Tag: Security Breach

Cyber Insurance: No Lifeline for Enterprise Technology Customers

Recent major cyber attacks have kickstarted a cyber insurance buying frenzy. However, because cyber insurance coverage is unpredictable on many levels, it is critical that technology customers take meaningful steps to address insurance risks and to contract appropriately with their technology vendors.

Cyber Insurance Challenges

Cyber insurance sounds great on paper but is difficult to implement effectively. Policies notably are not uniform or standard in providing coverage for particular occurrences, parties, or losses. Even within a particular insurance provision, contract language is unpredictable and varies widely across insurers. For example, cyber attacks initiated by state actors may or may not be covered, depending on whether the attack is considered terrorism, an act of war, or a warlike action.

Moreover, insureds and insurers routinely disagree as to the coverage and intent of cyber insurance policies. Litigation involving Mondelez, Payless Shoesource, Alorica, National Bank of Blacksburg, Sony, Target, and SS&C Technologies is just the tip of the iceberg. As for pace, let’s just say that two months ago, Home Depot filed suit against three insurers to seek to obtain coverage under its policies in connection with the massive date breach it suffered seven years ago.

Decision-Making Concerns

Of concern, then, enterprise technology customers frequently base their decision to accept cyber-related contractual indemnities and limitations of liability from their vendors based on the mere fact that the vendors – or the customers – have cyber liability insurance. The customers often accept the risks without evaluating the vendors’ purported policies and without revisiting their own coverages based on the particular technology transaction. Even obligating the vendor to implement reasonable security measures is not enough.

Contractual and Operational Mitigations

The following contractual and operational tips may help enterprise customers identify and mitigate cyber liability insurance related risks under their technology agreements.

  • Read your policies. Technology customers should carefully review and evaluate their insurance policies, including their cyber liability policy, to determine the extent of coverage for the cyber risks for the particular technology transaction and vendor. In some cases, standard business policies (such as property insurance, crime insurance, or commercial general liability coverage) may include cyberattack losses.
  • Summarize your policies for internal stakeholders. Your technology contract negotiation team will be much better able to assess applicable cyber risk for a particular technology transaction if they know the specific scope and extent of your own cyber and other insurance policies.
  • Monitor policy changes. The technology agreement should require the vendor to provide prompt notice of changes in the vendor’s insurance coverages. The agreement should establish that vendor breaches of insurance provisions specifically give rise to customer termination rights.
  • Increase insurance coverages. When the customer’s business team insists that the particular technology vendor is the best resource for the deal, but the vendor does not have adequate cyber insurance, the customer should consider obligating the vendor to procure sufficient coverage, even if only for the particular transaction. Be aware, however, that the vendor may seek to burden the customer with the cost of the additional coverage.

And, do keep in mind that businesses commonly underestimate the cyber coverage they need to mitigate cyber risks.

RETURN TO SENDER: Aetna to Pay $17M to Settle Claims Related to Vendor Mailer Data Breach

Aetna has agreed to pay $17.2 million and to implement a “best practices” policy regarding sensitive policyholder data, in order to settle class action litigation brought against it arising from a mass mailing sent by one of its mailing vendors. As discussed in a blog post last year, federal class action litigation was brought against Aetna and its mailing vendor in 2017 based on the vendor’s use of glassine envelopes to communicate HIV medication information to Aetna insureds. The envelopes revealed that the named addressee was contacted about options for filling HIV medication prescriptions. The litigation alleged violations by Aetna and its vendor of several laws and legal duties related to security and privacy.

The contract lessons for customers and vendors that arise from the events in question, which were identified in the earlier post, remain the same. Do your contracts for non-IT and non-healthcare services fully consider the risk of privacy and security litigation? Do your contract’s indemnification and limitation of liability clauses contemplate the possibility of class action litigation? Before entering into a contract, have you considered whether the specific vendor services being provided to the particular customer in question implicate laws you hadn’t considered? And, Have you considered which specific aspects of vendor services may directly impact potential legal liability, and have you adequately identified and addressed them in the contract?

Importantly, the newly announced settlement, itself, provides three bonus lessons.

Published data breach cost statistics are helpful, to a point. 

In its 2017 Cost of Data Breach Study, Ponemon Institute reports that the average per capita cost of data breach in the U.S. for the period of the study was $225. It also reports that, for the same period, the average total organizational cost in the U.S. for a data breach was $7.35 million. Somewhat remarkable, as part of its settlement Aetna agreed to pay $17.2 million in connection with the breach in question – a figure that is about $10 million over the average reported by Ponemon Institute. But, Aetna’s payment is not out of the ballpark, as averages are averages, after all. Much more remarkable, however, is the per capita settlement amount. Aetna’s settlement figure represents a per capita amount of $1,272 – that number is more than five times the reported average. (For reference, that per capita cost would put Equifax’s settlement number for its recent breach at $185 billion dollars.) Bottom line, when considering or counseling clients as to the financial impacts of data breaches, the average cost figures for data breaches are as important as the qualification of the figures, themselves, as only averages (with any number of data security breaches costing more, or less, than the averages).

Data breach cost statistics often do not compare well with litigation settlement amounts. 

Yes, Aetna agreed to pay $17.2 million as part of the settlement, as compared to Ponemon Institute’s reported $7.35 million average U.S. data breach cost. While the $7.35 million figure includes forensics costs, customer churn, post data breach costs, and other direct and indirect expenses, the $17.2 million figure is not as comprehensive. It does not include, for example, Aetna’s legal fees incurred to defend and settle the class action litigation, nor does it include other pre-settlement costs and expenses incurred by Aetna. As efficient or helpful as it may be to compare published per capita or per breach data statistics with litigation settlement amounts, it’s also important to identify the full scope of costs and expenses that the published statistics include, as well as what costs and expenses are not included in the settlement amounts.

Data breach cost statistics and litigation settlement amounts don’t include non-monetary settlement obligations. 

Cost-per-record, cost-per-breach, and litigation settlement figures can be particularly meaningful and relatable, especially when considering or counseling clients as to the potential financial impacts of data security breaches. Notably, however, the material obligations of defendants settling data breach litigation matters typically are not limited to monetary payments. Aetna, for example, as part of its settlement, also agreed to develop and implement a “best practices” policy for use of certain personally identifiable information, to provide policy updates for five years, to provide policy training for certain Aetna personnel for five years, and to require outside litigation counsel to sign business associate agreements, among other commitments. These activities will require Aetna to incur additional costs and expenses, including costs and expenses for internal and, possibly, external resources in connection with the performance of these activities.

Supplementing the earlier post on this Aetna class action litigation and lessons learned, the recent Aetna settlement and the new lessons cited above provide an even fuller picture of data and security breach and related contract considerations. Not only is it invaluable to consider data privacy and security issues in contracts and the roles of vendors and service providers, it also is important to consider and counsel clients as to the full potential impacts of data breaches, including potential litigation settlement amounts, costs and expenses in addition to settlement amounts, and non-monetary settlement-related obligations.

What Does Ransomware Cost Companies?

In its 10-Q filing for the quarter ended September 30, 2017, Merck & Co., Inc. stated the following:

On June 27, 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. … [T]he Company was unable to fulfill orders for certain other products in certain markets, which had an unfavorable effect on sales for the third quarter and first nine months of 2017 of approximately $135 million. … In addition, the Company recorded manufacturing-related expenses, … as well as expenses related to remediation efforts … , which aggregated $175 million for the third quarter and first nine months of 2017.

Worth noting, this $310 million amount likely does not include all legal fees, forensic costs, and all other costs, expenses, and losses related to the cyber-attack. Nor does it appear to include other costs, expenses, and losses that may be indirectly revealed elsewhere in Merck’s business or operations. The attack in question is the NotPetya ransomware attack, which impacted countless companies worldwide on June 27 of this year.

Lost Business Resulting from Ransomware

Merck’s announcement is remarkable for several reasons, especially for those who negotiate technology contracts and agreements with data privacy and security implications. First, it’s noteworthy in its relatively clear quantification of lost business resulting from the ransomware attack. That is, often it is difficult to quantify lost business, lost sales, and consequential damages when negotiating liability provisions related to data security and information security in technology agreements and other commercial contracts. This is not to say that Merck’s recitation of these amounts is a new rule-of-thumb or benchmark, but it may start a conversation.

Quantifiable Losses

Second, the loss numbers reported by Merck are not small ones. It is common to discount publicly announced forecasts of ransomware impacts that are viewed as extreme – $75 billion per year, according to one recently cited resource. But the concreteness of Merck’s number and the specificity of the ransomware attack merits attention.

Ransomware is Fact-Specific

Third, the Merck announcement implicitly underscores the criticality of the precise facts surrounding the NotPetya ransomware attack and the unique business and situation of Merck. Not all ransomware or malware attacks can cause the same sort or amount of losses reported by Merck, nor does the same ransomware or other malware give rise to the same quality or quantity of losses for every corporate victim. When negotiating data privacy and data security provisions in commercial technology contracts and similar agreements, it is important for all sides to consider the specific circumstances and risks related to the transaction and parties in question.

Ransomware Impacts Are Not Necessarily Per-Record

And, fourth, the Merck report sheds light on the financial repercussions of ransomware, as opposed to other malware and hacking activities. That is, there are a number of industry and other reports and surveys that speak to the financial and other impacts of data breaches and security breaches on a per-record basis (for example, cost per record, records per breach, etc.). The 2017 Ponemon Institute Cost of a Data Breach Study, Verizon’s 2017 Data Breach Investigations Report, and Gemalto’s Breach Level Index Findings for the First Half of 2017 are just a few. However, in many cases the particular per-record numbers reported do not provide a clear picture of the financial effects of ransomware, which often is not the kind or scope of cyber-attack that can be assessed on a per-record basis.

Merck’s 10-Q for the third quarter of 2017 is definitely not a quick-fix answer to the question of how much a ransomware attack would or could financially impact a company. However, for attorneys, contract professionals, and others who draft and negotiate technology agreements and contracts and, specifically, information and data security and privacy provisions, the Merck quarterly report is potentially meaningful.