Tag: Cybersecurity

White House Will Unveil Cyber Executive Actions At A Summit This Week

Squire Patton Boggs (US) LLP law firm

Legislative Activity

This Week’s Hearings:

  • Wednesday, February 11: The Senate Commerce, Science and Transportation Committee will hold a hearing titled “The Connected World: Examining the Internet of Things.”

  • Thursday, February 12: The House Homeland Security Subcommittee on Cybersecurity, Infrastructure Protection and Security Technologies will host a hearing titled “Emerging Threats and Technologies to Protect the Homeland.”

  • Thursday, February 12: The House Education and the Workforce Subcommittee on Early Childhood, Elementary and Secondary Education will hold a hearing titled “How Emerging Technology Affects Student Privacy.”

  • Thursday, February 12: The House Science, Space and Technology Subcommittee on Research and Technology and Subcommittee on Oversight will hold a joint hearing titled “Can Americans Trust the Privacy and Security of their Information on HealthCare.gov?”

Regulatory Activity

White House Will Unveil Cyber Executive Actions at a Summit this Week

On Friday, February 13, the White House will hold its Summit on Cybersecurity and Consumer Protection at Stanford University. President Obama will be speaking at the Summit and plans to issue a new Executive Order focusing on ways to increase cybersecurity information sharing between the private sector and the U.S. Department of Homeland Security (DHS).

The executive action will likely expand the current work that DHS’s National Cybersecurity and Communications Integration Center (NCCIC) does to include a new concept of Information Sharing and Analysis Organizations (ISAO), which was briefly previewed by the President last month. As currently discussed, ISAOs would be designed to share information across multiple industry sectors to supplement the work of the current network of Information Sharing and Analysis Centers (ISACs).  According to press reports from government officials, the executive action is expected to create a network of ISAOs that would be managed by DHS in the beginning and eventually would become a privately-run entity. Several government officials and industry representatives have said that the President’s action will represent a step forward to improving the current information sharing platforms but they also recognize that information sharing legislation is still needed.

In addition to the Summit on Friday, the National Institute of Standards and Technology (NIST) will hold a half-day workshop on Thursday focused on the technical aspects of consumer security. The Office of Science and Technology Policy will also host a meeting leading up to the Summit on Thursday focused on cybersecurity workforce development.

White House Blog Highlights Future Action on Cyber Risk Management

Last week, White House Cybersecurity Coordinator Michael Daniel wrote a blog post on how companies can strengthen their cyber risk management and the role of the federal government in incentivizing stronger cybersecurity practices in the private sector. He notes in the post that the White House believes “the market offers the most effective incentives for the private sector to adopt strong cybersecurity practices,” but also stated that the Obama Administration will continue to work in a variety of areas to support these efforts by streamlining regulations, investing in cybersecurity research and development, and updating federal procurement policies and practice. Daniel wrote that the White House is working with federal agencies and critical infrastructure to identify regulations that are excessively burdensome, conflicting, or ineffective and will release a report on the findings no later than February 2016. Additionally, the White House plans to release a report this spring on the key priorities for cybersecurity research and development over the next three to five years.

The blog post also noted that the White House will not pursue public recognition as a means of incentivizing the private sector to adopt cybersecurity best practices or the NIST Cybersecurity Framework given that this could take away from the voluntary nature of the Framework. While Daniel did not mention liability protection as an incentive for greater information sharing in the blog post, it is still a possible incentive that the White House would support given that it was also included in the information sharing legislative proposal that the President released last month.

ARTICLE BY

Amy F. Davenport
Norma M. Krayem
OF
Squire Patton Boggs (US) LLP

Responding to the Anthem Cyber Attack

Proskauer Rose LLP, Law Firm

Anthem Inc. (Anthem), the nation’s second-largest health insurer, revealed late on Wednesday, February 4 that it was the victim of a significant cyber attack. According to Anthem, the attack exposed personal information of approximately 80 million individuals, including those insured by related Anthem companies.Anthem has reported that the exposed information includes member names, member health ID and Social Security numbers, dates of birth, addresses, telephone numbers, email addresses and employment information. The investigation of the massive data breach is ongoing, and media outlets have reported that class action suits have already been filed against Anthem in California and Alabama, claiming that lax Anthem security measures contributed to this incident.

Employers, multiemployer health plans, and others responsible for employee health benefit programs should take note that theHealth Insurance Portability and Accountability Act (HIPAA) and state data breach notification laws may hold them responsible for ensuring that certain notifications are made related to the incident. The nature of these obligations will depend on whether the benefits offered through Anthem are provided under an insurance policy, and so are considered to be “fully insured,” or whether the Anthem benefits are provided under a “self-insured” arrangement, where Anthem does not insure the benefits, but instead administers the benefits. The most significant legal obligations on the part of employers, multiemployer health plans, and others responsible for employee health benefit programs will apply to Anthem benefits that are self-insured.

Where notifications must be made, the notifications may be due to former and present employees and their dependents, government agencies, and the media.  Where HIPAA applies, the notifications will need to be made “without unreasonable delay” and in any event no later than 60 days after the employer or other responsible party becomes aware that the breach has affected its own health plan participants. Where state data breach laws apply, notifications generally must be made in the most expedient time possible and without unreasonable delay, subject to certain permitted delays. Some state laws impose outside timeframes as short as 30 days. Under the state laws, reporting obligations on the part of employers, multiemployer health plans, and others responsible for employee health benefit programs will generally turn on whether they, or Anthem, “own” the breached data. Since the state laws apply to breaches of data of their residents, regardless of the states in which the compromised entities and data owners are located, and since former employees and dependents could reside anywhere, a comprehensive state law analysis is required to determine the legal requirements arising from this data breach. Fortunately, depending on the circumstances, some (but not all) state data breach notification laws defer to HIPAA breach notification procedures, and do not require additional action where HIPAA applies and is followed.

As potentially affected parties wait for confirmation from Anthem as to whether any of their employees, former employees or their covered dependents has had their data compromised, we recommend that affected parties work with their legal counsel to determine what their responsibilities, if any, might be to respond to this incident. Among other things, for self-insured arrangements, HIPAA business associate agreements and other contracts with Anthem should be reviewed to assess how data breaches are addressed, whether data ownership has been addressed by contract, and whether indemnification provisions may apply. Consideration should also be given to promptly reaching out to Anthem to clarify the extent to which Anthem will be addressing notification responsibilities. Once parties are in a position to make required notifications, we also recommend that companies consult with legal counsel to review the notifications and the distribution plans for those notifications to assure that applicable legal requirements have been satisfied.

ARTICLE BY

Roger A. Cohen
Paul M Hamburger
Kristen J. Mathews
Ellen H Moskowitz
Richard J Zall
OF
Proskauer Rose LLP

President Obama Seeks to Strengthen and Clarify Cybercrime Law Enforcement

Covington_NL

On Tuesday, President Obama introduced a legislative proposal on privacy and data security that seeks to strengthen and clarify law enforcement’s ability to investigate and prosecute cybercrimes.

The first section of the proposed legislation would expand the definition of “racketeering activity” under the Racketeering Influenced and Corrupt Organizations (“RICO”) Act to include felony offenses under the Computer Fraud and Abuse Act (“CFAA”)—the federal anti-hacking statute.  The second section would amend existing law to deter “the development and sale of computer and cell phone spying devices.”  The third section proposes substantial changes intended to modernize the CFAA.  Finally, the proposal’s fourth section is aimed at strengthening the government’s ability to disrupt and shut down botnets—networks of computers often deployed to commit crimes, such as spreading malware.

Although much of the proposal is modeled off a similar proposal advanced by the White House in 2011, there are key differences, including making clear that it is a crime to access a computer in breach of a use restriction, while at the same time limiting the scope of liability for such access to cases that the Administration believes are serious enough to warrant prosecution under the CFAA.

Updating and Expanding the RICO Act to Include CFAA Offenses

The White House proposal would include felony violations of the CFAA in the definition of “racketeering activity” under the RICO Act.  This would provide for increased penalties for cybercrimes and afford prosecutors the ability to more easily charge certain members of organized criminal groups engaged in computer network attacks and related cybercrimes.

Deterring the Development and Sale of Computer and Cell Phone Spying Devices

The White House proposal seeks to deter the development and sale of computer and cell phone spying devices by instituting two changes.  First, the legislative proposal would amend 18 U.S.C. § 1956 to “enabl[e] appropriate charges for defendants who engage in money laundering to conceal profits from the sale of surreptitious interception devices.”  Second, it would amend 18 U.S.C. § 2513 “to allow for the criminal and civil forfeiture proceeds from the sale of surreptitious interception devices and property used to facilitate the crime.”  This would expand the scope of section 2513, which currently provides for the forfeiture of only the surreptitious devices themselves.

Modernizing the CFAA

According to the White House, the goal of the proposal’s third section is to “enhance [the CFAA’s] effectiveness against attackers on computers and computer networks, including those by insiders.”  The proposed legislation contains several key amendments to various CFAA provisions:

First, the proposal would make access in violation of certain use restrictions an illegal act under the CFAA by amending the definition of “exceeds authorized access” to include instances in which a user accesses a computer with authorization to obtain or alter information “for the purpose that the accessor knows is not authorized by the computer owner.”  Language of this sort would address, at least in part, an existing circuit split on the meaning of the language “exceeds authorized access,” as used in the CFAA.  Some commentators, however, have questioned whether the proposed language will resolve the current ambiguity over the CFAA’s reach.  For example, if an employee accessed a computer for a non-work-related purpose, it would be obvious that the employee would be violating the CFAA (as amended by the White House’s proposed language) if there were a written policy that states “company computers can be accessed only for work-related purposes.”  However, if a non-employee accessed the computer, there may not be a clear violation of the CFAA because the non-employee is not bound by—and thus would not be breaching—the employer’s policy.  As a result, the courts may still have disagreements about the scope of the phrase “exceeds authorized access” even with the new language.

The White House’s proposal would also add a new provision to the CFAA by amending 18 U.S.C. § 1030(a)—the subsection of the CFAA that lists the punishable offenses under the statute.  The added provision would provide new threshold requirements for criminal offenses resulting from users exceeding their authorized access.  The proposal would punish a user who “intentionally exceeds authorized access to a protected computer, and thereby obtains information from such computer” if one of three conditions are met: “(i) the value of the information obtained exceeds $5,000; (ii) the offense was committed in furtherance of any felony violation of the laws of the United States or of any State, unless such violation would be based solely on obtaining the information without authorization or in excess of authorization; or (iii) the protected computer is owned or operated by or on behalf of a governmental entity.”  While courts must still interpret the meaning of these conditions, they provide a clearer framework for prosecution of offenses under the statute and, in theory, would constrain the government’s ability to prosecute individuals under the CFAA for minor offenses.

Additionally, the White House proposal would amend the CFAA “to enable the prosecution of the sale of a ‘means of access’ such as a botnet.”  Further, instead of requiring the government to prove “intent to defraud” under this subsection (the intent standard applicable to violations motived by financial gain), the legislation would require prosecutors only to establish “willfulness,” so as to criminalize unlawful trafficking of access to “other types of wrongdoing perpetrated using botnets” and not just password and similar information.

The proposal would also enhance CFAA penalties and enforcement mechanisms by raising penalties for circumventing technological barriers to access a computer (e.g., hacking into or breaking into a computer), and by making such violations felonies  carrying a prison term of up to ten years.  This is a significant change from the current law, which allows for either a misdemeanor or a felony carrying a maximum prison term of only five years.  The proposal would also create civil forfeiture procedures, “clarify that the ‘proceeds’ forfeitable [under the CFAA] are gross proceeds, as opposed to net proceeds,” and in appropriate circumstances, allow for the forfeiture of real property used to facilitate offenses under the statute.  And the proposal would clarify “that both conspiracy and attempt to commit a computer hacking offense are subject to the same penalties as completed, substantive offenses.”

Shutting Down Botnets

Finally, the legislative proposal would add to existing civil remedies by explicitly providing courts with the authority to issue injunctions aimed at disrupting or shutting down botnets.  Under the proposal, the Attorney General would be authorized to seek injunctive relief under 18 U.S.C. § 1345 if the government can show that the criminal conduct alleged would affect 100 or more protected computers during a one-year period.  Criminal conduct under the proposal would include “denying access to or operation of the computers [denial of services attacks], installing unwanted software on the computers [malware], using the computers without authorization, or obtaining information from the computers without authorization.”  The legislation would also protect from liability individuals or entities that comply with courts orders and would allow courts to order the government to reimburse those individuals or entities for costs directly incurred in complying with such orders.

This post was written with contributions from Jim Garland.

ARTICLE BY

Privacy and Data Security Practice Group
OF
Covington & Burling LLP

New Year to Bring Increased Regulatory Focus on Cybersecurity for Financial Institutions

Having weathered the cybersecurity turbulence of 2014, the financial services sector can look forward to increased regulatory attention from federal, state and non-governmental regulators in 2015. First, in the wake of data breaches at major banks and financial institutions, and drawing upon its mid-2014 “Report on Cyber Security in the Banking Sector,”1 the New York Department of Financial Services (the “NYDFS” or the “Department”) has announced a New Cybersecurity Examination Process for the banks under its regulatory jurisdiction (the “Examination Letter”). Additionally, the Chairman of the federal Commodity Futures Trading Commission (“CFTC”) has testified before a Senate committee that the CFTC will increase its attention to cybersecurity during its upcoming examinations of clearinghouses and exchanges. Also, the Conference of State Bank Supervisors (“CSBS”) has issued a resource guide for bank executives on cybersecurity that community bank CEOs, senior executives and board members are being strongly encouraged to use to address cybersecurity threats at their banks.

These latest regulatory developments impacting financial institutions will likely affect the cybersecurity policies of other regulators, including enforcement actions against regulated entities that fail to implement adequate cybersecurity programs. Thus, even if your organization is not a financial institution regulated by the NYDFS, CFTC or a state banking regulator, the key takeaways discussed below will provide insight into the types of questions regulators will pose, and offer practical guidance for developing a compliant privacy and data security program to mitigate cybersecurity risks. The December 2014 ruling that retailer Target had an affirmative duty to protect its customers’ personal and financial information illustrates that these pronouncements provide important guidance not just to regulated entities, but to companies generally.

NYDFS’s Examination Letter

On December 10, 2014, the NYDFS issued the Examination Letter to all New York chartered and licensed banking institutions announcing the Department’s new, targeted cybersecurity preparedness assessment. In an effort to promote greater cybersecurity across the financial services industry, the NYDFS warned that it will expand its routine information technology examinations to include cybersecurity. However, as noted in an article in American Banker2, the Examination Letter provides no indication that the examinations will differentiate among banks by size, meaning a smaller community bank may be subject to the same cybersecurity requirements as multinational banks with significantly more resources.

The new examination procedures are designed to encourage “all financial institutions to view cybersecurity as an integral aspect of their overall risk management strategy, rather than as a subset of information technology.” According to Benjamin M. Lawsky, Superintendent of the NYDFS, new procedures are also intended to promote a “laser-like focus on this issue by both banks and regulators” given that regulatory examination rankings can have a significant impact on the operations of financial institutions, including their ability to enter into new business lines or make acquisitions.

The Examination Letter notes that the NYDFS will be incorporating the following new security-oriented topics into its pre-examination “First Day Letters” to assist in expediting the Department’s review of financial institutions’ cybersecurity preparedness:3

  • Corporate governance, including written information security policies and procedures, and the periodic reevaluation of such policies and procedures in light of changing risks;

  • Cybersecurity incident detection, monitoring and reporting processes;

  • Resources devoted to information security and overall risk management;

  • The risks posed by shared infrastructure;

  • Protections against intrusion, including multifactor or adaptive authentication, and server and database configurations;

  • Information security testing and monitoring, including penetration testing;

  • Training of information security professionals as well as all other personnel;

  • Vetting and management of third-party service providers; and

  • Cybersecurity insurance coverage and other third-party protections.

In addition to the information requested in the First Day Letter, the NYDFS stated that it will schedule IT/cybersecurity examinations following the risk assessments of each financial institution. The new IT/cybersecurity examinations will take a deeper look into the financial institution’s ability to prevent, detect and respond to data breaches and other cyber attacks by requesting:

  • The qualifications of the institution’s Chief Information Security Officer, or the individual otherwise responsible for information security;

  • Copies of the institution’s information security policies and procedures;

  • The institution’s data classification approaches and data access management controls;

  • The institution’s vulnerability management programs, including its consideration of applications, servers, endpoints, mobile, network and other devices;

  • The institution’s patch management program, including how updates, patches and fixes are obtained and disseminated;

  • The institution’s due diligence process regarding information security practices used to vet, select and monitor third-party service providers;

  • Application development standards used by the institution, including the extent to which security and privacy requirements are incorporated into application development processes;

  • The institution’s incident response program, including how incidents are reported, escalated and remediated; and

  • The relationship between information security and the organization’s business continuity program.

The NYDFS’s Examination Letter is essentially a “take-home test” for any New York chartered or licensed banking institution or regulated firm preparing for an NYDFS examination or conducting its own internal audit to strengthen its cybersecurity practices and incident response preparedness. Additionally, although the new examination procedures do not impose cybersecurity requirements on regulated entities per se, the NYDFS is essentially announcing the standards and practices it expects to be adopted in any compliant cybersecurity program. For now, the new cybersecurity examination procedures are limited to banks, but it is likely that the NYDFS will extend these same types of procedures to the other financial services firms it regulates, such as insurance companies and investment companies.

CFTC’s Increased Focus on Cybersecurity

On December 10, 2014, CFTC Chairman Timothy Massad testified before a Senate Agriculture Committee hearing that cybersecurity is “perhaps the single most important new risk to financial stability.” As a result, cybersecurity will become an increasingly important aspect of the CFTC’s oversight for futures and swaps markets.

Chairman Massad testified that the CFTC requires clearinghouses, swap execution facilities, designated contract markets and other market infrastructures to implement system safeguards, which must include four elements: (1) a program of risk analysis and oversight to identify and minimize sources of cyber and operational risks; (2) automated systems that are reliable, secure and scalable; (3) emergency procedures, backup facilities and a business continuity/disaster recovery plan; and (4) regular, objective, independent testing to verify that the system safeguards are sufficient. Each CFTC-regulated entity must also have a risk management program that addresses seven key elements, including information security, systems development, quality assurance and governance. Furthermore, these entities must notify the CFTC promptly of cybersecurity incidents.

Although the CFTC does not conduct independent testing of its cybersecurity requirements, it reviews evidence provided for satisfaction of the requirements. Chairman Massad testified that the CFTC’s upcoming examinations will focus on the following areas:

  • Governance—Are the board of directors and top management devoting sufficient attention to cybersecurity?

  • Resources—Are sufficient resources and capabilities being devoted to monitor and control cyber-related risks across all levels of the organization?

  • Policies and Procedures—Are adequate plans and policies in place to address information security, physical security, system operations and other critical areas? Is the regulated entity actually following its plans and policies, and considering how plans and policies may need to be amended from time to time in light of technological, market or other security developments?

  • Vigilance and Responsiveness to Identified Weaknesses and Problems—If a weakness or deficiency is identified, does the regulated entity take prompt and thorough action to address it? Does it not only fix the immediate problem, but also examine the root causes of the deficiency?4

CSBS Guidance for Financial Services Officers and Directors

On December 17, 2014, the CSBS issued “Cybersecurity 101: A Resource Guide for Bank Executives” (the “CSBS Resource Guide”), which is designed to aid chief executive officers, senior executives and board members in their understanding, oversight and implementation of effective cybersecurity programs. The CSBS Resource Guide is organized according to the five core cybersecurity functions of the Commerce Department’s National Institute of Standards and Technology’s Framework for Improving Critical Infrastructure Cybersecurity: (1) identify internal and external cybersecurity risks; (2) protect organizational systems, assets and data; (3) detect systems intrusions, data breaches and unauthorized access; (4) respond to a potential cybersecurity event; and (5) recover from a cybersecurity event by restoring normal operations and services. For each of these core functions, the CSBS Resource Guide provides questions that chief executive officers should ask, as well as training guidance and a model checklist to follow in the event of a data breach.

Takeaways

In light of these developments, banks and other financial institutions should consider undertaking the following steps and customizing them to their specific circumstances and risks:

1. Conducting Periodic Cybersecurity Risk Assessments

  • Identify potential cybersecurity threats (including physical security threats) to security, confidentiality and integrity of personal and other sensitive information (both customer and internal) and related systems;

  • Evaluate effectiveness of current controls in light of identified risks;

  • Prioritize resources, assets and systems corresponding to the nature and level of threats and vulnerabilities, and revise procedures and controls, as necessary and appropriate, to address and mitigate areas of risk; and

  • Determine whether existing insurance policies will cover the threats identified in the risk assessment, and determine whether separate cyber coverage is needed.

2. Evaluating Potential Third-Party Vendor Risks

  • Review due diligence procedures for selecting vendors and procedures for approval/monitoring of vendor access to networks, customer data or other sensitive information;

  • Obtain copies of vendors’ written information security plans or certifications of compliance with applicable standards; and

  • Determine whether contracts with vendors include appropriate security measures, including incident response notification procedures and cyber insurance coverage.

3. Developing and Periodically Testing a Comprehensive Incident Response Plan

  • Implement a comprehensive, written incident response plan to respond proactively to actual or suspected cybersecurity events; and

  • Conduct periodic “table top” exercises of mock cybersecurity events with IT, legal, compliance, human resources and other business stakeholders.

ARTICLE BY

John C. Cleary
Bruce A. Radke
OF
Vedder Price

1 See http://www.dfs.ny.gov/about/press2014/pr1405061.htm
2 See http://www.americanbanker.com/news/bank-technology/new-york-cybersecurity-exams-will-be-tougher-than-ffiecs-1071603-1.html
3 The NYDFS’s new cybersecurity questions and topics are similar to the comprehensive cybersecurity questionnaire attached to the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations’ (“OCIE”) Risk Alert, issued on April 15, 2014, as part of the OCIE’s cybersecurity examinations of registered investment advisors and broker-dealers. Click here.
4 The NYDFS and the CFTC are certainly not the only banking and financial services regulators that have intensified their focus on cybersecurity. Indeed, during her December 10, 2014 testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Valerie Abend, chair of the Federal Financial Institutions Examination Council (“FFIEC”) Cybersecurity and Critical Infrastructure Working Group, said the FFIEC’s interagency cybersecurity guidelines “require banks to develop and implement formal information security programs that are tailored to a bank’s assessment of the risks it faces, including internal and external threats to customer information and any method used to access, collect, store, use, transmit, protect, or dispose of the information.”

Cyber and Technology Risk Insurance for the Construction Sector

Much Shelist law firm logo

The recent, well-publicized retail store data breach controversies have spawned a number of lawsuits and insurance claims. Not surprisingly, insurers have responded with attempts to fight claims for coverage for such losses. Insurance underwriters are carefully monitoring decisions being handed down by courts in these lawsuits. All of this activity has led to a new emphasis on cyber and technology risk and assessments, as well as on insurance-program strategies.

These developments have ramifications for the construction industry that include, and go well beyond, the data-breach context. Contractors, design professionals and owners may find that in addition to losses caused by data breaches, other types of losses occasioned by technology-related incidents may not be covered by their existing insurance programs.

Specifically, insureds may find themselves with substantial coverage gaps because:

  • data and technology exclusions have been added to general liability policies.

  • such losses typically involve economic losses (as opposed to property damages or personal-injury losses) that insurers argue are not covered by general liability policies.

  • data and technology losses may be the result of manufacturing glitches rather than professional negligence covered by professional liability policies.

Coverage for claims involving glitches, manufacturing errors and data breaches in technology-driven applications — such as Building Information Modeling (BIM), estimating and scheduling programs, and 3D printing — may be uncertain. A number of endorsements are currently available for data breach coverage, but insurers don’t necessarily have the construction industry in mind as they provide these initial products.

In addition, there is no such thing as a “standard” cyber liability policy, endorsement or exclusion. Insurers have their own forms with their own wording, and as seemingly minor differences in language may have a significant impact in coverage, such matters should be run past counsel.

Construction insurance brokers are telling us that insurers are in the process of determining how to respond to cyber and technology risk claims, what products to offer going forward, and how to underwrite and price these products. Keith W. Jurss, a senior vice president in Willis’s National Construction Practice warns:

“As the construction industry continues to identify the unique “cyber” risks that it faces we are identifying gaps in the current suite of “cyber” insurance coverages that are available.  In addition, new exclusionary language related to cyber risk under CGL and other policies adds to the gap.  The insurance industry is slowly beginning to respond with endorsements that give back coverage or new policies designed to address the specific risks of the construction industry.

“As we identify cyber insurance underwriters willing to evaluate the risks specific to the construction industry, we are seeing the development of unique solutions in the market. There is, however, more work required and as construction clients continue to demand solutions the industry will be forced to respond.”

Consequently, this is a time to stay in close touch with qualified construction insurance brokers who understand the sector and have their hands on the pulse of the latest available cyber and technology risk products. As these products become available, clients may also want to consider what cyber and technology risk coverage to require on projects and whether to include these requirements in downstream contracts.

ARTICLE BY

Josh M. Leavitt
OF
Much Shelist, P.C.

Data Breach Developments in California (Part 2)

Morgan Lewis

Last week, we discussed three important changes to California’s data breach law that become effective January 1, 2015. Part two of this series looks at the data breach report recently released by the California Attorney General.

California Data Breach Report

In October, the California Attorney General’s data breach report presented key findings on breaches occurring in California and recommendations for lawmakers and affected industries. Notable findings and recommendations from the report are summarized below.

  • Data breaches are on the rise. Among other findings, the report found that the number of data breaches in California increased by 28% from 2012 to 2013, with “intentional unauthorized intrusions into computer systems” showing the biggest increase among breach categories and accounting for 53% of reported incidents.

  • Breaches of payment card data in the retail industry are most likely to result in fraud. The report found that from 2012 to 2013, the retail industry experienced 77 breaches, or 26% of all breaches, representing the largest share among industry sectors. Almost all (90%) of these breaches involved payment card data, which, according to the report, is the most likely data breach category to result in fraud.

  • Offers of mitigation services are on the rise and can be helpful to affected individuals. The report notes that after experiencing a data breach, entities are commonly offering mitigation services, such as free credit monitoring or other identity theft protection services, which can be helpful by providing advanced notice to individuals whose information is used fraudulently. However, the report found that no offers were made in 28% of incidents where the services would have been helpful. As discussed in part one, the new California law requires breach notices to include offers of mitigation services in certain circumstances.

  • Retailers should take action to “devalue payment card data.” Based on the finding that retail breaches involving payment card data are most likely to result in fraud, the report recommends that retailers take advantage of “promising” new technology, such as chip cards and tokenization, to enhance their security measures and “devalue payment card data.” The report also encourages retailers to implement tokenization technology for online and mobile transactions.

  • Lawmakers should clarify the roles of data owners and data maintainers in providing notices. Interestingly, the report recommends that the California legislature should clarify the notice obligations of owners and maintainers under the law. Specifically, the report explains that the law appears to require data maintainers to notify data owners of breaches, while the data owners must notify the affected individuals. Given this difference in responsibility, important breach notices may be delayed because the owners and maintainers may not agree on their respective obligations.

ARTICLE BY

Barbara Murphy Melby
Christopher C Archer
OF
Morgan, Lewis & Bockius LLP

FCC: The New Data Security Sheriff In Town

Proskauer Law firm

Data security seems to make headlines nearly every week, but last Friday, a new player entered the ring.  The Federal Communications Commission (“FCC”) took its first foray into the regulation of data security, an area that has been dominated by the Federal Trade Commission.  In its 3-2 vote, the FCC did not tread lightly – it assessed a $10 million fine on two telecommunications companies for failing to adequately safeguard customers’ personal information.

The companies, TerraCom, Inc. and YourTel America, Inc., provide telecommunications services to qualifying low-income consumers for a reduced charge.  The FCC found that the companies collected the names, addresses, Social Security numbers, driver’s licenses, and other personal information of over 300,000 consumers.  The data was stored on Internet servers without password protection or encryption, allowing public access to the data through Internet search engines.  This, the FCC found, exposed consumers to “an unacceptable risk of identity theft.”

The FCC charged the companies with violation of Section 222(a) of the Communications Act, which it interpreted to impose a duty on telecommunications carriers to protect customers’ “private information that customers have an interest in protecting from public exposure,” whether for economic or personal reasons.  Additionally, the companies were charged with violation of Section 201(b), which requires carriers to treat such information in a “just and reasonable” manner.

The companies were determined to have violated Sections 201(b) and 222(a) by failing to employ “even the most basic and readily available technologies and securities features.”  The companies further violated Section 201(b), the FCC found, by misrepresenting in their privacy policies and statements on their websites that they employ reasonable and updated security measures, and by failing to notify all of the affected customers of the data breach.

Commissioners Ajit Pai and Michael O’Rielly dissented, arguing that, among other things, the FCC had not before interpreted the Communications Act to impose an enforceable duty to employ data security measures and notify customers in the event of a breach.  Though now that the FCC has so-interpreted the Act, we can expect the FCC to keep its eye on data security.

The FCC made clear that protection of consumer information is “a fundamental obligation of all telecommunications carriers.”  Friday’s decision also makes clear that the FCC will enforce notification duties in the event of a breach, and will look closely at carriers’ privacy policies and online statements regarding data security.

ARTICLE BY

David A Munkittrick
OF
Proskauer Rose LLP

Contract Corner: Cybersecurity (Part 3)

Morgan Lewis logo

Over the last two weeks, we discussed contract provisions designed to address the implementation of preventive security measures, as well as responding to security incidents. Our third and final blog post in this series focuses on contractual provisions that address the allocation of liability for breaches that result in security incidents.

Because of the potential for large-scale damages from a security incident, customers and service providers are generally very focused on the allocation of liability in indemnification and liability provisions. Below we list some key issues to consider when drafting these contract provisions.

  • Rather than relying on general negligence or contract breach standards, consider adding security incidents resulting from a contractual breach as separate grounds for indemnification coverage.

  • Determine whether indemnification is limited to third-party claims or includes other direct and/or indirect damages and liabilities caused by a security incident.

  • Coordinate indemnification defense with incident response provisions and consider the effect on the customer’s client relationships where the vendor assumes such defense.

  • Assess whether all potential damages from a security incident are covered by the damages provisions, including any damages that may be considered indirect or consequential.

  • To determine the allocation of liability, consider the contract value, industry norms, type of data at issue, potential business exposure, cost of preventative measures, and cause of the security incident.

  • Consider calling out specific damages related to a security breach that are not subject to any cap or exclusion to provide clarity and protection—such damages can include the costs of reconstructing data, notifying clients, and providing them with identity protection services.

With cyber attacks growing in number and sophistication on a daily basis and the increased amount and value of data that is at risk to such attacks, cybersecurity concerns are top of mind for senior management.

This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our prior Contract Corner posts for more on contracts, and be on the lookout for future posts in the series.

Click here for Part 1.

Click here for Part 2.

ARTICLE BY

Peter M. Watt-Morse
A. Benjamin Klaber
OF
Morgan, Lewis & Bockius LLP

Not By "Any Manner" Of Means: Securing Cyber-Crime Coverage After Zurich v. Sony

Gilbert LLP Law Firm

Much has been written about the New York Supreme Court’s landmark ruling in Zurich American Insurance Co. v. Sony Corp., Index. No. 651982/2011 (N.Y. Supr. Ct. Feb. 21, 2014), in which a New York trial court denied coverage to Sony Corporation for liabilities stemming from a 2011 cyber-attack on its PlayStation Network. The court held that while a wide-scale data breach represents a “publication” of private information, the PlayStation Network breach did not fall within the ambit of Sony’s commercial general liability (“CGL”) policy because the policy covered only publications by the insured itself—not by third-party hackers. The court rejected Sony’s argument that the phrase “in any manner,” which qualified the word “publication” in Sony’s policy, sufficed to broaden coverage to encompass third-party acts. Instead, the court determined that the “in any manner” language referred merely to the medium by which information was published (e.g., print, internet, etc.), not the party that did the publishing.

Most of the commentary surrounding Sony has focused on the court’s interpretation of the phrase “in any manner.” But that aspect of the court’s ruling was relatively unremarkable: other courts have similarly limited the phrase, most notably the Eleventh Circuit Court of Appeals inCreative Hospitality Ventures, Inc. v. United States Liability Insurance Co., 444 Fed. App’x 370 (11th Cir. 2011) (holding that the issuance of a receipt to a customer containing more than the last five digits of the customer’s credit card number does not represent a publication). Lost in theSony debate is the fact that Sony may be able to prevail on appeal even if the appellate court refuses to adopt a broad reading of the “in any manner” language. Indeed, Sony can make a compelling case that the term “publication,” when read in context with the policy as a whole, is intended to encompass both first-party and third-party acts.

In focusing narrowly on the language of the advertising injury coverage grant, the Sony court overlooked a “cardinal principal” of insurance law: namely, that an insurance policy “should be read to give effect to all its provisions and to render them consistent with each other.”Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 63 (1995). Had the court taken a more holistic approach, it might have noticed that language in other parts of the policy evidenced the insurers’ intent to cover third-party publications. If Sony’s policy resembled the standard Insurance Services Office, Inc. (“ISO”) CGL policy, its exclusions section was surely riddled with clauses restricting coverage for certain types of injury “caused by or at the direction of the insured.” Only six of the exclusions in the ISO policy are not so qualified, including the absolute pollution exclusion and the exclusion for publications that occur prior to the policy period. It makes sense that insurers would wish to broadly exclude such categories of injury, just as it makes sense that exclusions for intentionally injurious acts would be written narrowly to apply only to the insured’s own actions. These carefully worded exclusions—when read together and in context with the policy as a whole—evidence a conscious decision by Sony’s insurers to exclude some injuries only if caused by the insured, while excluding other types of injury regardless of who, if anyone, is at fault. This, in turn, suggests that the insurers contemplated coverage for third-party acts unless such acts are expressly excluded.

Nowhere is this better illustrated that in the ISO policy’s exclusion for intellectual property infringement. This exclusion purports to broadly bar coverage for injury “arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.” However, this broad exclusion is qualified by the caveat that it “does not apply to infringement,in your ‘advertisement’, [sic] of copyright, trade dress or slogan.” Thus, the exclusion bars coverage in the first instance for all intellectual property infringements irrespective of the identity of the perpetrator, then adds back coverage for certain acts of the insured. This evidences the insurer’s understanding that unless otherwise excluded, the policy affords coverage for advertising injury regardless of who caused it.

At minimum, the fact that the ISO policy exclusions vary with respect to whether they exclude all acts or only first-party acts should be sufficient to raise an ambiguity, thus triggering “the common-law rule of contract interpretation that a court should construe ambiguous language against the interest of the party that drafted it.” Mastrobuono, 514 U.S. at 62. Even if the policy does not unambiguously afford coverage for third-party publications, it is at the very least “susceptible to more than one reasonable interpretation.” Discovision Assocs. v. Fuji Photo Film Co., Ltd., 71 A.D.3d 448, 489 (N.Y. App. Div. 2010) (internal quotation marks and citation omitted). Pointing to ambiguity in the policy as a whole would provide policyholders such as Sony with a more plausible and straightforward avenue to securing coverage for third-party publications than does narrowly parsing the phrase “in any manner.”

The question of whether third-party publications are covered under the typical CGL policy is of crucial importance to policyholders seeking insurance recovery for cyber-crime injuries. Importantly, victory on this point by Sony or another hacking victim would transform Sony into a policyholder-friendly decision, because the Sony court answered the other difficult question presented in the case—whether a data breach represents a “publication”—in favor of coverage. If the appellate court is willing to look past the narrow language of the advertising injury coverage grant and focus on Sony’s policy as a whole, Sony will have a good chance of prevailing on appeal and, in doing so, will set a strong precedent in favor of cyber-crime coverage for hacking victims.

ARTICLE BY

Kami E. Quinn
Miriam Smolen
James Liddell
OF
Gilbert LLP

SEC Commissioner Highlights Need for Cyber-Risk Management in Speech at New York Stock Exchange

Proskauer Law firm

Cyber risks are an increasingly common risk facing businesses of all kinds.  In a recent speech given at the New York Stock Exchange, SEC Commissioner Luis A. Aguilar emphasized that cybersecurity has grown to be a “top concern” of businesses and regulators alike and admonished companies, and more specifically their directors, to “take seriously their obligation to make sure that companies are appropriately addressing those risks.”

Commissioner Aguilar, in the speech delivered as part of the Cyber Risks and the Boardroom Conference hosted by the New York Stock Exchange’s Governance Services department on June 10, 2014, emphasized the responsibility of corporate directors to consider and address the risk of cyber-attacks.  The commissioner focused heavily on the obligation of companies to implement cybersecurity measures to prevent attacks.  He lauded companies for establishing board committees dedicated to risk management, noting that since 2008, the number of corporations with board-level risk committees responsible for security and privacy risks had increased from 8% to 48%.  Commissioner Aguilar nevertheless lamented what he referred to as the “gap” between the magnitude of cyber-risk exposure faced by companies today and the steps companies are currently taking to address those risks.  The commissioner referred companies to a federal framework for improving cybersecurity published earlier this year by the National Institute of Standards and Technology, which he noted may become a “baseline of best practices” to be used for legal, regulatory, or insurance purposes in assessing a company’s approach to cybersecurity.

Cyber-attack prevention is only half the battle, however.  Commissioner Aguilar cautioned that, despite their efforts to prevent a cyber-attack, companies must prepare “for the inevitable cyber-attack and the resulting fallout.”  An important part of any company’s cyber-risk management strategy is ensuring the company has adequate insurance coverage to respond to the costs of such an attack, including litigation and business disruption costs.

The insurance industry has responded to the increasing threat of cyber-attacks, such as data breaches, by issuing specific cyber insurance policies, while attempting to exclude coverage of these risks from their standard CGL policies.  Commissioner Aguilar observed that the U.S. Department of Commerce has suggested that companies include cyber insurance as part of their cyber-risk management plan, but that many companies still choose to forego this coverage.  While businesses without cyber insurance may have coverage under existing policies, insurers have relentlessly fought to cabin their responsibility for claims arising out of cyber-attacks.  Additionally, Commissioner Aguilar’s speech emphasizes that cyber-risk management is a board-level obligation, which may subject directors and officers of companies to the threat of litigation after a cyber-attack, underscoring the importance of adequate D&O coverage.

The Commissioner’s speech offers yet another reminder that companies should seek professional advice in determining whether they are adequately covered for losses and D&O liability arising out of a cyber-attack, both in prospectively evaluating insurance needs and in reacting to a cyber-attack when the risk materializes.

Read Commissioner Aguilar’s full speech here.

ARTICLE BY

Shawn Ledingham
OF
Proskauer Rose LLP