Cyber Risks and Insurance in the Marine Industry

by Zelle LLP
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Insurance Law360
March 14, 2016

The first wireless radio equipment was used aboard Lightship 70 in 1899.[1] Over the next 115 years, the use of technology in the maritime domain has driven rapid change in the United States Coast Guard’s operating environment — such as the use of portable high frequency direction finding radios to intercept rum runners during Prohibition; the use of enigma codes during WWII; the development of Long Range Aids to Navigation; and the development of the Differential Global Positioning System (DGPS). [2]

Technology has permitted the maritime domain to improve production, cost and reduce delivery schedules.[3] However, “these technological changes have opened the door to emerging threats and vulnerabilities as equipment has become accessible to outside entities.”[4]

The threats associated with a maritime cyber risk include the threat of hackers crippling onboard navigation or control systems; or hackers using the GPS system to direct the ship to unsafe waters and vulnerable to physical attack from pirates. The far greater threat is posed by terrorist groups, who may hack into a ship’s navigation system to cause loss of life or significant property damage. [5]

Despite these identified threats, there is very little awareness of cybersecurity issues in the maritime sector and few risk management plans to enhance cybersecurity.[6] Moreover, while evidence on the magnitude of the maritime industry's exposure to cyber crime is difficult to establish, an April 2014 study of the related energy sector by insurance brokers Willis found that the industry “may be sitting on an uninsured time bomb.”[7]

Who is Vulnerable?

Currently, every new ship built has software to run its engines, which is almost always updated remotely.[8] Complex cargo systems are also managed digitally. Even cranes run on satellite-based GPS systems. Information technology is also used extensively in maritime navigation systems. [9]

Additionally, all passenger vessels and cargo vessels of more than 500 gross tonnage (GT) and vessels of more than 300 GT (if engaged in international trade) are required by the International Maritime Organization (IMO) to be fitted with an Automatic Identification System (AIS). [10] The AIS system must be capable of automatically exchanging information regarding a vessel’s identity, type, position, course, speed, navigational status and other-safety related information with other ships, shore-based facilities and aircraft.[11] However, because AIS doesn’t have an inbuilt mechanism to encrypt or authenticate signals, it is considered a soft target for cyberattacks.[12] Unmanned (“drone”) ships will potentially increase vulnerabilities leading to more cyberattacks.[13]

Additionally, port facilities, which move more than $1 trillion dollars of goods every year, increasingly rely on automation to streamline operations.[14] “Port owners and operators are moving away from traditional stand-alone systems, and maritime industrial control systems (ICS) are becoming more integrated.”[15] Although new systems help to streamline production and increase the flow of trade, the number of weaknesses in network systems is also increasing.[16]

Government Involvement

In 2015, the U.S. Coast Guard launched a year-long initiative to fully understand the cyber threats facing the industry, with the ultimate goal of developing cybersecurity guidelines.[17] In its final report, the U.S. Coast Guard opines that cybersecurity vulnerabilities can be addressed through a risk-based approach, using the bow-tie model which suggests that companies identify the cyber threats to and vulnerabilities of properties and operation; and plan barriers to prevent incidents and mitigate the consequences of cyber risks. This includes procedures to maintain the barrier quality documented in performance standards.

In its report, the U.S. Coast Guard provides the following examples of breaches and damages in the maritime industry:

  • In 2010, malware overwhelms underway off-shore drilling rig in Asia, forcing a prolonged shutdown.
  • In 2011, pirates suspected of exploiting cyber weaknesses for use in targeting vulnerable shipments.
  • In 2012, foreign military compromises “multiple systems” onboard commercial ship contracted by U.S. TRANSCOM.
  • In 2012, over 120 ships, including major Asian Coast Guard vessels, experience malicious jamming of GPS signals.
  • In 2013, European authorities announce drug smugglers hacked cargo tracking systems in major European port to avoid detection.
  • In 2014, a major U.S. port facility suffered a system disruption which shut down multiple ship-to-shore cranes for several hours.
  • Mark Gazit, CEO of ThetaRay, an internet security company, said an attacker managed to tilt a floating oil rig to one side off the coast of Africa, forcing it to shut down. It took a week to identify the cause and fix, he said, mainly because there were no cybersecurity professionals aboard.[18]

Does Current Marine Insurance Cover Cyber Risks?

The majority of insurance policies that cover ships, shipyards and cargo-handling facilities include a cyberattack Exclusion Clause (CL380 10/03) which provides:

1.1 Subject only to Clause 1.2 below, in no case shall this insurance cover loss damage liability or expense directly caused by or contributed to by or arising from the use or operation, as a means for inflicting harm, of any computer, computer system, computer software program, malicious code, computer virus or process or any electronic system.

1.2 Where this clause is endorsed on policies covering risks of war, civil war, revolution, rebellion, insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power, or terrorism or any person acting from a political motive, Clause 1.1. Shall not operate to exclude losses (which would otherwise be covered) arising from the use of any computer, computer system computer software program, or any electronic system in the launch and/or guidance system and/or firing mechanism of any weapon or missile.

Even without the above exclusion, it is unclear whether damage to software and computer systems would be considered “physical damage to tangible property” — as required by a standard marine insurance policy, and losses a ship or port owner sustains due to a cyberattack could be uninsured. [19]

There is no specific exclusion of cyber risks under normal protection and indemnity club rules.[20] However, some traditional exclusions, such as the war risk exclusion, will likely apply. “Several P&I members offer limited additional cover under the biochemical risks inclusion clause 2015 for crew injury, illness or death (including deviation, repatriation and substitute expenses and shipwreck unemployment indemnity) arising from the malicious use of computer software, code or viruses.”[21] Losses caused by a cyberattack would be excluded if the ship or its cargo was used to inflict harm, or a computer, system or software program is used to launch, guide or fire a weapon or missile. [22]

Does Cybersecurity Coverage Call for new Contractual Representations and Warranties?

In the maritime industry, the number of known cases is low as attacks often remain invisible to the company, or businesses don't want to report them for fear of alarming investors, regulators or insurers, security experts say.[23]

Additionally, in the United States, there are 47 different state rules regarding data breach reporting. However, these rules typically apply to the breach of personal information.

The U.S. Securities and Exchange Commission has advised public companies that they are responsible for evaluating cybersecurity risks and disclosing these risks to investors as appropriate.[24] Without reporting requirements, a limited market and a growing pool of applicants, insurers often rely on questionnaires, penetration tests and on-site assessments to underwrite a risk.[25]

Notably, the marine insurance industry recognizes the doctrine of uberrimae fidei, a doctrine requiring the insured “to disclose to the insurer all known circumstances that materially affect the insurer’s risk, the default of which ... renders the insurance contract voidable by the insurer.”[26]

It is unclear whether the doctrine of utmost good faith would be applied to an entity seeking to procure cybersecurity insurance for maritime risks and to disclose material facts to an insurer when applying for insurance. If so, the current protocol of failing to report such cyberattacks in the maritime domain may become a thing of the past.

Conclusion

The threat of a significant cyberattack in the marine industry is imminent. Whether and to what extent the industry is willing to recognize this risk and prepare itself accordingly is unknown. Standalone cybersecurity coverage could likely address many of these risks, but at what cost? And to what extent would the insured be required to disclose all cyber vulnerabilities to an underwriter under the doctrine of uberrimae fidei?

Although many outstanding questions remain, what does appear certain is cyber issues in the marine industry will remain in the forefront for those in the marine industry and the marine insurance industry for the foreseeable future.

[1] See United States Coast Guard Cyber Strategy, June 2015, Washington, D.C., at Page 6.

[2] Id. at 7.

[3] Experts Warn Global Shipping Industry Vulnerable to a cyberattack.

[4] Id.

[5] See United States Coast Guard Cyber Strategy, June 2015, Washington, D.C., at Page 7.

[6] Tony Cowie, Maritime Insurance Cyber Security – Framing the Exposure – May 2015.

[7] Insurance Capacity in the Global Energy Markets Leaps to the Highest Level this Century.

[8] See Stuart Poole-Robb, Trains and boats and planes – the new targets for cyber crime, www.itpropportal.com, July 14, 2015.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] See here. (“As long as drone ships don’t comply with IMO rules, they would be considered unseaworthy and ineligible for insurance, according to Andrew Bardot, secretary and executive officer of the London-based International Group of P&I Clubs, whose 13 members cover 90 percent of the global fleet.”)

[14] Experts Warn Global Shipping Industry Vulnerable to a cyberattack.

[15] Id.

[16] Id.

[17] Kate B. Belmont, Maritime cyberattacks, Changing Tides and the Need for Cybersecurity Regulations, Blank Rome Maritime, October 2015.

[18] See United States Coast Guard Cyber Strategy, June 2015, Washington, D.C., at Page 17.

[19] See America Online, Inc. v. St. Paul Mercury Insurance Co., 207 F. Supp. 2d 459 (E.D. Va. 2002) (holding that liability insurers were not required to cover claims against their insureds where the harm alleged was data loss because such loss failed to meet the definition of “physical damage to the tangible property of others” necessary for coverage). But see Lambrecht & Associates, Inc. v. State Farm Lloyd's, 119 S.W.3d 16 (Tex. App.—Tyler 2003) (no pet.)(finding damage for loss of use to media and records met the definition of “physical loss” affording coverage under the policy).

[20] See Cyber Risks for P&I Clubs.

[21] Id.

[22] Id.

[23] Jeremy Wagstaff, All at sea: Global shipping fleet exposed to hacking threat.

[24] See Legal Update, SEC Division of Corporation Finance Issues Guidance on Cyber Security Disclosures.

[25] See https://www.bitsighttech.com/security-ratings-cyber-insurance

[26] Windsor Mount Joy Mutual Insurance Co. v. Giragosian, 57 F.3d 50, 54-55 (1st Cir. 1995).

 

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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