[BreachExchange] Insurance for Cybersecurity Incidents and Privacy Breaches

[Audrey McNeil]

http://www.exchangemagazine.com/2018/week7/Thursday/18021511.htm

Insider Risk

Studies consistently indicate that a significant portion of privacy
breaches and other cybersecurity incidents are caused or facilitated by a
current or former insider (e.g. an employee or contract worker) of the
affected organization or its business partners. An organization’s insiders
present significant risk because they have authorized access to the
organization’s information technology systems, special knowledge of the
organization’s valuable data and security practices and a greater window of
opportunity for misconduct. Insiders can cause or facilitate a
cybersecurity incident or privacy breach inadvertently – due to
carelessness or manipulation by other persons – or deliberately for various
motives. Regardless of whether an insider’s acts are inadvertent or
deliberate, the potential results can be the same – significant losses to
the organization and civil lawsuits (including class actions) and
liabilities to individuals and organizations harmed by the incident. An
insider risk management program can help reduce insider risk. For more
information, see BLG bulletin Cyber Risk Management – Insider Risk .
Vicarious Liability for Employee Misconduct

An employer can be vicariously liable for a cybersecurity incident or
privacy breach caused by an employee’s negligent or inadvertent act while
performing assigned work or caused intentionally by a rogue employee, even
if the employer is not at fault and could not have prevented the
misconduct. For example, in the December 2017 decision in Various Claimants
v. WM Morrisons Supermarket PLC , the English High Court held the defendant
Morrisons supermarket chain vicariously liable for a disgruntled rogue
employee’s deliberate privacy breach that was intended to cause harm to
Morrisons. The court held that Morrisons had not breached any legal
obligation and could not have prevented the privacy breach. Nevertheless,
the court imposed vicarious liability on Morrisons because there was a
sufficient connection between the rogue employee’s assigned work and his
wrongful conduct to make it fair for Morrisons to be liable to the
individuals affected by the privacy breach. For more information, see BLG
bulletin Insider Risk Management and Rogue Employees .

Insurance for Cyber Incidents and Privacy Breaches

Insurance can be an effective way to help manage the risk of privacy
breaches and other cybersecurity incidents caused by insiders. Traditional
insurance policies (e.g. commercial liability and commercial crime
policies) often do not cover privacy breaches or cybersecurity incidents,
either because of narrow policy language or express exclusions. However,
most insurance companies offer insurance policies specifically designed to
protect an insured against losses and liabilities arising from privacy
breaches and cybersecurity incidents. The protection afforded by an
insurance policy depends on the precise language of the policy (e.g.
definitions, coverage descriptions, restrictions and exclusions)
interpreted in accordance with legal principles established by Canadian
courts. In 2017, two Canadian courts considered whether an insurance policy
provided coverage for a cybersecurity incident or privacy breach.

Business Email Compromise Scam

In The Brick Warehouse LP v. Chubb Insurance Company of Canada , the
Alberta Court of Queen’s Bench held that a traditional crime coverage
policy did not protect the insured against losses resulting from a business
email compromise scam that deceived the insured’s employee into instructing
the insured’s bank to transfer funds to a bank account controlled by the
cyber-criminal. The insurance policy covered losses resulting from “funds
transfer fraud”, which the policy defined as “fraudulent ... instructions
issued to a financial institution directing such institution to transfer,
pay or deliver money or securities from any account maintained by an
insured at such institution without an insured’s knowledge or consent”. The
court acknowledged that the insured expected the insurance policy to
provide protection against loss resulting from criminal action, but
reasoned that the policy only covered losses that fell within the
restricted coverage set out in the policy. The court held that the
circumstances did not constitute “funds transfer fraud”, as defined in the
policy, because an employee of the insured knowingly issued the funds
transfer instructions to the insured’s bank.

Privacy Breach by Employee

In Oliveira v. Aviva Canada Inc. , the Ontario Superior Court of Justice
considered whether a “Professional and General Liability and Comprehensive
Dishonesty, Disappearance and Destruction Insurance Policy” purchased by a
Canadian hospital required the insurer to defend a hospital employee
against a privacy breach lawsuit by a former patient. The patient alleged
that the employee, who was not involved in providing care to the patient,
breached the patient’s privacy by repeatedly accessing the patient’s
medical records without any legitimate reason. The insurance policy
provided coverage to the hospital and its employees for third party claims
for “personal injury”, which the insurance policy defined broadly as
including invasion or violation of privacy, but only for liability “arising
from the operations of” the hospital and only for employees “while acting
under the direction of” the hospital. The insurer refused to defend the
employee against the privacy breach lawsuit on the basis that the alleged
privacy breach did not arise from the “operations” of the hospital and the
employee was not “acting under the direction of the hospital” when the
employee committed the alleged privacy breach. The insurer argued that the
employee abused her position and engaged in unauthorized activities that
were unrelated to her employment by the hospital and contrary to her
employment obligations. The insurer further argued that the hospital’s
“operations” were providing healthcare services to patients, and therefore
did not include the employee’s conduct because the employee was not
providing medical care to the patient.

The court rejected the insurer’s arguments because they would have excluded
a significant portion of the privacy breach coverage that the insurance
policy purported to provide. The court applied established legal principles
for the interpretation of insurance policies, including: “the duty to
defend is broader than the duty to indemnify”, “the mere possibility that a
claim falls within the policy will suffice to trigger a duty to defend”,
“coverage provisions should be construed broadly; exclusion causes should
be interpreted narrowly” and “courts should avoid interpretations of
policies that substantially nullify coverage”. The court reasoned that
insurance coverage for “invasion or violation of privacy” included the
common law tort of “intrusion upon seclusion”, which necessarily includes
intentional, highly offensive invasions of privacy by employees outside a
patient’s circle of care. The court followed prior cases that broadly
interpreted “acting under the direction of” a named insured and
“operations” of a named insured. The court concluded that the insurer was
obligated to defend the employee against the privacy breach lawsuit.

Comment

The privacy and cyber insurance market is evolving rapidly. At this time,
there is no standard form language used in privacy breach and cyber
insurance policies, and there can be significant differences in the
coverage provided by similar kinds of policies. For those reasons, an
organization should obtain advice from a lawyer and an experienced
insurance consultant when applying for privacy and cyber insurance, when
assessing the costs and benefits of various kinds of privacy and cyber
insurance, and when determining whether an existing insurance policy
provides coverage for a privacy breach or cybersecurity incident.
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