Guest Post: Courts Wrestle With Coverage for Cyber-Related Claims

Peter Selvin

As companies experienced cyber-related incidents, they have sought coverage for their losses under a variety of different kinds of insurance policies. As discussed in the following guest post, courts have struggled to address the coverage issues these claims present. The article’s author is Peter Selvin, a member of TroyGould PC, where he practices in the areas of civil litigation and insurance coverage and recovery. A version of this article previously appeared in the Los Angeles Daily Journal. I would like to thank Peter for allowing me to publish his article as a guest post on my site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Peter’s article.

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Cyber insurance is designed to fill an enterprise’s coverage gaps, where coverage under other forms of insurance may not be triggered by these kind of losses. At the same time, and because cyber insurance is a relatively new product, there are few reported cases involving coverage disputes. Importantly, those cases highlight the need for policyholders to scrutinize the menu of available coverage grants in any proposed cyber insurance policy.

While to date there has been relatively few reported cases involving cyber insurance coverage disputes, there has been much litigation surrounding whether traditional insurance policies will respond to cyber-related claims. Although there are some outlier cases finding coverage under a CGL policy for some forms of cyber-risk (Eyeblaster, Inc. vs. Federal Insurance Co., 613 F.3d 797 (8th Cir. 2010)), the majority view is that CGL policies ordinarily do not provide coverage for cyber-related risks. As the court held in American Online vs St. Paul Mercury Insurance Company, 347 F. 3d 89 (4th Cir. 2003), a CGL policy “does not cover the loss of instructions to configure the switches or the loss of data stored magnetically. These instructions, data and information are abstract and intangible, and damage to them is not physical damage to tangible property”.

In this regard, consider the following scenarios:

  • Where the data on an insured’s computer have been stolen, or where it has been held hostage in connection with a ransomware attack, policyholders have sought to secure coverage under CGL and other traditional insurance products by arguing that its data was in fact “tangible property” within the meaning of a CGL policies. Although policyholders won some early victories on this point (American Guarantee & Liability Ins. Co. vs Ingram Micro, Inc., WL 726789 (D. Ariz. April, 2000)), most courts do not consider the data residing on an insured’s network to constitute “tangible property” within the meaning of a CGL policy. American Online, supra, Capitol Com’n vs Capitol Ministries, 2013 WL 5493013, *4 (E.D.N.C. 2013) (electronic data and computer software is intangible property).
  • When a hacker infiltrates an insured’s computer, steals the insured’s information and then posts the stolen data on the internet, policyholders have argued that this scenario meets the requirement of a “publication” as that word is typically used in Section B of the coverage grant of a CGL policy. The key question is whether there has been a “publication” where a third party, as distinct from the policyholder, “published” the material on the internet. This scenario played recently out in Zurich American Ins. Co. vs Sony Corp, 2014 WL 8382554 (N. Y. Sup. Ct. 2014). In that case a hacker infiltrated Sony’s network and then posted the stolen information on the internet. While Sony argued that the third party’s posting met the “publication” requirement under the company’s CGL policy’s, the Court held that because Sony did not itself “publish” the pertinent information, there was no “publication” and hence no coverage under the policy. But see Travelers Indemnity Co. vs Portal Healthcare Solutions, 644 Fed. Appx. 245, 247-48 (4th Cir. 2016), holding that the presence of information online itself constitutes a publication.

Policyholders have also faced challenges in seeking to secure coverage for cyber risks under crime policies. Thus, where an insured wires funds in reliance on an email that a fraudster has made to appear genuine, the insured has been “spoofed”. In that instance as well, the majority view is that a crime policy will not afford coverage. See, e.g., American Tooling Center vs. Travelers Casualty and Surety, 2017 WL 3263356 (6th Cir. 2017); Apache Corporation vs. Great American Insurance Company, 2015 WL WL 7709584 (5th Cir. 2015); Taylor and Lieberman, 2015 WL 3824130 (C.D. Cal. 2017). Although Medidata, 268 F.Supp.3d 471 (S.D.N.Y. 2017) went the other way, that case is now on appeal.

Aqua Star (USA) Corp. vs. Travelers Casualty and Surety Company of America, 719 Fed. Appx. 701 (9th Cir. 2018) highlights the need for policyholders to scrutinize the available coverage grants offered by a particular policy. In that case, the policyholder sought coverage under a “computer fraud” policy for a loss of funds. That case arose from an incident in which its employees, in reliance on genuine appearing, but fraudulent, instructions, changed wire transfer information and thereby caused four wires to be sent to the fraudster.

Although not expressly discussed in the Court’s decision, it would appear that the policyholder in that case elected not to purchase so-called “social engineering” coverage. That form of coverage, which is often offered as an available option, would have protected the policyholder from the loss occasioned by the “spoofing” incident.

The other reported cases addressing coverage under a cyber insurance policy, reinforce that the exclusions normally found in traditional insurance products may also limit coverage under in cyber in cyber insurance policies.

Thus, in P.F.Chang’s vs. Federal Insurance Company, 2016 WL 3055111 (D. Arizona 2016), Chang’s had entered into a Master Service Agreement with a division of Bank of America (“BAM”). The agreement facilitated the processing of credit card payments by Chang’s customers. The agreement also obligated Chang’s to reimburse BAM for any fees, fines, penalties or assessments incurred by BAM in taking remedial credit and identity theft steps arising from the data breach.

After Chang’s experienced a data breach, the hackers  exposed its customers’ credit card information on the internet. As a result, BAM issued a $1.9 million assessment against Chang’s, representing to the costs that BAM would have to incur to Chang’s customers for reimbursements and credit and identify theft remediation.

Chang’s tendered the claim under its cyber policy, but its carrier (Federal) denied the claim.

The Court upheld Federal’s denial of the claim on the ground that the policy, like many traditional insurance policies, excluded reimbursement for obligations, which Chang’s had assumed under its contract with BAM. In other words, the customary exclusion for liability assumed under a contract came into play and foreclosed coverage.

Another general principle of insurance law foreclosed coverage under a cyber insurance policy in Travelers Property Casualty Co. vs. Federal Recovery Services, 103 F. Supp. 3d 1297 (D. Utah 2015). In that case, the insured had entered into a contract with a fitness company whereby it was to handle the electronic dues payments for the fitness company.

After the fitness company transferred its business to a former competitor, it requested that the insured transfer its electronic payment information to its successor. The insured refused, claiming that it was owed additional compensation for its services. When the fitness company sued the insured, it tendered its defense to Travelers.

The Court determined that no defense was owed under the cyber policy. This was because the cyber policy only obligated Travelers to defend if its insured was sued for damages arising from any “error, omission or negligent act”. Focusing on the fitness company’s allegations that the insured had withheld the return of the electronic payment information knowingly and intentionally — essentially holding it hostage to the payment of additional compensation — the Court held that the alleged acts did not fit within the coverage grant. See also Resource Bankshares Corp. vs St. Paul Mercury Ins. Co., 407 F.3d 631, 635 (4th Cir. 2005).

Google+ User Data Securities Lawsuits Filed Against Alphabet

Last week, the Wall Street Journal reported that this past spring Google had exposed thousands of the Google+ social network users’ private data and then opted to withhold disclosure of the incident because of concerns that doing so would attract regulatory scrutiny and harm the company’s reputation. Following the news reports, questions immediately were asked about a possible SEC investigation of the incident. And now, these developments have drawn two new securities class action lawsuits in which shareholders of Alphabet, Google’s parent company, allege that the company misled investors about the adequacy of the company’s security measures to protect user data from theft and security breaches. As discussed below, the new lawsuits bring together several securities litigation filing trends involving data and privacy-related issues. Continue Reading

Guest Post: Ten Questions the SEC Will Probably Be Asking Google

John Reed Stark

Earlier this week, media reports circulated that this past spring Google had exposed the private data of thousands of the Google+ social network users and then opted not to disclose the issue, in part because of concerns that doing so would draw regulatory scrutiny and cause reputational damage. In the wake of these revelations, one question is whether the SEC will look into these circumstances. In the following guest post, John Reed Stark, President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement, takes a look at what he regards as a likely SEC investigation and the questions that the SEC likely will be asking. A version of this article originally appeared on Securities Docket. I would like to thank John for allowing me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit an article. Here is John’s post.   Continue Reading

Chinese Hotel Company Hit With Data Breach-Related Securities Suit

For some time now, some observers had been predicting that we would be seeing a bunch of data breach-related securities class action lawsuits, but the predicted wave never seemed to materialize. However, with a recent uptick in these kinds of cases, that could be changing. On October 8, 2018, in the latest of these kinds of lawsuits to be filed, a plaintiff shareholder filed a securities class action lawsuit against China-based Huazhu Group. As discussed below, there are a number of interesting features of this latest data breach-related securities suit. Continue Reading

Privacy Rights, Liability Exposures, and Potential D&O Claims

One of the most important recent legal and regulatory developments has been the elevation of privacy rights and concerns. Privacy issues are related to but distinct from cybersecurity issues and concerns, because privacy is concerned about more than just keeping data free from unauthorized intrusion. Privacy concerns also involve how data is used and to what kinds of controls the persons whose rights are affected have over the data. As more and more businesses gather and use user data and other potentially sensitive personal information, they will increasingly find themselves grappling with the growing wave of privacy regulation and legislation. Among the many potential exposures these circumstances create for companies and their senior officials is the growing possibility of privacy-related D&O litigation. Indeed, the growing potential for privacy-related claims may be among the most important emerging D&O liability exposures. Continue Reading

D&O Insurance: Insurer Must Defend Later Securities Lawsuits Related to Earlier Claim

I have frequently written on this blog about relatedness issues and how they affect the availability of D&O insurance coverage for a series of lawsuits that have been filed over time against a company. D&O insurers frequently argue, in order to try to avoid coverage,  that a later lawsuit is related to an earlier proceeding in order to try to argue that the subsequent suit is deemed made at the time of the earlier proceeding. In an interesting case in the Southern District of Texas, the insurer took the opposite position and tried to argue that two securities class action lawsuit complaints filed after the end of the policy period were unrelated to an earlier securities suit that had been filed during the policy period, in order to try to avoid coverage for the subsequent lawsuits.

 

In an October 4, 2018 decision (here), Magistrate Judge Nancy K. Johnson ruled that the later securities lawsuits filed against Nobilis Health were interrelated with the earlier lawsuit against the company, and therefore that the insurer was obligated to cover the costs the insured company incurred in defending all three lawsuits. The court’s decision underscores the breadth of the relatedness in D&O insurance policies and highlights the fact that relatedness issues can, depending on the circumstances, result in a coverage expansion and not only a narrowing of coverage. Continue Reading

Guest Post: PSD2: A New Era for Banking?

The rise of financial technology (fintech) is rapidly changing the financial services industry, in the U.S., in the U.K. and elsewhere. But with the rise of fintech also has come increasing regulation. Among the regulatory regimes applicable to fintech sector is the EU’s Payment Services Directive (PSD), designed among other things to provide certain consumer protections. A Revised Payment Services Directive (PSD2) came into force on January 13, 2018. In the following guest post, Karen Boto, a Legal Director at Clyde & Co law firm, takes a look at PSD2 and considers that insurance challenges the revised regulatory regime presents. A version of this article was previously published as a Clyde & Co client alert. I would like to thank Karen for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Karen’s article. Continue Reading

Sixth Circuit: Attempted Notice of Potential Claim Insufficient to Provide Notice of Actual Claim

Claims made policies provide coverage for claims first made during the policy period, but only if the insurer is provided with timely notice of claim. Most claims made policies allow policyholders to provide insurers with a notice of circumstances that may give rise to a claim in the future, in order to make the date of the notice of circumstances as the claims made date for any future claims. A recent Sixth Circuit considered a situation in which a policyholder attempted to provide notice of circumstances, even though, the court later concluded, a claim had already been made. The appellate court concluded that because the policyholder’s notice omitted the circumstance the court considered to represent a claim, the attempted notice was insufficient to provide notice of the actual claim. The court’s decisions raises questions about policyholder’s notice obligations under the policy. The Sixth Circuit’s July 10, 2018 decision can be found here. Continue Reading

Educational Services Company Hit With Data Breach-Related Securities Suit

One of the most-watched corporate and securities litigation trends in recent years has been the incidence of D&O claims after companies experience data breaches. Although there have been a number of high profile claims along the way, the volume of data breach-related D&O claims has never quite lived up to the hype. Just the same, these kinds of claims have continued to be filed. The most recent case is a securities class action lawsuit that has now been filed against educational services company Chegg, Inc., after its recent announcement of a data breach involving customer data. The Chegg lawsuit, filed on September 27, 2018 in the Northern District of California, can be found here. Continue Reading

N.Y. Appellate Court: Coverage Precluded for Disgorgement “Penalty”

In the latest development in nearly decade-long legal battle, a New York intermediate appellate court has held in light of the U.S. Supreme Court’s 2017 decision in Kokesh v. SEC that amounts Bear Stearns paid under an SEC disgorgement order represent a “penalty” for which coverage is precluded under the bank’s insurance policy. This ruling, which overturned a trial court order holding that the disgorgement amount was covered, represents a substantial reversal of fortune for the claimants in this long-running and high-profile insurance coverage dispute. While further proceedings in the case seem likely, the ruling nevertheless represents a setback for policyholders seeking to establish insurance coverage for disgorgement amounts. The intermediate appellate court’s September 20, 2018 opinion can be found here. Continue Reading

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