companies over $4 million as a result of the data breach and aftermath.

Plaintiff sought coverage from its insurer, defendant National Union Fire Insurance Company of Pittsburgh, PA ("National Union"), a subsidiary of AIG. National Union denied coverage, asserting that the loss was excluded under the computer fraud rider because it was related to the theft of confidential customer information. Moreover, National Union asserted that plaintiff's loss did not qualify as a loss "resulting directly from . . . the theft of any Insured property by Computer Fraud," as required by the policy. The District Court in Ohio granted summary judgment to the policyholder for the amount of the loss plus interest, including the fines paid to Visa and Mastercard due to the data breach. The District Court rejected plaintiffs' bad faith claims. The Sixth Circuit affirmed the District Court opinion in its entirety.

In affirming the District Court, the Sixth Circuit found that a commonly used, broadly worded exclusion for proprietary and other confidential information did not apply to the loss in this case. The coverage exclusion provided that "Coverage does not apply to any loss of proprietary information, Trade Secrets, Confidential Processing Methods, or other confidential information of any kind." The Court agreed with the District Court's finding that even if the copying of customer information qualified as a "loss," it was not a loss of "proprietary information . . . or other confidential information of any kind." The Court interpreted the definition to include only "confidential information" of DSW's involving the way in which its business is operated. Moreover, the stolen credit card and checking account information was not proprietary because it was owned or held by many entities, including the customers, financial institutions, and merchants involved in the stream of commerce. The Court concluded that the term "other confidential information of any kind" did not mean all information belonging to anyone that is expected to be protected from unauthorized disclosure, because that interpretation "would swallow not only the other terms in [the] exclusion but also the coverage for computer fraud."

Secondly, the Court rejected the insurer's attempts to liken its policy to a traditional fidelity bond, which does not provide third party liability coverage. The Court noted that the terms of the policy, rather than its title, govern the coverage provided.

Finally, the Sixth Circuit agreed that, under Ohio law, the losses plaintiff suffered did result directly from the data breach as required by the terms of the policy. The Court found the phrase ambiguous, and further found that "resulting directly from" does not unambiguously mean that the data breach be the "sole" or "immediate" cause of the insured's loss, as defendant urged. Instead, the Court found that the language only required that the breach be the proximate cause of the loss.

This ruling represents a favorable outcome for policyholders that have been resistant to purchase cyber policies, as yet another commonly used policy has been held to cover data breach costs. At least in the Sixth Circuit, commonly used, broadly worded exclusions for proprietary and other confidential information will not exclude coverage for customer credit card and checking information, and a less exacting proximate cause standard will be applied in determining whether an insured's loss will be covered by crime policies.

Proskauer's Insurance Recovery & Counseling Group focuses on assisting policyholders facing these issues by conducting strategic policy reviews that can identify potential gaps in coverage, and by representing policyholders in disputes with their insurers. The Privacy & Data Security Group also works with clients to review their privacy policies to ensure compliance with applicable laws. Please call or email us if you need assistance or have a question.

Read the Court's full opinion here.

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.

© Proskauer Rose LLP | Attorney Advertising

Written by:

Proskauer Rose LLP

Proskauer Rose LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.