Data Breach + No Insurance + No Legal Counsel = #Loss

by Hodgson Russ LLP


Welcome to the new age! Data breaches are embedded in our lives – there is no escape. The costs to any company to operate a business without cyber liability insurance and legal counsel are astronomical. Is your company equipped with adequate reserves to fund a data breach? This article outlines the 2014 average costs of a data breach, the 2013 data breach reported claims to insurers, what a cyber liability policy covers, the types of claims being reported to insurance carriers, and why you need legal counsel.

Are you ready for the truth?

What Are The Costs of a Data Breach?

Without any exaggeration, the costs of a data breach places a significant dent in the operating budget of a company. The risk of a negative figure on the balance sheet is inevitable unless a company has cyber liability insurance or a substantial cash reserve. The out-of-pocket cost to handle a data breach could jeopardize the solvency of a company. Proceed at your own peril.

These are the hard facts. In 2014, the costs of a data breach in the United States, as reported by the Ponemon Institute,1 are:

• The average organization cost of a data breach is $5,850,000.
• The average detection and escalation costs are $417,700.
• The average notification costs are $509,237.
• The average post data breach costs are $1,599,996.
• The average lost business costs are $3,324,959.

These figures demonstrate that liability for a data breach will subject a company to unexpected costs and adversely affect operating costs, resulting in a loss of revenue. This does not include the tangential losses of market share loss and diminution of a brand, reputation, and client loyalty, which may exceed the actual damages from the data breach.

What Does Cyber Insurance Cover?

What does a cyber liability policy offer? Generally speaking, the term “data breach” means:

. . .the unauthorized taking, use of, or disclosure of personally identifiable information, in paper or electronic form, or information stores on a computer system, including but not limited to, charge, debit, and credit card information, banking, financial, and investment services account information, proprietary information, and personal, private, and confidential information.2

A cyber policy offers two types of coverage. The first type is third-party coverage usually for technology services and miscellaneous professional liability, technology products liability, privacy liability, network security liability, and media communications services liability.3 The second type is first-party coverage for crisis management expense, regulatory fines and defense, business interruption, privacy notification costs, and extortion.4 There are also coverage enhancements for early claim resolution incentive, soft hammer, contingent bodily injury and property damage, and punitive damages. The limits of liability vary and may be subject to deductibles or a self-insured retention, or even sub-limits.

Additional resources available to policyholders under a cyber policy may include:

• Breach coaching: law firm notification and remedy support in the event of a cyber breach
• Incident roadmap: post-incident response steps, breach consultation and team response
• Risk management tools: self-assessment and cyber risk management
• Learning center: articles, webinars, and white papers from today’s top technology and legal experts
• News center: cyber risk and security resources from across the Internet
• eRisk resources: directory of external experts in prevention and response fields

Understanding the nuances and coverage afforded under a cyber liability policy can be daunting. Insurance coverage counsel can explain policy terms, limitations, and conditions, including but not limited to, exclusions, carve-outs, and the coverage defenses insurers rely on to disclaim coverage or reserve their rights under the policy.

What Types of Claims Are Being Reported to Insurance Carriers?

NetDiligence’s “2013 Cyber Liability & Data Breach Insurance Claims, a Study of Actual Claims Payouts,” provides some insight into the actual costs of claims. The key findings are:

• PII—personal identifiable information—was the most frequently exposed data (28.7 percent breaches), followed by PHI—personal health information—(27.2 percent of breaches).
• Lost/stolen laptop/devices were the most frequent cause of loss (20.7 percent), followed by hackers (18.6 percent).
• Health care was the sector most frequently breached (29.3 percent), followed by financial services (15.0 percent).
• Small-cap ($300M-$2B) and nano-cap (<$50M) companies experienced the most incidents (22.9 percent and 22.1 percent respectively). Mega-cap (>$100B) companies lost the most records (45.6 percent).
• The average number of records lost was 2.3 million.
• Claims submitted for this study ranged from $2,500 to $20 million. Typical claims, however, ranged from $25,000 to $400,000.
• The average claim payout was $954,253. Many claims in the dataset have not yet been paid. If we assume that, at a minimum, the self-insured retention will be met, the average claim payout would be $3.5 million.
• The average per-record costs was $6,790. However, if NetDiligence excludes outliers (incidents with a low number of records exposed but extremely high payouts), the average per-record cost was $307.
• The average cost for crisis services was $737,473.
• The average cost for legal defense was $574,984.
• The average cost for legal settlement was $258,099.

What should a company do with this information? Contact a broker and shop around for a quote on premiums. If any company believes it is immune from a data breach, think again!

Why Does a Company Need Legal Counsel?

As part of any risk-management program, a company should retain legal counsel in conjunction with purchasing a cyber liability policy. The benefit of legal counsel is to mitigate damages, ensure the proper preventative measures are in place in case of a data breach; ensure compliance with federal, state, and local law governing retention, accuracy, and access; and, overall, to minimize the risks if the company faces a data breach. Legal counsel also acts as a data breach coach to ensure the proper third-party vendors are contacted in the event of a breach. Legal counsel is also effective in interpreting a policy and negotiating the terms and conditions with the broker and the insurance company to limit the risk of a disclaimer or carve-outs in the policies. The most important reason to retain outside counsel is to ensure that the protection of the attorney-client privilege extends to communications about the breach.


The costs of a data breach are real. Do not fall under the false impression that your company is not susceptible to a data breach because you are a small or mid-cap company. If you are in possession of any type of personal identifiable information or your computers are hacked, your company is at risk. Rest assured that the costs of cyber insurance and legal counsel are far less expensive than the costs of a data breach. Preventative measures are the best defense against a data breach. Be ready!


1 Ponemon Institute, “2014 Cost of Data Breach Study: Global Analysis,” Benchmark research sponsored by IBM, Independently Conducted by Ponemon Institute LLC, May 2014.

2 See, XL Eclipse ProTM 2.0 Policy.

3 Id.

4 Id.

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.

© Hodgson Russ LLP | Attorney Advertising

Written by:

Hodgson Russ LLP

Hodgson Russ 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.