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Data Breach Insurance: Does Your Policy Have You Covered?

Recent developments in two closely watched cases suggest that companies that experience data breaches may not be able to get insurance coverage under standard commercial general liability (CGL) policies. CGLs typically provide defense and indemnity coverage for the insured against third-party claims for personal injury, bodily injury or property damage. In the emerging area of insurance coverage for data breaches, court decisions about whether insureds can force their insurance companies to cover costs for data breaches under the broad language of CGLs have been mixed, and little appellate-level authority exists.

On May 18, 2015, the Connecticut Supreme Court unanimously affirmed a state appellate court decision that an IBM contractor was not insured under its CGL for the $6 million in losses it suffered as the result of a data breach of personal identifying information (PII) for over 500,000 IBM employees. The contractor lost computer backup tapes containing the employees’ PII in transit when the tapes fell off of a truck onto the side of the road. After the tapes fell out of the truck, an unknown party took them. There was no evidence that anyone ever accessed the data on the tapes or that the loss of the tapes caused injury to any IBM employee. Nevertheless, IBM took steps to protect its employees from potential identity theft, providing a year of credit monitoring services to the affected employees. IBM sought to recover more than $6 million dollars in costs it incurred for the identity protection services from the contractor, and negotiated a settlement with the contractor for that amount.

The contractor filed a claim under its CGL policy for the $6 million in costs it had reimbursed to IBM. The insurer refused to pay. In subsequent litigation with the contractor, the insurer made two main arguments. First, it argued that it only had the duty to defend against a “suit,” and that the negotiations between the contractor and IBM were not a “suit.” Second, the insurer argued that the loss of the tapes was not an “injury” covered by the policy.

The Connecticut Supreme Court adopted both of the insurer’s arguments, and the decision highlights two key areas for any company considering whether it needs additional insurance coverage for data breaches: what constitutes an “injury” under a CGL, and when an insurer is required to reimburse a company for costs associated with an injury. First, the court held that the loss of the computer tapes was not a “personal injury” under the CGL, because there had been no “publication” of the information stored on the tapes. In other words, because there was no evidence that anyone accessed or used the stolen PII, the court found that the data breach did not constitute a “personal injury” under the policy—even though the contractor spent millions of dollars reimbursing IBM for costs associated with the data breach.

Second, the court found that the CGL policy only required the insurer to reimburse [...]

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New Data Disposal Law in Delaware Requires Action by Impacted Businesses

While the federal government continues its inaction on data security bills pending in Congress, some U.S. states have been busy at work on this issue over the summer.  A new Delaware law H.B. 295, signed into law on July 1, 2014 and effective January 1, 2015, provides for a private right of action in which a court may order up to triple damages in the event a business improperly destroys personal identifying information at the end of its life cycle.  In addition to this private right of action, the Delaware Attorney General may file suit or bring an administrative enforcement proceeding against the offending business if it is in the public interest.

Under the law, personal identifying information is defined as:

A consumer’s first name or first initial and last name in combination with any one of the following data elements that relate to the consumer, when either the name or the data elements are not encrypted:

  • his or her signature,
  • full date of birth,
  • social security number,
  • passport number, driver’s license or state identification card number,
  • insurance policy number,
  • financial services account number, bank account number,
  • credit card number, debit card number,
  • any other financial information or
  • confidential health care information including all information relating to a patient’s health care history, diagnosis condition, treatment or evaluation obtained from a health care provider who has treated the patient, which explicitly or by implication identifies a particular patient.

Interestingly, this new law exempts from its coverage:  banks and financial institutions that are merely subject to the Gramm-Leach-Bliley Act, but the law only exempts health insurers and health care facilities if they are subject to and in compliance with the Health Insurance Portability and Accountability Act (HIPAA), as well as credit reporting agencies if they are subject to and in compliance with the Fair Credit Reporting Act (FCRA).

Given how broadly the HIPAA and FCRA exemptions are drafted, we expect plaintiffs’ attorneys to argue for the private right of action and triple damages in every case where a HIPAA- or FCRA-covered entity fails to properly dispose of personal identifying information, arguing that such failure evidences noncompliance with HIPAA or FCRA, thus canceling the exemption.   Note, however, that some courts have refused to allow state law claims of improper data disposal to proceed where they were preempted by federal law.  See, e.g., Willey v. JP Morgan Chase, Case No. 09-1397, 2009 U.S. Dist. LEXIS 57826 (S.D.N.Y. July 7, 2009) (dismissing individual and class claims alleging improper data disposal based on state law, finding they were pre-empted by the FCRA).

The takeaway?  Companies that collect, receive, store or transmit personal identifying information of residents of the state of Delaware (or any of the 30+ states in the U.S. that now have data disposal laws on the books) should examine their data disposal policies and practices to ensure compliance with these legal requirements.  In the event a business is alleged to have violated one of [...]

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