Message from New York Court: Rely on CGL Policy Coverage for Data Breaches at Your Own Peril

by Dorsey & Whitney LLP
Contact

A New York trial court announced a decision on February 21, 2014, that may be a harbinger of wide-reaching limitations on insurance coverage for data breaches under commercial general liability (CGL) policies. The court’s ruling, while subject to appeal, demonstrates the hazards of relying on traditional CGL policies for coverage for data breaches.

The lawsuit, Zurich American Insurance Co. v. Sony Corporation of America,1 arose out of the April 2011 data breach of Sony’s PlayStation Network, in which hackers stole personally-identifiably information belonging to 77 million users. Sony’s losses are estimated to be as high as $2 billion. Sony sought both defense and indemnification from Zurich, one of its CGL insurers, for the more than 50 class action lawsuits brought against it by its customers. Zurich denied coverage and brought a declaratory judgment action, arguing the data breach claims are not covered claims.

The trial court granted summary judgment for the insurers, holding that theft of information by third parties hacking a computer system does not qualify as “oral or written publication in any manner of material that violates a person’s right of privacy” for purposes of Coverage B (Personal and Advertising Injury coverage) under the typical CGL policy. The court agreed with the insurers that “oral or written publication” requires “an act by or some kind of act or conduct by the policyholder in order for coverage to be present.” Because the losses claimed by Sony’s customers did not result from conduct by the policyholder (Sony), but rather by third party hackers, the court found no coverage.

The Sony decision is one of the first to address data breach coverage issues. The ruling has come as a surprise to many who, until now, had assumed that CGL policies would offer some coverage for data breaches.2 But the Sony decision (as well as more recent changes to the standard CGL policy) highlights the need for companies to consider specialized “cyber” insurance coverage rather than relying on traditional insurance products to manage and mitigate their data breach risks.

Data breach is becoming an ever-increasing risk to companies handling any form of personally-identifiable information. According to Robert S. Mueller, III, a Director at the Federal Bureau of Investigation, “[T]here are only two types of companies: those that have been hacked and those that will be. And even they are converging into one category: companies that have been hacked and will be hacked again.” And it is a costly risk. For example, the 2013 Cost of Data Breach Study reports that U.S. organizations spend on average $565,020 on post-breach notification alone. Companies also face lawsuits from customers seeking damages for invasion of privacy, as well as other consequences, such as governmental and regulatory investigations, fines, penalties, and damage to brand and reputation. The risk and prevalence of data breaches—and potential risk-shifting and mitigation mechanisms such as insurance—warrant close attention.

Dorsey & Whitney LLP is offering a Privacy and Technology Commerce Breakfast Briefing in Minneapolis, Minnesota on March 12, 2014. Among other things, the program will discuss protecting a company’s legal interests in the cybersecurity space, cybersecurity risk management, and incident response considerations. For the agenda and registration information, click 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.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney 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):
hide

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.

Security

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 info@jdsupra.com. 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: info@jdsupra.com.

- 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.