This author has previously discussed the inevitability of security hacks and attempts to require companies holding third-party data to pay some type of damages to the alleged victims of a hack. Even though damage from such hacks is often hard to prove, those who claim to have been victimized and their lawyers, who often operate on contingencies, will continue to file lawsuits that often result in the imposition of at least defense costs and, at times, of some indemnity payments. Hacked companies also suffer actual damage from loss of customers when the hacks are reported as required by multiple laws. Companies should thus take reasonable precautions against data breaches. But if a company takes such reasonable precautions, it should be able to buy insurance for the inevitable hack that actually provides coverage for resulting defense expenses, indemnity payments, and loss of business income. Continue Reading Watch Out for the Statutory/Governmental Exclusion and Any Restriction on Paying Ransom Demands for Malware Attacks
Why is this technology so exciting?
The National Highway Traffic Safety Administration (NHTSA) has noted that 94% of auto accidents are attributed to some form of human error on the part of drivers. In 2014, there were an estimated 1.25 million deaths worldwide due to vehicle crashes. There is a potential for autonomous vehicle technology to dramatically re-shape these statistics. The Insurance Institute for Highway Safety anticipates that there will be 3.5 million self-driving vehicles on US roads by 2025 and 4.5 million by 2030. Continue Reading Self-Driving Cars Coming to a Store near You!
Your company receives a demand letter and you realize that the claim stems from a vendor’s product or service. What do you do next? The first step for most companies will be to review the operative contract for any indemnification provisions. Next on the list will be to review any certificates of insurance issued by the vendor. All too often, however, companies at this phase learn that they were never actually added as additional insureds to their vendors’ policies or that their vendor’s coverage is inadequate. Continue Reading Issues With Vendor Certificates of Insurance
Companies enter an array of technology transactions with third-parties that allow vendors access to the Company’s source code, customer data, employee information, cybersecurity measures, and other critical data and infrastructure. These relationships inevitably increase the potential of a cyber attack impacting the Company through an attack against the vendor. Continue Reading How Does Your Company Transfer Risk in Its Technology Transactions?
A merger, acquisition, or other corporate transaction can raise a number of issues for the insurance coverage of the parties involved. The transaction may affect the parties’ current coverage and their rights under their historic policies. The parties will want to specify clearly the intended interplay of other aspects of the deal, such as indemnities, with available insurance. And the parties may wish to consider purchasing various types of insurance for aspects of the deal itself. Continue Reading Insurance and Mergers & Acquisitions
As previously reported here, (Nov. 8, 2017), companies falling victim to electronic impersonation (“spoofing”) schemes have frequently turned to “computer fraud” coverage found in typical crime policies. In this type of fraud, someone impersonates a vendor, contract partner, or company executive via email or other electronic means, and directs the transfer of funds to an account connected to the fraudster. Courts adjudicating insurance coverage actions arising out of these schemes have reached quite disparate results, with some decisions affirming coverage and some finding no coverage because the loss does not “result directly” from the “use of a computer” or because certain exclusions apply. Since our last update, several more decisions have been issued with potential implications for policyholders pursuing coverage or renewing crime policies. These recent decisions have generally affirmed that spoofing schemes fall within standard computer fraud coverage, though courts have also been willing to apply targeted exclusions for data entry or fraudulent transfers in policies that have them. Purchasers should therefore pay particular attention to any such exclusions in their policies.
A district court in New Jersey recently held that an insured stated a claim for relief under the policy’s “computer fraud” coverage after someone had impersonated a Thailand-based vendor through substitution of email domain names and had directed payment to an account operated by the imposter. Childrens Place, Inc. v. Great Am. Ins. Co., No. 18-11963 (ES) (JAD) (D.N.J. Apr. 25, 2019). The fraudsters also accessed and altered an electronic “vendor setup form” so that it provided false payment instructions. The insurer argued that the imposters did not have “direct access” to the computer system, as required under the insuring agreement, and that the fraud did not “directly cause” the transfer of money from the insured’s account to an account outside its control because of the independent acts undertaken by employees. But the court was persuaded that the complaint alleged sufficient facts to constitute both direct access by the impersonators and a direct causal link to the transfer.
The Second Circuit similarly affirmed coverage under a computer fraud provision, which applied to the “fraudulent . . . entry of Data into . . . or change to Data elements or program logic of . . . a Computer System.” Medidata Solutions Inc. v. Fed. Ins. Co., 729 Fed. Appx. 117 (2018). The insured argued that someone had fraudulently entered data into Medidata’s computer system by using code to cause an email address to appear as that of the company’s president, along with the company president’s photo. The court held that the “unambiguous language of the policy covers the losses” because the imposters “crafted a computer-based attack” that created messages that appeared to be from high-ranking company officials. The attack met the policy criteria because the email’s appearance was “altered by the spoofing code to misleadingly indicate the sender.” The court also applied New York’s proximate cause standard and held that the insured had suffered a direct loss, noting that any independent acts taken by employees to effectuate the transfer were not “sufficient to sever the causal relationship between the spoofing attack and the losses incurred.”
Similarly, the Sixth Circuit found coverage for a manufacturer who fell victim to an imposter posing as a vendor. Am. Tooling Ctr., Inc. v. Travelers Cas. & Surety Co., 895 F.3d 455 (6th Cir. 2018). The fraudster directed payment to be made to a different bank account through a series of emails to the company’s vice president. The court agreed with the insured that the payments constituted “direct loss” because the policyholder “immediately lost its money” when it transferred the funds, and “there was no intervening event.” Moreover, the loss satisfied the “use of a computer” component of the “computer fraud” provision because the imposters “sent [the insured] fraudulent emails using a computer and these emails fraudulently caused [the insured] to transfer the money.”
While the reasoning in these three decisions should prove helpful for policyholders seeking coverage for spoofing schemes, two other recent decisions have denied coverage based on exclusions for fraudulent transfers or data entry. A Washington district court upheld an insurer’s denial of “computer fraud” coverage after an accounts payable clerk altered the instructions for payment to a general contractor in response to a fraudulent external email. Tidewater Holdings, Inc. v. Westchester Fire Ins. Co., No. C18-6006 BHS (W.D. Wash. May 31, 2019). Although the court concluded that the scheme fell within the coverage grant, the court also found that an exclusion for “loss resulting from any Fraudulent Transfer Request” applied to the claim. The policy defined “Fraudulent Transfer Request” as “the intentional misleading of an Employee, through a misrepresentation of a material fact which is relied upon by an Employee, sent via an email, text, instant message, social media related communication, or any other electronic . . . instruction.” The court rejected the insured’s argument that application of the exclusion was ambiguous as applied to different coverage sections. Furthermore, unlike the exclusions discussed in the blog update of January 8 of this year, the exclusion at issue here was not limited to “physical” loss.
Addressing another case filed in Washington district court, the Ninth Circuit upheld the denial of coverage for a fraudulent scheme that caused company employees to alter wiring instructions and to send four payments to a fraudster’s account. Aqua Star (USA) Corp. v. Travelers Cas. & Surety Co. of America, 719 Fed. Appx. 701 (9th Cir. 2018). Although the court assumed without deciding that the policy generally covered that type of “computer fraud,” the court focused on an exclusion for “loss or damages resulting directly or indirectly from the input of Electronic Data by a natural person having the authority to enter the Insured’s Computer System.” The court noted that the employees plainly had authority to access the system and had entered the data causing the loss.
Overall, these recent cases provide strong support for placement of spoofing and similar schemes within the general parameters of computer fraud coverage. At the same time, coverage for this type of loss under any particular crime policy will depend upon the existence and precise wording of any exclusions for fraudulent transfers or data entry. As ever, purchasers of crime policies should scrutinize the potential scope of any such exclusion.
It is becoming increasingly important for tech companies considering a merger, acquisition, or other corporate transaction to understand the use of Representation & Warranty Insurance (“R&W Insurance”). R&W Insurance is a type of insurance policy purchased in connection with corporate transactions; it covers the indemnification for certain breaches of the representations and warranties in the transaction agreements. It is designed to provide additional flexibility in addressing these obligations by, for example, reducing or eliminating the need for an escrow by the Seller. Continue Reading Representation and Warranty Insurance Coverage for Corporate Transactions
I have several times discussed the need for cyber insurance that will actually cover reasonable claims; a need that still seems to exist. The case of Hub Parking Technology USA v. Illinois National Insurance Company (https://www.law360.com/articles/1170778/parking-tech-co-says-aig-must-defend-it-in-privacy-row) that was brought in Pennsylvania District Court in June of this year illustrates this problem. Hub bought security and privacy insurance that was intended to cover security breaches and disclosure of personal data in violation of privacy rules. Hub was then sued in underlying litigation for printing parking receipts at the Cleveland Airport that showed eight digits of credit card numbers instead of the standard last four digits permitted under various state statutes and case law. When Hub submitted the claim to its cyber insurer, the cyber insurer rejected the claim based on its conclusion that there had been no loss of privacy or security information, as well as on several exclusions, such as those for contractually assumed liability and intentional acts. Although the insurer may have had a legitimate complaint that there really was no damage from this alleged violation (and the plaintiffs had not alleged that anyone suffered actual damage or identity theft arising from the parking receipts at issue; they rather relied on an FTC study showing that similar incidents have caused actual damage, so that the potential for damage existed), that should not have prevented the insurer from providing at least a defense. Continue Reading Will Your Cyber Insurance Actually Pay Claims?
A policyholder is usually thrilled when its insurer agrees to provide a defense of a claim. However, all too often, an insurer’s position on how that defense is to be provided surprises the policyholder. Sometimes, the policyholder learns for the first time that it does not have the right to select defense counsel. Other times, it learns that it is allowed to select defense counsel but must do so from a list of pre-approved panel counsel. In yet other circumstances, the policyholder is permitted to select its own defense counsel but may be limited to the rates approved by the insurance company (which are sometimes far below what the policyholder’s preferred counsel is charging). Continue Reading Who Gets to Select Defense Counsel?
Insurance policies are some of a company’s most valuable assets during times of increased risk and uncertainty. Yet, corporate policyholders often leave money on the table by failing to thoughtfully construct their insurance program to respond to the risks inherent in their business and neglecting to properly manage potential insurance claims. In recent years, data privacy and security has become a growing source of corporate risk for businesses and presenting new, evolving challenges for risk managers and insurers. Continue Reading CCPA Insurance Coverage Issues: Avoid Gaps in Your Program