A New York trial court announced a decision on February 21, 2014, that may be a harbinger of wide-reaching limitations on insurance coverage for data breaches under commercial general liability (CGL) policies. The court’s ruling, while subject to appeal, demonstrates the hazards of relying on traditional CGL policies for coverage for data breaches.
The lawsuit, Zurich American Insurance Co. v. Sony Corporation of America,1 arose out of the April 2011 data breach of Sony’s PlayStation Network, in which hackers stole personally-identifiably information belonging to 77 million users. Sony’s losses are estimated to be as high as $2 billion. Sony sought both defense and indemnification from Zurich, one of its CGL insurers, for the more than 50 class action lawsuits brought against it by its customers. Zurich denied coverage and brought a declaratory judgment action, arguing the data breach claims are not covered claims.
The trial court granted summary judgment for the insurers, holding that theft of information by third parties hacking a computer system does not qualify as “oral or written publication in any manner of material that violates a person’s right of privacy” for purposes of Coverage B (Personal and Advertising Injury coverage) under the typical CGL policy. The court agreed with the insurers that “oral or written publication” requires “an act by or some kind of act or conduct by the policyholder in order for coverage to be present.” Because the losses claimed by Sony’s customers did not result from conduct by the policyholder (Sony), but rather by third party hackers, the court found no coverage.
The Sony decision is one of the first to address data breach coverage issues. The ruling has come as a surprise to many who, until now, had assumed that CGL policies would offer some coverage for data breaches.2 But the Sony decision (as well as more recent changes to the standard CGL policy) highlights the need for companies to consider specialized “cyber” insurance coverage rather than relying on traditional insurance products to manage and mitigate their data breach risks.
Data breach is becoming an ever-increasing risk to companies handling any form of personally-identifiable information. According to Robert S. Mueller, III, a Director at the Federal Bureau of Investigation, “[T]here are only two types of companies: those that have been hacked and those that will be. And even they are converging into one category: companies that have been hacked and will be hacked again.” And it is a costly risk. For example, the 2013 Cost of Data Breach Study reports that U.S. organizations spend on average $565,020 on post-breach notification alone. Companies also face lawsuits from customers seeking damages for invasion of privacy, as well as other consequences, such as governmental and regulatory investigations, fines, penalties, and damage to brand and reputation. The risk and prevalence of data breaches—and potential risk-shifting and mitigation mechanisms such as insurance—warrant close attention.
Dorsey & Whitney LLP is offering a Privacy and Technology Commerce Breakfast Briefing in Minneapolis, Minnesota on March 12, 2014. Among other things, the program will discuss protecting a company’s legal interests in the cybersecurity space, cybersecurity risk management, and incident response considerations. For the agenda and registration information, click here.
1 651982/2011 (N.Y. Sup. Ct., N.Y. Cnty. Feb. 21, 2014)
2 Indeed, in April 2013, the Insurance Services Office, Inc. (ISO), an organization that, among other things, develops standard policy forms, including CGL policy forms, issued endorsements that attempt to limit CGL coverage for data breach-type claims. These endorsements have been approved in a majority of states, and are expected to begin showing up in CGL policies this year. Nonetheless, the revisions at least implicitly acknowledge that there may be coverage for such claims under the previous CGL policy versions.