Emerging Cyber Risk: Can Insurers “Hack” It?

This roundtable discussion was originally posted on AIRROC Matters

Cyber risks are among the most pervasive risk s of our time.

They impact all industries that purchase insurance, and all lines of insurance. A panel from the insurance community whose roles in their companies focus on cyber risks (some from the underwriting and product development perspective, and others from the claims handling perspective ) discuss key issues and challenges that insurers face from cyber risks.


Panelists:

Eric Cernak – Munich Re US – Cyber and Privacy Practice Leader

Kirstin Simonson – Travelers – Cyber Lead for Global Technology

Karrieann Couture – CNA Specialty Claims – overseeing technology, cyber, and fidelity claims operations

Moderator:

Laurie Kamaiko – Sedgwick LLP – Cybersecurity & Practice Group Leadership Team and Co-Chair Cyber Insurance Task Force


Q: What constitutes a “cyber risk,” and what is the range of cyber risks that insurers and their policyholders are dealing with these days?

Simonson: In the early days, we were focused on whether general liability insurance  would respond to cybersquatting  or other intellectual property issues. Around 2003, all of that changed when states started enacting breach notification laws requiring notice to individuals when the security of their personal information  held by companies was breached and that information  was stolen or lost; that was the driver behind a lot of the cyber coverages. Today, there are now really two buckets of risks in play: The first is the data privacy bucket, which involves the privacy of personal information  and the protection of confidential information  of others that a company holds within the confines of its networks. The second is the network security bucket, which involves how a network is being infiltrated and used to cause some type of harm to one’s own company or to others. While there are liability aspects to these and resulting third-party claims, a big chunk of the exposure is the expenses a business faces when an event happens, whether it is a data hacking event that requires forensics and notification costs, or whether it is ransomware with the investigation of that and issues of whether and how the business pays the ransom. It all stems from how everything is connected across the internet, which places everything at risk.

Q: What are some of the types of cover­ ages under traditional lines of insurance, as well as stand alone cyber policies, that are being impacted by cyber risks?

Cernak:  Coverages have evolved from tech E&O, media liability and, ecommerce insurance. Now there is not only data breach coverage for the expenses of responding to and remediating a data breach, but also for the third party actions that can be brought as a result of a breach. There is also systems damage and restoration coverage that is of growing importance, to help businesses restore their systems or data that may have been corrupted  or stolen as a result of a computer  attack. A corollary to that on the third party side is actions being brought against businesses for transmitting  malware, propagating a denial of service attack (even if the company is not aware that it is being used for that), or breaches of sensitive information  held by a corporation.

Originally, larger organizations  were more interested in purchasing cyber coverages as a stand-alone  policy. Over time, however, it has migrated to smaller organizations that usually access this coverage through endorsements to traditional types of policies. Some coverages may not be as common  on an endorsement  basis as they are on a stand-alone cyber policy basis, such as fraudulent funds transfer-otherwise known as business email compromise (BEC)-or contingent business interruption, property, and media liability coverages. Part of the reason for this is that for a stand-alone cyber policy, the underwriting process allows one to really dive in and understand the risk.

The primary difference is that you’re not going to find a lot of manuscripting  or tailored coverages in the endorsement market. The endorsements  are standard, with a short (or no) application, and often with prepackaged affordable coverages that can provide as little as $5,000 up to $1,000,000 of coverage. The majority of the coverages provided by endorsement also have services pre­ packaged in at pre-negotiated  rates for breach response, forensic IT, legal, or extortion specialists. This makes cyber coverage by endorsement  a pretty good vehicle for smaller entities, and entities often move up from cyber endorsements to cyber stand-alone  coverage over time.

Q: What lines of insurance offer cyber coverage endorsements?

Couture: Cyber endorsements are offered on professional liability policies, and often pick up first party expense for a data breach, with the idea that the main policy may pick up some privacy liability protection if it arises out of professional services. That privacy liability coverage may be broad, but does not include everything, so there may be situations where the endorsement/policy combination may not address all cyber needs. For example, where a business is experiencing a privacy liability situation impacting employees or vendors, there may be no coverage under its traditional professional liability coverage even with a cyber endorsement.

Cernak: There is a movement toward more comprehensive endorsement packages. Early on, the insured would have to guess at what it needed, and a business would get an endorsement for data breach or for a first party computer attack. There is a growing trend for providing the most common cyber coverages under a single endorsement, at a capped annual aggregate. The good news is there is probably some coverage for other cyber incidents in these more comprehensive endorsements,  than what the insured may have initially anticipated and as noted also provide services that provide a lot of value.

Q: How are the cyber exposures from smart products impacting the cyber market and interrelating with traditional lines of insurance, such as genera/liability,  professional liability, product liability and product  recall, even homeowners and auto insurance?

Simonson: When we think about all of the devices available now, whether it’s a smart home device, autonomous vehicles, wearables, we see everything is interconnected. One of the things that is going to start coming more into play is attempts to attach liability to the manufacturers  of these devices, and possibly even the distributers and sellers of the devices. Also, when a device at home doesn’t behave the way it’s supposed to, or when the device is hacked and it causes something like your HVAC or furnace to turn off while you are gone, and your pipes freeze and your house is damaged, what is the impact on the standard homeowners coverage?

In a commercial setting, what if a refrigeration system with medical samples for a clinical trial is shut off? What are the damages, policies and coverages impacted? There may even be recall of some of these devices and the components  within them. The industry will face many challenges and legal tests in the coming years of trying to determine  where the liability is, and which kind of policy is going to respond or not respond. It blends into traditional  products liability, even with just a failure of security of the device, and leads to downstream impact. From the autonomous vehicle perspective, we hear discussions right now about who is responsible and whose insurer is going to pay if there is an accident. Currently, auto is heavily regulated and there is a no-fault system as well as a tort system. But when is an accident the fault of the human behavior of the driver or the autonomous vehicle, or the fault of another vehicle that is human driven? There’s a lot that we need to think about when we look at insurance coverage for these accidents.

Couture: With regard to professional liability policies, typically those are designed for situations where a professional such as a lawyer or accountant provides inappropriate advice and does not contemplate injury that might arise out of disclosure of private or confidential information. But these policies tend to have broad definitions of”professional services”; and if there is an impact to the insured’s client, there is a chance that the policy is going to be picking up the third party claim. However, it’s not likely to pick up the first party response costs to a data breach, and that’s where attorneys and other professionals really need to focus, because they may have legal obligations to respond to such a breach; and if they don’t have coverage for it, they will be funding that themselves.

Q: Are there cyber events which trigger multiple  policies, in different lines of insurance?

Simonson: Denial of service events can impact a property policy and a cyber policy. Each may have business interruption and contingent business interruption coverages, although they can also be very different in how the coverages are going to apply. For years we’ve seen the pressure on GL policies to cover data breaches. Now, as we see more business email compromise claims and social engineering claims that involve money transfer, we are seeing more pressure on traditional crime policies.

As purchasers are buying policies that have duplicate coverages, you’re going to see interplay between the policies and associated pressures and challenges. The coordination of responses between multiple policies is even more challenging when they are issued by different carriers. The bigger challenge, however, is when someone is trying to find coverage where no coverage was ever intended, whether that’s CGL or crime, because they didn’t buy something else that would have responded.

Q: What is the silent cyber” that has been talked about in the industry press recently, and how has it affected traditional lines of insurance?

Couture: “Silent cyber” refers to a policy that had no intention  of covering a cyber-type exposure. In the CGL area, there is no intention  to cover hacks, but the policy may be pulled into a situation and end up providing a defense. In a CGL policy, there is an ongoing discussion as to whether advertising and personal injury coverage would apply to a hack of personal information  or whether a knowing or intentional  act of the insured is required and present in a data breach. Then there is the effect of the insured not even being aware of the data security vulnerability at issue. The flip side of the argument is that there’s no direct language requiring intentional conduct, so why wouldn’t the policy cover something  an insured should have protected? There is also an argument as to whether a hacking is the “publication” necessary for advertising and personal injury coverage. A hacker may have access to information, but is that really something that is a publication? Even if a policy has an appropriate exclusion in place today, there may be something new tomorrow that it doesn’t address, and so one has to keep abreast of technology trends and be prepared for the next thing that’s coming around.

Cernak: For CGL policies, there has been some exclusionary language produced by ISO, which did two things. One, it made it more difficult to make a claim under these policies. Two, it helped to elevate awareness that people should buy something that provides explicit cyber coverage rather than relying on silent coverage.

Simonson: Silent exposures render every insurer a cyber insurer, whether they think of themselves as one or not. The exposure that a business faces as a result of the internet or other cyber exposures are not limited to coverages that are found under a cyber policy. For example, there can be exposure to Workers’ Compensation  insurance from the growing number of wearable technology in the workplace, which may generate an uptick in Workers’ Comp claims. So whether you issue a cyber policy or not, or whether you intended to cover it or not, you are already in the game.

Q: Are cyber events impacting D&O Insurance?

Couture: We’ve seen shareholders bring derivative lawsuits on behalf of the corporation  when there is a data breach. Some allege breach of fiduciary duty, corporate waste, and failure to have the appropriate cybersecurity. There are also situations in which a data breach is announced causing the stock price drop and resulting in a laws it. This leads to scrutiny of the secunty in place at the time and an expectation that the corporation  has taken steps to ensure protection of data. We have seen that having a plan and having some cybersecurity and attention to cybersecurity in place has protected many corporations, but not necessarily prevented them from facing a lawsuit. Moreover, the more government agenc1es that have cybersecurity requirements, the more compliance is a challenge.

Q: Is there an impact on homeowners’ policies?

Cernak: There are a number of other exposures that present themselves in a home. For example, people may have data breach potential exposure if they volunteer for community activities and collect and maintain information  about individuals. Connected devices may be subject to ransomware and extortion threats requiring a coverage response. Thermostats could be held for ransom and cause pipes to freeze, refrigerators could have their temperature be turned up causing spoilage, and connected locks can be opened remotely. In the eyes of a home insurer right now, it doesn’t matter if you turn the heat down by walking over to the thermostat or if it is remotely turned down, or if a brick is thrown through  a glass window or someone opens the front door remotely to steal your TV. There are also privacy issues, such as TVs and children’s toys monitoring activities in the house. People are also using social media to get a sense of when you are home and when you are not, which could lead to increased theft. There is also a need for coverage for cyberbullying, both on the first-party side for resources and costs to help the insured victim of cyberbullying, as well as for cyberbullying liability when someone in the household is perpetrating the cyberbullying. Some of these events can have coverage under a homeowner  policy event without explicit coverage, i.e., silent cyber. We haven’t seen a great deal of activity yet to carve out those potential coverages from traditional  homeowner’s policies. There are a handful of homeowner insurers providing explicit cyber coverage on an endorsement  basis. There is also some on-line fraud coverage available. These endorsements look similar to some of the cyber endorsements on commercial lines policies. As homes become more technologically advanced with increased computing  power, there is going to be more need for coverage, as seen in commercial lines.

Similar to the commercial side, as people realize the potential exposures and associated lawsuits, you may see activity with insureds seeking coverage under homeowners’ policies, and a resulting tightening  up of the policy language with either affirmative coverage or affirmative exclusions.

Q: What about claims by one insurer against another, or between businesses (B2B), arising out of a cyber event? Are you seeing subrogation claims?

Couture:  While we haven’t seen a lot of claims between insurers so far, as first-party costs increase there is an expectation that insurers will consider subrogation, for example against vendors who were the conduit to a breached insured’s network. Subrogation entails a cost-benefit of available insurance coverage or sufficient assets and whether there is an indemnification agreement. These claims will typically be either for negligence or breach of contract, so the insured will need to prove that the vendor failed to follow a standard  of care. That can be a challenge, because not only do the risks and standards  of care continue to evolve, but the insured may also be at fault. So if the vendor fails to, for example, update its software or maintain adequate encryption, that scenario may be enough to go against the vendor; but if the insured also fails to train employees on how to avoid a malware intrusion that was a contributing cause to the cyber event, that might be an issue in any subrogation or contribution claim.

Simonson: Nothing stops claims or suits from determining fault even absent subrogation.  For example, I hire a vendor to provide a service, and they do something that causes a breach. I am the one that has to notify those affected and pay notification costs. Nothing stops me from bringing a claim against that vendor myself, apart from my insurer, and hope that they have professional liability coverage in place or the wherewithal to respond. If something happens, and there is breach litigation such as a consumer  class action, both the business that breached and its vendor may be named as defendants.

Q: How are some of the traditional · provisions common to insurance policies playing out when applied to cyber risk claims?

Simonson: Contractual legality exclusions, which are in almost every policy in some form, are an issue. In the payment card industry, liability is assumed by merchants  under a chain of agreements that includes a master services agreement with a card brand such as Visa or MasterCard, under which obligations and penalties for a data breach are established via contract. Also, a lot of companies such as vendors are agreeing to pay notification costs on their customer’s behalf. So contractual liability exclusions may be problematic in certain situations.

Also, if you look at cyber coverages across the products in the market, you will see varying exclusions relative to internet or other infrastructure outage, failure to have the security protocols that were shown on your application, or failure to meet current security standards. Each carrier may have a different approach to what they consider to be a business risk they may not be interested in covering. So it’s really important  that purchasers of a coverage pay attention  to these provisions.

Q: How are insurers coordinating their response to cyberrelated claims noticed under various lines of insurance?

Couture: Typically, the cyber claim is the fastest moving of all. Whether the cyber team takes the lead will depend on the facts and lines of insurance available. Regardless of whether they take the lead, they should be helping to coordinate the overall breach response. Overall, the key components  are communication, education, and business partnership to get the claim to the right team quickly and ensure engagement of the right resources. With regard to communication, there should be a recognized point of contact for cyber­ related matters and issues that everyone in the company should know, to which cyber-related questions and claims get routed. From an education perspective, . that includes claim professionals, intake personnel, and pretty much every employee. As we educate employees about basic cyber risks of insurers, it also helps improve the quality of service to the insureds as employees will understand what the risks are. Business partnerships  are important, including working with brokers, agents, and insureds to understand  the insured’s insurance profile when there is a possible cyber incident that could impact multiple policies. Brokers can help when they are reporting a claim by identifying other policies and providing basic information  at their disposal.

Simonson: Another challenge is that we can’t always predict how the insured will report a claim. So it’s important  that the insurer recognize certain tag words to identify cyber claims from an insured, who is used to reporting slip and fall claims under a GL policy. How swiftly the insurer distinguishes the cyber claim and involves the cyber group prevents a delay in handling the claim and relieving angst internally and externally.

Cernak: Building on that, another thing an insurer can do is identify examples of types oflosses that could eventually turn into, but may not be initially, a cyber loss. For example, someone calls in and reports a claim for stolen computers as a property loss. They may not recognize that they may also have a data breach from personal information  on the stolen computers that wasn’t encrypted.

Q: What about aggregation of risk when a cyber risk falls under may different policies or impacts  many insureds?

Cernak: The first step is acknowledging that the potential for aggregation of risk really does exist in cyber and is not as easily addressed as under other lines of business. For example, if you feel you have too much exposure to Atlantic hurricanes, you just stop writing on the Florida coast and start writing elsewhere. For cyber, you don’t have that luxury; there is no place to hide from cyber exposure. We saw a small glimpse of what can happen last fall when a DNS provider was brought off-line for a bit. We have seen localized mini­ accumulation  events where a service provider’s clientele list was apparently breached and a vulnerability was discovered in how they set up systems, and the hacker targeted the entire clientele list with the same type of attack.

The struggle, though, is how do you know what an accumulation  event will be if you haven’t ever seen one? Data on that is limited and the data we are collecting today doesn’t reflect the risk five or ten years from now.

We are seeing certain mechanisms that facilitate aggregation, such as denial of service attacks, which are going to become larger and more common. These attacks are going to use larger networks and more computing power and will be increasingly automated. When denial of service attacks are targeted at entities upon which a number of businesses rely, that’s when you start to get some of that accumulation  concern.

Couture: We have some ability to do claim coding to track what’s coming in. The key to tracking accumulation is also communication with the different areas within the insurer’s claims operation as well as actuary, underwriting,  and risk control teams. Finally, one should stay abreast of technology and the areas it impacts. You need to have a commitment to continually educate yourself and those around you.

Cernak: People are starting to talk more and more about a common  terminology and coding, but what do you do with that information  once you have it? That’s where people in the industry  are still struggling.

Simonson: We need to develop tools that help us understand our potential aggregation exposure, but how do we do that? We can review our exposure limits and we can review the potential impact of a single event on our book of business, but there is still a lot more work to be done to capture the reality of the risk. We need to plan for the worst case scenario, and walk through “what if this happens, would this policy apply?”

Q: What about reinsurers, what challenges are they now facing?

Cernak: Many of the same challenges facing direct carriers also apply to reinsurers, just with a multiplier on it. A lot of the same issues of understanding what is actually being covered, and in how many places apply to reinsurance. A reinsurer can have accumulation vertically on a single risk, or horizontally across multiple risks. As there are ever larger towers of insurance being constructed,  there are only so many reinsurers in the market assuming some of this cyber risk, and thus knowing which layer you are on and how many times you are being approached by different carriers on the same tower is key to assessing risk accumulation.

Q: What do you see as the challenges and cyber risks coming down the road that our current policies may need to face in the next year or so?

Simonson: The biggest challenge we are going to face is responding to the connectedness of everything. We may not realize the implications of “unlocking our doors remotely;’ or the risks we are exposing ourselves to when we download a simple app. Who knew my smart TV was always listening? We need to watch the technology trends and anticipate what the risk to insurance companies may be. We hear much more about whether devices that are connected to the internet should be regulated and designed so they are secure, and whether . the companies are living up to the security promises they made, the basis for recent FTC investigations. Insureds and insurers that are used to dealing with manufacturing defects may have to deal with these issues, but it’s really not the device that fails, but it is also doing something else that impacts people in a way they don’t like. While regulations may be increasing, what does full compliance mean in this context? How do we comply with regulatory provisions such as those in the EU’s General Data Protection Regulation effective next year that includes a right-to-be-forgotten provision? As regulations shift to protect privacy, there is a whole different type of compliance that a lot of companies in the United States, which aren’t used to such provisions, are going to need to address.

Cernak:  I think the whole concept of trust, and what and who you trust and how that can be exploited, is an area to focus on in the future. Trust is going to carry more value as things become more connected, and how does one know who to trust? Right now, a lot of the lawsuits relating to breaches are predicated on the promises made by companies to keep data safe and secure, as contained in privacy statements.

Couture: That’s a good point, and it is especially timely now with all the devices listening in. Additionally, there is the question of which companies to trust to keep the information  they collect safe and private and stored for a limited time.

Q: Last tips?

Cernak: Keep abreast of everything, and know your policy language and intent,

so you understand what you’ve written. Be paranoid.

Couture: Have a commitment to continuous education in cyber risks all around.

Simonson: Be involved in one of the numerous  information  sharing associations focused on cyber risks

Getting Highly Automated Vehicles on the Road

A number of current vehicle safety standards are blocking the development of the more sophisticated self-driving cars and trucks.

The National Highway Traffic Safety Administration promulgates Federal Motor Vehicle Safety Standards (FMVSS) that all vehicles sold in the U.S. must meet. Many of these standards are incompatible with highly automated vehicles (HAVs) — especially those designed to be operated exclusively by the vehicle’s software control system.

For example, existing standards include requirements for brake pedals, manually controlled turn signals and many other vehicle design elements. For HAVs to move beyond developer testing and into deployment, either NHTSA will need to promulgate specific FMVSS for HAVs or Congress will need to enact another mechanism to facilitate deployment.

With rapidly evolving technology, it is likely that any standards for HAVs issued in the next few years would quickly be rendered irrelevant and could be counterproductive to the development of this technology in the U.S. In recent months, NHTSA and the U.S. House of Representatives have taken steps toward developing a regulatory framework for self-driving cars and trucks. NHTSA has recently issued a revised guidance to encourage HAVs developers to share safety data with the Department of Transportation and the public. The House of Representatives has passed H.R. 3388, with bi-partisan support, to expand a FMVSS exemption mechanism in the current law to allow sales of HAVs in advance of promulgated FMVSSs.

2017 NHTSA Guidance

On Sept.12, NHTSA issued a guidance document on the safety regulation of HAVs titled “Automated Driving Systems: A Vision for Safety 2.0.” As the “2.0” in the title suggests, the 2017 guidance updates the guidelines issued by the previous administration in September 2016. The current guidance document focuses on automated vehicle testing rather than deployment.

The 2017 guidance is voluntary and encourages developers to disclose to the public Voluntary Safety Self Assessments on 12 key safety elements: system safety; operational design domain; object and event detection and response; fallback (minimal risk condition); validation methods; human machine interface; vehicle cybersecurity; crashworthiness; post-crash automated driving system behavior; data recording; consumer education and training; and federal, state and local laws.

The 2017 guidance devotes significant attention to the role of state legislatures and highway safety officials in the testing of automated vehicles. It includes a mild warning against states establishing automated vehicle safety standards independent of NHTSA, but continues to leave the decision whether to allow testing on public roads to the states.

It is unclear whether the voluntary and public record data reporting under the 2017 guidance will provide a useful basis for NHTSA to develop formal safety standards for HAVs. However, the guidance will probably facilitate public understanding of how developers seek to make HAVs safer than human operated vehicles.

The SELF DRIVE Act

The automated vehicle bill passed by the House of Representative on Sept. 6 expressly preempts states from enacting any laws or regulations regarding the design, construction or performance of HAVs that deviate from federal standards and offers a mechanism to move beyond testing to the deployment of HAVs.

Similar legislation is being introduced in the U.S. Senate.

Under existing law, NHTSA has the authority to allow exemptions from FMVSS if the exemption would facilitate the development or field evaluation of a new motor vehicle safety feature providing a safety level at least equal to the safety level of the relevant FMVSS standard. In effect, the exemptions allow beta testing of safety innovations in the real world. Manufacturers with exemptions must report information about crashes for which they have knowledge to NHTSA.

Under current law, each manufacturer’s exemption is limited to 2,500 vehicles sold in the U.S. each year. H.R. 3388 increases the exemption for HAVs to 25,000 in the first year, 50,000 vehicles in the second year and 100,000 vehicles in the third and fourth years. The highly automated vehicle exemptions under H.R. 3388 terminate after four years.

Pros and Cons

The annual caps built into H.R. 3388 provide potential advantages and downsides. By capping the number of HAVs a given manufacturer can sell each year, the bill will mute “first mover” advantage to the developer with the first, best or best hyped HAV. This may allow the emergence of a less concentrated market for HAVs.

The flip side disadvantage is that consumers may be denied access to the best (or, at least, the preferred) HAVs for a number of years. The approach in H.R. 3388 may also buy time for NHTSA to develop FMVSS for HAVs that do not backfire or for Congress to devise another solution to regulating an emerging technology.

Ironically, the incremental approach in H.R. 3388 may facilitate the development of breakthrough automotive technology better than a more radical form of regulation that could force a new technology into less than optimal paths.

Federal Automated Vehicle Legislation

H.R. 3388

Short Title: SELF DRIVE Act

Status: Passed

Number of highly automated cars authorized for sale: 25,000 in the first year, 50,000 in the second year, and 100,000 in the third and fourth years. Preemption: Preempts states and local government from establishing design or performance criteria for highly automated vehicles (HAVs) different from federal requirements.

Use of Crash Data: Requires manufacturers to provide its HAV data privacy policy to consumers, but does not expressly address use of recorded crash data.

S. 1885

Short Title: AV START Act

Status: Voted out of Senate Commerce, Science & Technology Committee

Number of highly automated cars authorized for sale: 50,000 in the first year, 75,000 in the second year, and 100,000 in each year until NHTSA promulgates safety standards for HAVs. Preemption: Same as H.R. 1185

Use of Crash Data: Requires manufacturers to comply with the event data recorder provisions of the 2015 FAST Act (Public Law 114-94), which does not allow insurers access to crash data without the permission of the vehicle’s owner or lessee.

***This article was originally published on October 16, 2017 in Insurance Journal, and can be found here.

The Ever Expanding Scope of Cyber Risks: All Policy Lines Beware

What exactly is a cyber risk, and in particular a risk that is covered by insurance, is a constantly evolving concept. Insureds, insurers and reinsurers are continually faced with new types of risks and claims that fall within the rubric of “cyber.” What is a cyber risk is often broadly construed as anything related to the use of a computing device or network. As cyber risks expand, so do their impact on insurance lines, both those designed to apply to them and those that are impacted inadvertently in what has become known as “silent cyber” coverage. Thus, insurers in all lines need to become familiar with identifying and addressing cyber risks.

The types of events that can trigger cyber coverage, and the scope of coverage afforded by cyber policies, still vary considerably. In the early 2000’s, in the wake of the enactment of data breach notification laws that began in the U.S. in 2003 in California (and now are present in 48 states in the U.S. and worldwide), most cyber policies focused on payment of breach investigation and notification costs for events that involved the loss or theft of protected personal information maintained in electronic formats. That is still a fundamental coverage afforded by almost all cyber policies, and is often a coverage added on to other types of policies. However, in recent years, there has been an expansion of the type of cyber events to which businesses, and their insurers, are subject. Some of the current cyber events do not even involve an actual breach of computer systems, but merely the threat of one.

Even the basic exposure of businesses to theft and loss of protected personal information has increased in scope. Laws and regulations in the U.S. are expanding the definition of what constitutes protected personal information, for example increasingly including on-line log-in credentials and biometrics. Jurisdictions outside the U.S., many of which already had a broad definition of protected personal information, are adopting notification requirements, such as the EU’s General Data Protection Regulation (“GDPR”) that will go into effect in May 2018. This has increased the exposure to businesses, and to their insurers who provide coverage for the costs of investigating and responding to a data breach. While cyber insurers offering stand-alone cyber coverage are likely aware of these developments, insurers offering breach response add-on coverage to “traditional” lines of coverage such as professional liability and other E&O insurance may not be fully taking into account the impending increase in exposure presented by these developments.

Moreover, there has been expansion of cyber risks well beyond the theft or loss of information. As demonstrated by recent news stories, cyber events now include denial of service attacks and attacks directed at destruction of information and systems. This is in addition to the rapid increase in cyber extortion and ransomware, funds transfer frauds utilizing social engineering and electronic communications to trick business employees into making wire transfers to bank accounts controlled by criminals (often referred to as business email compromise), and similar events that may not include a theft of information or breach of a business’s own computer systems. Often, the resulting damages are well beyond investigation and notification costs, and include economic losses resulting from denial of access to systems, property and data damage, bodily injury (particularly when medical devices are affected) and an array of third party claims by corporate and individual customers, business partners, and others affected by the event.

These days, just the vulnerability to a cyber-attack, even if an attack or breach has not occurred, can generate claims against a business by regulators, customers, and shareholders. Increasingly, there are regulatory and legal proceedings that allege failure by a business to comply with the growing number of laws and regulations that require cybersecurity protection to be in place or require disclosure of data collection and security practices, with resulting fines, injunctive relief and potentially other damages awarded for non-compliance. Recent lawsuits against a law firm and a medical device developer, while so far unsuccessful, generated substantial legal defense costs. Regulatory proceedings investigating businesses compliance with security and disclosure requirements for cyber risks can also be expensive to defend. Vulnerabilities in cybersecurity have led to finger pointing by businesses to their cybersecurity vendors and other business parties. Vulnerabilities in software that increase the risk of cyber-attacks of any kind, be it auto theft, data compromise, or privacy violations, can also generate claims even before a breach or loss occurs.

Businesses faced with such losses and claims often look not only to stand alone cyber insurance policies to pay, but also to other types of policies they may have in their insurance arsenal. Many “traditional” lines of insurance have expanded to include add-on coverages for breach response or other designated cyber risks to first party property, third party professional liability and other types of E&O lines, and even general liability.

However, often other lines less deliberately, and often inadvertently, get caught up in claims that arise from cyber risks, and are faced with requests to cover claims of economic losses, property damage or bodily injury. Virtually every insurer has been faced with a claim they never anticipated, which arose from what can be described as a cyber event because it involved use of or affected a computer system even tangentially.

Crime insurers are now facing the increasing number of funds transfer frauds that involve usage of computers, resulting in a series of conflicting court decisions as to coverage. D&O insurers have been faced with claims by shareholders against boards of companies that sustained data breaches for their role in alleged inadequate cyber security or breach response. Employer’s liability insurers may see claims from employees disciplined or terminated because of cyber events and perceived fault. Media liability insurers (and cyber insurers offering media coverage as part of stand-alone cyber policies) are faced with claims arising from the content of statements on business websites and social media. Products liability and product recall insurers are likely to see claims arising from allegedly defective cyber security in devices connected to networks, which these days include a broad range of consumer and health-related products. Property insurers have long dealt with claims arising from events ranging from stolen computers to network outages, resulting in property damage and business interruption claims both direct and contingent. Some insurers on these lines have embraced extensions of coverage that knowingly encompass such cyber risks. Others have relied on cyber exclusions that can be difficult to fashion to exclude all possible exposures from all possible cyber related events. Personal lines insurers, such as homeowner insurers, are not immune, as individuals as well as businesses are at times faced with claims, as demonstrated by those against families who have a member accused of cyberbullying.

Thus, it is increasingly important for insurers to train both underwriters and claims handlers involved in other lines of insurance than cyber stand-alone policies to recognize the risk of cyber exposures when drafting coverage forms and exclusions, underwriting prospective insureds, and receiving notice of a claim. Often, identifying a potential cyber related claim and consulting with internal talent experienced in addressing such risks can be key to controlling the risk and exposure both on an individual and aggregate basis for the insured, the insurer, and the reinsurer.

*This article was originally published in the TransRe Global Cyber Newsletter

Sedgwick LLP Teams Up With Non-Profit To Assist Hurricane Maria Victims in Puerto Rico

Sedgwick LLP appreciates all of our Puerto Rico clients, and in an effort to help the communities in which they serve, we invite you to support the people of Puerto Rico by donating to Asesores Financieros Comunitarios, a charity and non-profit providing assistance to those impacted by Hurricane Maria. Asesores Financieros Comunitarios is a United Way affiliate, and your donation will provide economic assistance for employees laid off and on reduced-leave as a result of Hurricane Maria. Donations do qualify as a Federal Exemption 501c3. For more information, and to donate now, please click here.

State Updates on Cybersecurity Regulations: New York DFS Issues FAQs on Its Cybersecurity Regulations and Colorado Adopts Rules Applicable to Broker-Dealers and Investment Advisors

New York and Colorado have continued to take the lead in cybersecurity requirements for regulated financial institutions.

The New York Department of Financial Services (DFS), which issued the first state cybersecurity regulation directed at its regulated financial institutions, 23 NYCRR Part 500, recently updated its “Frequently Asked Questions Regarding 23 NYCRR Part 500” on July 31, 2017, to assist entities covered by the regulation in their compliance. It has also announced a new online portal for secure transmission of all notifications required under this new regulation.

Meanwhile Colorado’s Division of Securities adopted the new cybersecurity rules it had proposed earlier this year applicable to broker-dealers purchasing securities in Colorado and investment advisors who do business in the state.

For background, see our May 3, 2017, article, “Other States Start to Follow New York Lead on Cybersecurity of Regulated Entities,” in which we addressed the recently enacted New York State Department of Financial Services cybersecurity regulation and the then-proposed Colorado regulations targeted at financial advisers.

New York FAQs

The New York DFS Regulations that went into effect March 1, 2017, (with transition periods) were designed to “promote the protection of customer information and information technology systems or regulated entities.”  The regulated “Covered Entities” were defined to mean any “Person” operating under or required to operate under a license, registration charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law of New York.

On July 31, 2017, the DFS issued its updated “Frequently Asked Questions Regarding 23 NYCRR Part 500,” which provides its answers to 18 frequently asked questions concerning the regulations. The FAQs provide insight into how the DFS interprets the regulations and the extent to which it will defer to the “appropriate judgment” of the Covered Entities on certain issues, including the circumstances under which an “unsuccessful attack” constitutes a “Cybersecurity Event” that meets the reporting requirements of the regulations.

It is noteworthy that the FAQs state that the DFS “trusts” that Covered Entities will exercise appropriate judgment in these situations and does not intend to “penalize” Covered Entities for the exercise of honest, good faith judgment. They also address a wide variety of issues, including that an entity can be both a Covered Entity and a Third Party Service Provider, and the impact of a Covered Entity’s relationship with its Affiliates in complying with the regulations. The New York DFS is adamant that the Covered Entity will be responsible for complying with the regulations regardless of its adoption of its Affiliate’s cybersecurity program or utilization of an Affiliate’s CISO. The Covered Entity remains charged with annually certifying its compliance with the regulations.

The following are some of the other issues that are addressed in the FAQs (here is a full list of the FAQs):

The circumstances under which a Covered Entity must submit notice to DFS of a Cybersecurity Event:

The Department recognizes that Covered Entities are subject to many daily attempts to gain unauthorized access to their Information Systems and the information stored on them, and most are unsuccessful and will not be reportable, such as those of a routine nature. However, it also notes some unsuccessful attacks will be reportable if “in the considered judgment of the Covered Entity” it is “sufficiently serious to raise a concern.” Thus, while the DFS states it trusts that Covered Entities will exercise “appropriate judgment” as to “which unsuccessful attacks must be reported” and it “does not intend to penalize Covered Entities for the exercise of honest, good faith judgment,” a Covered Entity cannot automatically consider an unsuccessful attempt to not be reportable. (See FAQ 1.)

A reportable cybersecurity event is one that is described as fitting into at least one of the following categories:

  • The Cybersecurity Event impacts the Covered Entity and notice of it is required to be provided to any government body, self-regulatory agency or any other supervisory body; or
  • The Cybersecurity Event has a reasonable likelihood of materially harming any material part of the normal operation(s) of the Covered Entity.

In addition, a Covered Entity is required to give notice to DFS when the Covered Entity is required to give notice to affected consumers under other laws and regulations. The DFS noted in response to an FAQ regarding whether notice must be given to the Department when a Cybersecurity Event involved harm to consumers, that if a notice is required under New York’s information security breach and notification law (General Business Law Section 899-aa), then that Cybersecurity Event must also be reported to the Department. (FAQ 5.)

A reportable Cybersecurity Event is to be reported as promptly as possible, but in no event later than 72 days “from a determination that a reportable Cybersecurity Event has occurred.” (FAQ 15.) The circumstances under which a Covered Entity must address the cybersecurity issues of its subsidiaries and affiliates are as follows:

When a subsidiary or other affiliate of a Covered Entity presents risks to the Covered Entity’s Information Systems or the Nonpublic Information stored on those Information Systems, those risks must be evaluated and addressed in the Covered Entities Risk Assessment, cybersecurity program and cybersecurity polices. (FAQ 3.)

The circumstances under which a Covered Entity that qualifies for a limited exemption must still comply with the regulations are as follows:

The DFS notes that the exemptions are limited in scope (see 23 NYCRR Part 500.19), and even entities that qualify for those exemptions are only exempt from complying with certain provisions of the regulation. They must still comply with the sections listed in the exemptions that apply to covered entities. (FAQ 4.)

To provide a secure route for submission of such notices to DFS, as well as for submission of required certificates of compliance by the Covered Entities of their other obligations under the new Regulation, DFS  has also announced a new online portal.

It is important for those subject to these New York regulators to monitor the FAQs published by DFS. The FAQs provide guidance into the DFS’s interpretation and enforcement of its newly adopted regulation.

New Colorado Regulation

The Colorado Division of Securities has now also adopted new cybersecurity rules, which are applicable to broker-dealers purchasing securities in Colorado and investment advisors who do business in the state. New Colorado Regulation (see page 45; 51-4.8)

The Colorado regulations are less onerous and narrower in application than the New York Regulation. They are limited to broker-dealers purchasing securities in the state and investment advisors doing business in Colorado. For those entities, the Colorado rules require cybersecurity procedures to protect “Confidential Personal Information.”  Publicly available information is not considered Confidential Personal Information. They only require that broker-dealers and investment advisors “establish and maintain written procedures ‘reasonably’ designed to ensure cybersecurity. While the Colorado Division of Securities may consider a variety of factors in determining what is reasonable, the cybersecurity procedures must include: (a) annual risk assessment that does not have to be conducted by third-parties; (b) secure email, including encryption and digital signatures for emails containing Confidential Personal Information; (c) authentication of client’s email instructions and employee access to electronic communication; and (d) disclosure to clients of the risks of utilization of electronic communication. The required annual risk assessment does not have to be conducted using an independent third party.

Unlike New York’s regulations, Colorado’s rules do not have requirements for third party vendors. In addition, the final rules adopted in Colorado deleted the breach notification requirement to the Department that was in the initial proposed rules. Thus, overall it is less burdensome, and less costly, than the New York regulation. Entities subject to them are still, of course, subject to federal financial regulation and oversight, such as that provided by the SEC.

It remains to be seen whether other states will enact their own cybersecurity regulations, and if so, which entities will be subject to such regulation.

And Now There are Three: Nevada Joins California and Delaware in Privacy Policy Requirements for Website Operators

The latest development with respect to privacy policies involves amendments to existing legislation governing state statutes governing the security of personal information for website operators and online service providers. (See June 30, 2017 Alert – FTC Issues Updated Guidance for Compliance with COPPA).  This may be the next wave of statutory amendments in the ongoing battle to balance the collection of personal information with a consumer’s right to privacy.  Nevada has now joined California and Delaware with its recent amendment to its Security of Personal Information statute (NRS 603A – Security of Personal Information).  California was the first state to require commercial websites and online services to post a privacy policy in 2004, which was amended in 2013 to require new privacy disclosures regarding tracking on online visits. (See the California Online Privacy Protection Act (CalOPPA)).  Delaware’s Online Privacy and Protection Act (“DOPPA”) went into effect on January 1, 2016.  The Nevada amendments which become effective on October 1, 2017, is narrower in scope than the laws of California and Delaware.  The Legislative Counsel’s Digest indicates that it excludes in-state entities whose revenue is primarily from sources other than online sales and who have fewer than 20,000 unique visitors per year.  It also limits its application to website operators that “purposefully” direct or conduct activities in Nevada, or consummate a transaction with the state or one of its residents.

For those entities who do not fall within the parameters of the exclusion, the amendments require notice of the following  categories of information:

  1. Identify the categories of “covered information” collected through the website and categories of third parties with whom that information may be shared.

“Covered information” includes (a) a first and last name; (b) a home or other physical address that includes the names of a street and city or town; (c) an electronic mail address; (d) a telephone number; (e) a social security number; (f) an identifier what allows a specific individual to be contacted either physically or online; and (g) any other information concerning an individual collected from that person through the website or online service in combination with any other identifier in a form that makes the information personally identifiable.

  1. Describes the process, if any, by which the user may review and request changes to “covered information” collected through the website.
  2. Disclose whether third parties may collect information about a user’s online activities from the website.
  3. Provide an effective date of the notice.
  4. Describe how the website operator will notify the consumer of any material changes to the notices required to be made under the new law.

Under the amendments, the Nevada Attorney General will have the power to issue temporary or permanent injunctive relief against the website operator and to assess penalties up to $5,000 per violation to enforce compliance.  No private right of action is afforded to the consumer for violations of these new provisions of the Nevada law.

So what does this mean for website operators in Nevada before October 1, 2017?  First, determine whether your website operations are excluded from the amendments.  If not, review all current privacy policies to determine which ones will need to be modified to comply with the law.  Finally, create any new policies that need to be provided under the new legislation and monitor developments on privacy policy legislation in other states to make sure your website operations will be in compliance with any future changes.  Illinois’ proposed “Right to Know” law passed the state Senate but failed to be approved by the House before the legislative session ended on May 31, 2017.  This bill may be reintroduced in a future legislative session.

If you need assistance reviewing your privacy policies, including website operations, please contact Cinthia Motley, 312-849-1972, cinthia.motley@sedgwicklaw.com or Carol Gerner, 312-849-1959, carol.gerner@sedgwicklaw.com.

New Jersey Bill Limiting Identity Card Scanning Signed Into Law

On July 21, 2017, New Jersey Governor Chris Christie signed into law a bill that places new restrictions on retailers’ collection and use of information collected when a customer’s identification (ID) card is scanned. The Personal Information and Privacy Protection Act (the Act) (we previously analyzed this bill, here) takes effect on October 1, 2017, and permits retailers to scan a person’s ID card for the following limited purposes:

  • To verify authenticity of the ID card or identity of the person (1) if the person is paying for goods or services in a method other than cash, or (2) if the person is returning an item or (3) if the person requests a refund or exchange;
  • To verify the person’s age when providing age-restricted goods or services;
  • To prevent fraud or other criminal activity if the person returns an item or requests a refund or an exchange and the business uses a fraud prevention service;
  • To prevent fraud or other criminal activity related to a credit transaction to open or manage a credit account;
  • To establish or maintain a contractual relationship;
  • To record, retain, or transmit information as required by state or federal law;
  • To transmit information to a consumer reporting agency, financial institution, or debt collector, to be used as permitted by the Fair Credit Reporting Act, Gramm-Leach-Bliley Act, or the Fair Debt Collections Practices Act; and
  • To record, retain or transmit information by a covered entity governed by HIPAA.

Significantly, the Act prohibits retailers from selling or disseminating to third parties the information that they obtain from scanning ID cards, for almost any purpose, including marketing, advertising or promotional activities. The one exception to this rule is where a retailer’s automated return fraud issues a reward coupon to a loyal customer. We note the Act does not explain what an automated return fraud system is, thus, retailers should assess the extent to which they collect information from scanning ID cards and ensure that such information is excluded from what is shared with third parties.

The Act also prohibits retailers from saving the scanned information, when the scanned information is used solely to (1) verify the authenticity of the ID card, (2) verify the identity of a person who is making a non-cash payment, is returning an item, or is seeking a refund or exchange, or (3) verify a person’s age in an age-restricted transaction.

If any of the scanned information is saved, it must be “securely stored.” Although the Act does not define “secure” storage, the New Jersey Identity Theft Prevention Act (N.J.S.A. 56:8-161 et seq.) (N.J. ID Theft Law) provides some guidance. Under that statute, the unauthorized access of personal information is not considered a “breach” where the information is encrypted or rendered unreadable (N.J.S.A. 56:8-161).  This suggests that at minimum, secure storage might require encrypting or using some other technology to render the scanned information unreadable, or anonymizing it to be disassociated with any person.

The Act also covers data breach reporting requirements. It requires retailers to “promptly” report any breach of the security of the scanned information to the New Jersey State Police and any “affected persons” in accordance with the N.J. ID Theft Law, which already includes a reporting obligation to the State Police any time a business must notify a New Jersey resident of a breach of his or her personal information. While the Act does not define “prompt” reporting, the timing for reporting breaches of scanned information likely mirrors the requirement imposed by the N.J. ID Theft Law — the most expedient time possible without unreasonable delay (N.J.S.A. 56:8-163).

The Act also expands the scope of information subject to breach reporting obligations. The existing N.J. ID Theft Law limits the “personal information” that triggers reporting obligations, if breached, to “an individual’s first name or first initial and last name linked with any one or more of the following data elements: (1) Social Security number; (2) driver’s license number or state identification card number; or (3) account number or credit or debit card number, in combination with any required security code, access code, or password that would permit access to an individual’s financial account” (N.J.S.A. 56:8-161). The Act similarly includes the person’s name, state issuing the ID card, and ID card number; but also adds her address and date of birth.

The Act provides for $2,500 in penalties for the first violation and $5,000 for any subsequent action, and expressly permits a private right of action. There is no cap on penalties.

Retailers who do business in New Jersey should evaluate their compliance with the Act’s new requirements well in advance of October 1, 2017, when the law takes effect. It is unclear if the Act applies solely to retailers who have brick and mortar stores in New Jersey. The Act refers to “retail establishments” but does not define what a retail establishment is. But, because the Act addresses scanning ID cards, it is hard to imagine how ID cards could be scanned anywhere else but a physical location. This includes: (1) evaluating the extent to which they scan customers’ ID Cards and whether and to what extent the scanned information is saved, (2) ensuring that they do not share information scanned from customers’ ID cards with third parties, (3) evaluating the security used (including encryption, redaction, anonymization, and other physical, technical and administrative safeguards) to protect such information, if any is stored, and (4) evaluating their incident response programs for expansion of breach reporting obligations, particularly in light of the expanded scope of personal information imposed by the new law.

If you have questions about your incident response plan or how to evaluate your business’ security programs and procedures, please contact Cinthia Motley, 312-849-1972, cinthia.motley@sedgwicklaw.com or Nora Wetzel, 415-627-3478, nora.wetzel@sedgwicklaw.com.

ALERT – FTC Issues Updated Guidance for Compliance with COPPA

On June 21, 2017, the Federal Trade Commission (FTC) updated its guidance for compliance with the Children’s Online Privacy Protection Act (COPPA).  COPPA regulates websites and other online services in connection with collection of information from children under 13.  The full version of the FTC’s updated guidance is available at https://www.ftc.gov/tips-advice/business-center/guidance/childrens-online-privacy-protection-rule-six-step-compliance

The FTC guidance instructs businesses to:

  • Determine if a company’s website or online service collects information from children under 13
  • Post a privacy policy that complies with COPPA
  • Directly notify parents before collecting personal information from children
  • Get parents’ verifiable consent before collecting personal information from children
  • Honor parents’ ongoing rights regarding personal information collected from children
  • Implement reasonable security procedures to protect the personal information collected from children

The FTC’s updated guidance addresses new models used to obtain personal data, such as voice activated devices used to collect personal information.  The guidance incorporates reference to new products, like connected toys and other products intended for children that collect information like voice recordings or geolocation data.  It also introduces two new methods for obtaining parental consent: (1) asking knowledge-based authentication questions and (2) using facial recognition to match a verified photo ID.

“Website or online service” under COPPA, according to the updated guidance, includes mobile apps that send or receive information online (like network-connected games, social networking apps, or apps that deliver behaviorally-targeted ads), internet-enabled gaming platforms, plug-ins, advertising networks, internet-enabled location-based services, voice-over internet protocol services, and connected toys or other Internet of Things devices.  In addition, “[p]ersonal information” includes each of the following:  full name; home or other physical address, including street name and city or town; online contact information like an email address or other identifier that permits someone to contact a person directly — for example, an IM identifier, VoIP identifier, or video chat identifier; screen name or user name where it functions as online contact information; telephone number; Social Security number; a persistent identifier that can be used to recognize a user over time and across different sites, including a cookie number, an IP address, a processor or device serial number, or a unique device identifier; a photo, video, or audio file containing a child’s image or voice; geolocation information sufficient to identify a street name and city or town; or other information about the child or parent that is collected from the child and is combined with one of these identifiers.  Evident from the foregoing list, personal information is defined broadly under COPPA.

The FTC’s updated guidance also notes that if Company A collects personal information through Company B’s child-directed site or service — through an ad network or plug-in, for example — Company B is responsible for complying with COPPA, even if Company B does not collect the personal information.  Moreover, a company’s privacy policy, to be posted on the homepage and on any page where a company collects personal information from children, must describe the company’s practices, and the practices of any other companies collecting personal information on the company’s site or service.

The FTC’s updated guidance shows regulators are concerned with adapting to new technology that collect children’s personal information and providing clear notice to parents. If you need assistance reviewing your business’s compliance with COPPA in light of the updated guidance provided by the FTC, please contact Cindy Motley, 312-849-1972, cindy.motley@sedgwicklaw.com or Nora Wetzel, 415-627-3478, nora.wetzel@sedgwicklaw.com.

New Jersey Senate Passes Bill Limiting Identity-Card Scanning by Retailers for Limited Purposes

On June 22, 2017, the New Jersey Senate passed the Personal Information and Privacy Protection Act (“the Act”), now awaiting Governor Christie’s handling. The Act permits retailers to scan a person’s identity card (“I.D. card”) for specified purposes and limits the type of information that may be collected to the name, address, date of birth, state issuing the I.D. card, and I.D. card number.

Scanning of I.D. cards, like a drivers’ license, by a retailer is permitted only to:

  • Verify authenticity of the I.D. card or identity of the person (1) if the person is paying for goods or services in a method other than cash, or (2) if the person is returning an item or  (3) if the person requests a refund or exchange;
  • Verify the person’s age when providing age-restricted goods or services;
  • Prevent fraud or other criminal activity if the person returns an item or requests a refund or an exchange and the business uses a fraud prevention service;
  • Prevent fraud or other criminal activity related to a credit transaction to open or manage a credit account;
  • Establish or maintain a contractual relationship;
  • Record, retain, or transmit information as required by State or federal law;
  • Transmit information to a consumer reporting agency, financial institution, or debt collector, to be used as permitted by the Fair Credit Reporting Act, Gramm Leach Bliley Act, or the Fair Debt Collections Practices Act; or
  • Record, retain or transmit information by a covered entity governed by HIPAA.

A retailer may not save any of the scanned information when the scanned information is used solely to (1) verify the authenticity of the I.D. card, (2) verify the identity of a person who is making a non-cash payment, is returning an item, or is seeking a refund or exchange, or (3) verify a person’s age in an age-restricted transaction.

If a retailer saves the scanned information arising from any of the other permitted purposes, the scanned information must be “securely stored.”  Though the Act does not itself define what “secure” storage is, the N.J. Identity Theft Prevention Act (N.J.S.A. 56:8-161 et seq.) (“N.J. I.D. Theft Law”) gives us some guidance. Excepted from the N.J. I.D. Theft Law’s definition of breach is personal information that is encrypted or rendered unreadable. (N.J.S.A. 56:8-161).  This suggests that at minimum, secure storage might require encrypting or using some other technology to render the scanned information unreadable, or anonymizing it to be disassociated with any person.

The Act also requires retailers to “promptly” report any breach of the security of the scanned information to the N.J. State Police and any “affected persons” in accordance with the N.J. I.D. Theft Law, which already includes a reporting obligation to the State Police any time a business must notify a New Jersey resident of a breach of its personal information. While the new Act does not define “prompt” reporting, timing for reporting breaches of scanned information under the new Act are probably governed by the same time frames as under the N.J. I.D. Theft Law — the most expedient time possible without unreasonable delay. (N.J.S.A. 56:8-163).

Further, the new Act expands the scope information subject to breach reporting obligations. The existing N.J. I.D. Theft Law defines Personal Information which triggers reporting obligations, if breached, as “an individual’s first name or first initial and last name linked with any one or more of the following data elements: (1) Social Security number; (2) driver’s license number or State identification card number; or (3) account number or credit or debit card number, in combination with any required security code, access code, or password that would permit access to an individual’s financial account.” (N.J.S.A. 56:8-161). The new Act maintains some of the same elements of personal information including name, state issuing the I.D. card, and I.D. card number, however, two new data elements have been added — address and date of birth — provided the source of this data is scanning an I.D. card.

Finally, the Act prohibits the sale or dissemination of information obtained by a retailer from scanning I.D. cards to any third party for any purpose, including marketing, advertising or promotional activities, but with one exception — the Act does not bar an automated return fraud system from issuing a reward coupon to a loyal customer.

We also note the penalties provided by the Act are $2,500 for the first violation and $5,000 for any subsequent action and the Act permits a private right of action.

While the governor’s action with regard to the Act is uncertain, the passing of the Act suggests regulators are trending towards broadening the scope of information subject to breach reporting obligations and expanding the scope of information to which security-related regulations will be imposed.  Retailers should (1) check their incident response programs to evaluate them for expansion of breach reporting obligations, particularly in light of the potentially expanded scope of personal information imposed by New Jersey and (2) evaluate the security used (including encryption, redaction, anonymization, and other physical, technical and administrative safeguards) to protect their customer’s information, if retailers collect or plan to collect their customer’s personal information.

If you have questions about your incident response plan or how to evaluate your business’s security programs and procedures, please contact Cindy Motley, 312-849-1972, cinthia.motley@sedgwicklaw.com or Nora Wetzel, 415-627-3478, nora.wetzel@sedgwicklaw.

Two New Developments in Website Accessibility Cases: Nation’s First Website Accessibility Trial Verdict Is Far From a Winn for Retailers, and Hobby Lobby Is Dealt a Blow in California Decision

As numerous retailers know firsthand, website accessibility has become a hotbed for litigation in recent years. Despite plaintiffs filing scores of website accessibility claims against retailers each year, very few of these cases make it past pleadings, and there has been little to no guidance from the courts. This changed on June 13, 2017, in Juan Carlos Gil v. Winn-Dixie Stores, Inc., Case No.: 16-23020-CIV-SCOLA (S.D. Fl.) (available here), when U.S. District Court Judge Robert N. Scola, Jr. issued the very first post-trial web accessibility verdict, finding that grocer Winn-Dixie violated Title III of the Americans with Disabilities Act (ADA) by having an inaccessible website to visually impaired consumers. Judge Scola ordered injunctive relief, providing the parties with a draft three-year injunction, and also awarded Gil his attorneys’ fees and costs.

Although this decision carries no precedential authority over other federal courts or judges, including those in the Southern District of Florida, the decision remains significant for businesses trying to defend themselves against web accessibility claims.

Background

Like most website accessibility claims, the crux of the Gil action is that the plaintiff, a visually impaired consumer, was allegedly unable to use the services on Winn-Dixie’s website (in this case, downloading coupons, refilling prescriptions, and finding store locations) with the assistance of his screen reader software. Based on his experiences, Gil claimed that Winn-Dixie’s website violated Title III of the ADA, because it was inaccessible to the visually impaired. The complaint was filed on July 12, 2016.

Although the Winn-Dixie suit was one of Gil’s first times bringing website accessibility claims, it has been far from his last. Since April 2016, he has filed similar suits against more than 60 other retailers, all in the Southern District of Florida. Scott Dinin, his counsel in each of these actions, is a leading player in the web access arena.

On October 24, 2017, Winn-Dixie filed a motion for judgment on the pleadings, requesting that the court dismiss the case on the grounds that a website is not a place of public accommodation pursuant to Title III of the ADA. Winn-Dixie’s motion prompted the United States Department of Justice (DOJ) to file a Statement of Interest, which noted that Winn-Dixie’s argument could not “be squared with the plain language of the statute, the regulations, or with federal case law addressing this issue.” The DOJ continued:

Because the United States respectfully submits this Statement of Interest to clarify public accommodations’ longstanding obligation to ensure that individuals with disabilities are not excluded, denied services, or treated differently than other individuals because of the absence of auxiliary aids and services, such as accessible electronic technology. This obligation means that websites of places of public accommodation, such as grocery stores, must be accessible to people who are blind, unless the public accommodation can demonstrate that doing so would result in a fundamental alteration or undue burden.

On March 15, 2017, Judge Scola rejected Winn-Dixie’s Motion, explaining that Gil had alleged sufficient facts that, if proven at trial, would demonstrate a “nexus” between Winn-Dixie’s physical store locations and its website that would place the website within the purview of Title III.

The case went to trial on June 5, 2017. The two-day, non-jury trial included testimony by Gil, Gil’s website accessibility expert, and a corporate representative from Winn-Dixie who had knowledge about its website applications.

The Court’s Order: Websites That Operate as a “Gateway” to Physical Store Locations Are Places of Public Accommodation Covered by the ADA

Judge Scola issued an order in favor of Gil on June 12, 2017. Judge Scola held that Winn-Dixie violated Title III of the ADA by failing to provide an accessible public website and, thus, denying individuals with disabilities with “full and equal enjoyment” of its website.

The ruling expressly avoids deciding whether Winn-Dixie’s website, itself, is a place of public accommodation. Instead, the court reasoned that because Winn-Dixie’s website “is heavily integrated with Winn-Dixie’s physical store locations,” the website is considered a place of public accommodation under Title III as it “operates as a gateway to the physical store location.” The court noted that a customer’s ability to download coupons, locate stores, and refill prescriptions on the website sufficiently demonstrated a nexus between the website and physical store locations.

In finding that Winn-Dixie’s website is inaccessible to visually impaired users, the court adopted the Web Content Accessibility Guidelines (WCAG) 2.0 as the accessibility standard that Winn-Dixie must follow to make its website ADA compliant. Even though the guidelines have not been formally adopted by the DOJ, Judge Scola’s ruling confirms that WCAG 2.0 is the leading industry standard for accessibility. (We have previously recommended in “Online Retailers Increasingly at Risk of Website Accessibility Lawsuits,” that online retailers endeavor to meet WCAG 2.0 standards.)

The court expressly rejected Winn-Dixie’s argument that the cost of remediating the website, which Winn-Dixie estimated to be $250,000.00, was an undue burden. In response, the court stated that whatever the cost of remediation may be, it “pales in comparison to the $2 million Winn-Dixie spent in 2015 to open the website and the $7 million it spent in 2016 to remake the website for the Plenti [customer rewards] program.”

Notably, and of significant import to retailers facing such claims,  the court did not limit the reach of its order to only those portions of Winn-Dixie’s website that it operates internally. The court specifically held Winn-Dixie responsible for the entire website’s lack of accessibility, notwithstanding the fact that portions of the website are operated by third party vendors such as Google and American Express. The court explained, “[m]any, if not most, of the third party vendors may already be accessible to the disabled and, if not, Winn-Dixie has a legal obligation to require them to be accessible if they choose to operate within the Winn-Dixie website.”

Lastly, the court provided the parties with a draft injunction, ordering Winn-Dixie to do the following, among other things:

  • Adopt and implement a web accessibility policy that ensures that its website conforms with WCAG 2.0 criteria;
  • Require any third party vendors who participate on its website to be fully accessible to the disabled by also conforming with WCAG 2.0 criteria;
  • Display a publicly available Statement of Accessibility on the website;
  • Provide mandatory training, once a year, to all employees who write or develop programs or codes for the website on how to conform all web content and services with WCAG 2.0 criteria; and
  • Conduct web accessibility monitoring of its website once every three months to identify non-compliance with WCAG 2.0 criteria.

Gorecki v. Hobby Lobby Serves Further Blow to Online Retailers

On June 15, 2017, just a week after the Gil decision was issued, Judge John F. Walter of the Central District of California denied a motion to dismiss website accessibility claims in Gorecki v. Hobby Lobby Stores, Inc. (Case No.: 2:17-cv-01131-JFW-SK). Hobby Lobby argued in its motion that because the U.S. Department of Justice had not promulgated final website accessibility regulations under Title III setting forth specific accessibility standards, it would violate due process to grant injunctive relief, since Hobby Lobby did not have sufficient notice of the need to make its website accessible. Hobby Lobby also argued the action should be dismissed under the primary jurisdiction doctrine which, if applied, would hold that the court should not rule on website accessibility issues until DOJ promulgates and adopts regulations. In the past, these arguments have failed in the context of website accessibility, but their potential viability was recently revisited after Judge James S. Otero of the Central District of California dismissed a website accessibility action on these same grounds in Robles v. Dominos Pizza LLC (Case No.: 2:16-cv-06599-SJO-FFM).

The Court in Gorecki rejected each of Hobby Lobby’s arguments. With regards to Hobby Lobby’s claim that it lacked sufficient notice, the court emphasized that DOJ has articulated its position that Title III requires website accessibility for over 20 years — in speeches, congressional hearings, amicus briefs and Statements of Interest, rulemaking efforts, and enforcement actions and related settlement agreements — and that regardless, Title III has always required “full and equal enjoyment” and the provision of “auxiliary aids and services for ‘effective communication.’” The court also rejected Hobby Lobby’s argument that the primary jurisdiction doctrine should apply, stating that the case could be handled like other Title III matters, and that invoking the doctrine could needlessly delay potentially meritorious claims.

Conclusion

Although the Gil and Gorecki decisions are not binding, both decisions highlight the risks of litigating website accessibility claims, particularly in instances where there is a nexus between the business’ website and its physical store location.

 

If you are concerned that your business needs help combatting cybersecurity threats or responding to a security incident, the Sedgwick Cybersecurity team can assist you. Contact us at SedgwickResponder@sedgwicklaw.com.

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