Systemic Cyber Risks And The Internet of Things

by Farella Braun + Martel LLP
Contact

Companies’ awareness of “cyber” risks has increased significantly because of large and highly publicized data security breaches, such as Target and Home Depot.  Companies are starting to more proactively manage the risk of data security breaches by strengthening their IT defenses and, in many cases, buying cyber insurance.  However, many do not realize that data security breaches are just the tip of the cyber-risk iceberg.  Because nearly our entire economic system depends on electronic devices, machinery and infrastructure that is connected to the internet (i.e., the “Internet of Things”), the potential exists for much larger scale hacking attacks that could control, damage, destroy or shut down many of the systems on which we rely to conduct business.  Some of this risk is covered by cyber insurance, but much of it is not.  Proactive and effective “Enterprise Risk Management” will be vital to companies seeking to protect themselves against these growing risks.  Businesses should carefully review their unique risk profiles, indemnity contracts and insurance policies (including their non-cyber “traditional” policies) to identify and mitigate their exposures.

We have all heard of the large scale attacks on Target, Home Depot and more recently, Ashley Madison.  The news generated by these cyber attacks has contributed to the public’s increasing awareness of the large volumes and types of personal information that companies are holding about their customers.  To protect themselves against some of the losses that such data security breaches may cause, many companies have prudently responded by buying “cyber insurance.”

But few realize that data security breaches are just the tip of the cyber-risk iceberg.  While the storage of personal information on the internet has grown exponentially, so has the connectivity of pretty much all the electronic consumer products, corporate computing infrastructures and industrial machinery on which our economy relies.  The enormous number of devices and machines that are connected to the internet do not just give hackers additional ways of gaining access to computer systems and the data they store – the Target hackers accessed the point-of-sale terminals via the company’s HVAC system.  Hackers now have the ability to cause widespread physical and economic harm by shutting down or damaging critical systems.

 

A few lesser known recent events show the massive risks associated with the Internet of Things: 

  • In late 2014, the German government quietly acknowledged the hacking attack of a German steel mill, in which hackers gained control of a smelting furnace and caused it to overheat, resulting in substantial damage to the furnace and interruption of the mill’s business.
  • “White-hat” hackers were recently able to remotely take partial control of cars (steering, braking and acceleration) while they were speeding down the highway.
  • The FDA and Department of Homeland Security recently recommended that hospitals across the nation stop using certain medical pumps because they rendered the hospital’s systems vulnerable to cyber security threats. There are a number of stories of parents discovering that their internet-connected baby monitors had been hacked, allowing third parties to control the monitors.  One of these events was discovered when the parents heard someone yelling obscenities at their sleeping child, and noticed that the monitor’s video camera followed them round the room when they went to investigate.
  • Even household “smart” fridges have been known to be used as “bots” in the sending of spam email by remote hackers. 

The bottom line is – if a device connects to the internet, it’s vulnerable.  And so is the rest of the system connected to it. Insurance companies are taking notice. 

Recently, Lloyd’s of London authored a report of potential consequences of a hypothetical attack on the electricity grid of the eastern United States.  Lloyd’s calculated that losses to the economy could be as high as $2 trillion, with only about one quarter of that covered by insurance.

Insurance companies are beginning to realize that their “cyber” exposure is not limited to cyber insurance policies.  It runs through their traditional lines of coverage, such as property, general liability and directors’ and officers’ liability insurance. 

The exposures faced by organizations of all types are far-ranging.  First-party losses can include stolen data, property damage (spoiled products, damaged hardware), business interruption (both direct and contingent) and reputational harm.  Additionally, organizations face exposure to lawsuits from customers and business partners for lost data, property damage (both physical and loss of use), bodily injury, violation of privacy and consequential losses, including reputational harm.  Directors and officers of organizations face the possibility of investigations and lawsuits for not anticipating and protecting their companies’ assets against these kinds of attacks.

Further, manufacturers and suppliers of even small components are finding themselves facing huge potential exposures.  Imagine the violation of privacy claims facing a small start-up company whose baby monitors allowed hackers to scream at babies.  Or the exposure of a manufacturer of a communications module in a large system which allowed hackers access to the databases holding Personally Identifiable Information (PII) and Protected Health Information (PHI) of the biggest retailers or health providers in the country. 

Which insurance policies would cover which losses and liabilities is still, to a great degree, unclear.  Cyber insurance policies are designed to provide some protection against first party losses resulting from a data security breach, such as response and investigation costs, fines and damaged computer hardware.  They can also provide protection against third party liability risks from the theft of PII and PHI, and certain consequential losses. 

But cyber insurance has limits.  It may not cover first party property damage (other than to computer systems).  Even if it does, only low sub-limits may be available.  Additionally, while these policies can cover direct business interruption, they may not to cover contingent business interruption (interruption to your business caused by a disruption to a vendor’s business or supplier’s system (such as a credit card processor or internet provider).  They likely will not cover the value of your IP that may have been stolen. 

On the third party liability side, they will pay response costs and the defense of lawsuits against you from customers whose PII or PHI has been compromised.  But they may not coverage IP infringement caused by you, or other losses of business information.  And again, be aware of limits – defense costs are usually within limits, not in addition (as in the traditional CGL policy).  They are also likely to have war and terrorism exclusions – which could eliminate coverage for state-sponsored attacks (such as the well-publicized attack on Sony Pictures in 2014).

Traditional property policies may provide some coverage.  But these policies were designed decades ago, before the internet existed and before cyber attacks had been thought of.  Currently, there is no cyber exclusion in the “special form” (all risk) standard policy.  But since cyber attack is not a listed peril, there is no coverage in the named perils version of that form.  The smaller ISO “Businessowners” policy now specifically includes some cyber coverage, but the limits available are only $10,000 to $100,000.

The coverage picture for the conventional CGL policy is also unclear.  In Zurich American Ins. Co., et al. v. Sony Corp. of America (No. 651982/2011 (NY Sup. Ct., New York City)), the trial court determined there was no coverage under the personal and advertising injury section of a CGL policy for the theft of PII because there was no evidence the information had been “published.”  Sony appealed, but the case settled before the appeal was heard.  Other litigation over this issue has not produced a clearer picture.  In 2014, the Insurance Services Office (ISO), which develops insurance policy forms that many insurers incorporate into their policies, developed a blanket data/personal information exclusion that insurers are now adding to policies.  The use of this endorsement is likely to become more widespread as insurers try to push these risks out of CGL coverage and into a standalone cyber policy.

D&O policies may provide some coverage for third party claims alleging financial loss.  These policies are non-standard (meaning that one insurer’s policy is different to the next).  Therefore, policies should be reviewed very carefully.  Finally, Technology Errors & Omissions policies, which are also non-standard, may provide some coverage for third party claims based on errors in products or services leading to a loss.

The bottom line is that every organization – for-profit, not-for-profit, governmental, medical or commercial – needs to review its exposures very carefully from an “Enterprise Risk Management” perspective.  After understanding those exposures, it needs to review its risk transfer instruments – insurance policies and indemnity agreements – very carefully.  A good broker is essential and the use of coverage counsel is often recommended in shaping an insurance program that best addresses each organization’s risks.  Legal input can be helpful – indemnity agreements are only as good as the financial backing behind them and often run the “wrong way,” especially for small companies. 

Finally, remember that what is covered today may not be covered tomorrow.  The insurance landscape is changing quickly.  The insurance industry is developing new products, but is also modifying its existing products so that risks not contemplated when the policies were drafted do not inadvertently fall within coverage.  Review renewal policies just as carefully as new policies before buying them.

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.

© Farella Braun + Martel LLP | Attorney Advertising

Written by:

Farella Braun + Martel LLP
Contact
more
less

Farella Braun + Martel 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.