If your business suffered the same sort of cyberattacks alleged to have taken place against “U.S. government Web sites – including those of the White House and the State Department –” over the July 4, 2009 holiday weekend, would your insurance cover losses that your company faced?[1] Not worried, because the alleged attacks were only against government sites? Unfortunately, the cyberattacks were more widespread, and allegedly included, “according to a cyber-security specialist who has been tracking the incidents, . . . those run by the New York Stock Exchange, Nasdaq, The Washington Post, Amazon.com and MarketWatch.”[2]
Denial of Service Attacks
The cyberattacks described were denial-of-service incidents. Personnel from “CERT® Program,” which “is part of the federally funded Software Engineering Institute (SEI), a federally funded research and development center at Carnegie Mellon University in Pittsburgh, Pennsylvania,” have explained:
Denial-of-service attacks come in a variety of forms and aim at a variety of services. There are three basic types of attack:
- consumption of scarce, limited, or non-renewable resources
- destruction or alteration of configuration information
- physical destruction or alteration of network components.[3]
Some attacks are comparable to “tak[ing] an ax to a piece of hardware,” and are known as “so-called permanent denial-of-service (PDOS) attack[s].”[4] If a system suffers such an attack, which also has been called “pure hardware sabotage,” it “requires replacement or reinstallation of hardware.”[5]
What Insurance Coverage Might Apply?
If your company faces a denial-of-service cyberattack and suffers losses as a result, but your company has not purchased a specialized suite of policies marketed as cyber security policies, coverage nonetheless may be available under other insurance policies. Consider whether first party all risk or property coverage may apply. First party all risk policies tend to provide coverage for the policyholder’s losses due to property damage. If the denial-of-service cyberattack caused physical damage to your company’s servers or hard drives, your company’s first party all risk insurer should not have a credible argument that there was no property damage. Even if the damage is limited to data and software, however, it may be argued that the loss is covered under your company’s first party all risk policy, as some courts have found that damage to data and software consists of property damage.[6]
First party policies may also provide coverage for extra expense, business interruption, and contingent business interruption losses due to a cyberattack. (Contingent business interruption losses may include those arising out of a third party’s cyber security-based business interruption.)[7]
Look also to other first party coverages, such as crime and fidelity policies, to determine whether there may be coverage for losses due to a cyberattack. In particular, crime policies may have endorsements, such as computer fraud endorsements, that may cover losses from a denial of service cyberattack.
If, after a cyberattack, third parties seek to hold your company responsible for their alleged losses, consider whether your company’s liability policies would provide coverage. More importantly, consider your company’s commercial general liability (CGL) insurance policy (if your company does not have a specialized cyber liability policy).
The first coverage provided in a standard-form CGL insurance policy covers liability for property damage. Similar to the analysis above for first party all risk policies, if there was damage to servers or hard drives, insurers should not be heard to argue that there was no property damage. Courts are divided as to whether damage to data or software alone consists of property damage under insurance policies, with some courts recognizing that “the computer data in question ‘was physical, had an actual physical location, occupied space and was capable of being physically damaged and destroyed’” and that such lost data was covered under a CGL policy.[8] Be aware, however, that the insurance industry has revised many CGL policies to include definitions giving insurers stronger arguments that damage to data and software will not be considered property damage. But also note that your company’s CGL policy may have endorsements that provide coverage specifically for damage to data and software.[9] Consider further whether a claim would fall within the property damage coverage for loss of use of tangible property—loss of use of servers and hard drives because of the cyberattack.
Consider Cyber Security Specialty Policies
Looking beyond the coverages and endorsements discussed above, your company should consider the recent cyberattacks as an opportunity to reevaluate the need for specialized coverages for cyber security losses. Insurance companies continue to introduce new specialized products for cyber security risks, marketing the new policies as including data compromise, cyber liability, network risk, and/or computer data coverage. The Insurance Services Office, Inc., which designs and seeks regulatory approval for many insurance policy forms and language, has a standard insurance form called the “Internet Liability and Network Protection Policy,” and insurance companies may base their coverages on this basic insuring agreement, or they may provide their own company-worded policy form. Cyber security and data breach policies, certain forms of which may be known as Network Risk, Cyber-Liability, Privacy and Security, or Media Liability insurance, are relatively new to the marketplace and are ever-changing. An experienced broker may be able to advise what coverages are available, and an attorney with experience in advising policyholders about insurance coverage issues may be able to advise as to the potential strengths and weaknesses of the various policy terms offered.
[Note 1: This post also appears on Lexis’ Insurance Law Center, with thanks to my friend Karen Yotis.]
[Note 2: This post is featured in Blawg Review #221, thanks to H. Scott Leviant of The Complex Litigator.]
[1] U.S. Government Sites Among Those Hit by Cyberattack, CNN, http://www.cnn.com/2009/TECH/07/08/government.hacking/index.html(July 8, 2009).
[2] Siobhan Gorman & Evan Ramstad, Cyber Blitz Hits U.S., Korea, Wall St. J., http://online.wsj.com/article/SB124701806176209691.html (July 9, 2009).
[3] Denial of Service Attacks, CERT, http://www.cert.org/tech_tips/denial_of_service.html (last visited July 9, 2009); About CERT, CERT, http://www.cert.org/meet_cert/ (last visited July 10, 2009).
[4] Kelly Jackson Higgins, Permanent Denial-of-Service Attack Sabotages Hardware, Security Dark Reading, http://www.darkreading.com/security/management/showArticle.jhtml?articleID=211201088 (May 19, 2008).
[5] Id.
[6] See, e.g., Lambrecht & Assocs., Inc. v. State Farm Lloyds, 119 S.W.3d 16 (Tex. App. 2003) (first party property coverage for data damaged because of hacker attack or computer virus); Am. Guar. & Liab. Ins. Co. v. Ingram Micro, Inc., No. 99-185 TUC ACM, 2000 U.S. Dist. LEXIS 7299, at *6 (D. Ariz. Apr. 18, 2000) (construing “physical damage” beyond “harm of computer circuitry” to encompass “loss of access, loss of use, and loss of functionality”).
[7] Se. Mental Health Ctr., Inc. v. Pac. Ins. Co., 439 F. Supp. 2d 831, 837 (W.D. Tenn. 2006) (finding coverage under business interruption policy for computer corruption); see also Scott N. Godes, Ensuring Contingent Business Interruption Coverage, Law360, (Apr. 8, 2009) http://insurance.law360.com/articles/94765 (discussing coverage under first party policies resulting from third party interruptions).
[8] See, e.g., Computer Corner, Inc. v. Fireman’s Fund Ins. Co., 46 P.3d 1264, 1266 (N.M. Ct. App. 2002).
[9] See, e.g., Claire Wilkinson, Is Your Company Prepared for a Data Breach?, Ins. Info. Inst., at 20 (Mar. 2006) http://www.iii.org/assets/docs/pdf/informationsecurity.pdf (discussing the Insurance Services Office, Inc.’s endorsement for “electronic data liability”).
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