Crime (Policy) Does Pay - Sixth Circuit Holds That Endorsement Of Crime Policy Covers Losses From Hacker's Data Breach*

Author:Mr Kevin Khurana
Profession:Proskauer Rose LLP
 
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Cyber hacking, data breaches and privacy concerns have become commonplace headlines. While not always front page news, one study reported on 1,700 instances of computer hacking, cyber terrorism, and other data breaches in the past seven years, resulting in some 900 million compromised records. Another study of 49 breaches in 2011 reported that the average cost of a data breach (including detection, internal response, notification, post-notification cost and lost customers) was $5.5 million. For businesses which have not yet purchased stand-alone cyber insurance policies, a recent federal appellate court case may provide the basis for coverage under other policies.

Providing policyholders with another method by which to receive data breach coverage, the Sixth Circuit Court of Appeals recently held that a computer fraud rider to a "Blanket Crime Policy" covered losses from a hacker's theft of customer credit card and checking account data. While most insurance companies have attempted to exclude cyber risks from many general liability and first-party property policies, this holding potentially adds crime policies to the list of policies that cover data breach costs, a list that, in addition to insurance-industry preferred cyber policies, also includes general liability, errors and omissions, media E&O and directors and officers policies.

In 2005, a hacker used the local wireless network at one of plaintiff DSW's stores to hack into its main computer system and download customer credit card and checking information, pertaining to over 1.4 million customers of 108 stores. The hacker used the credit card information to engage in fraudulent credit card transactions. Unsurprisingly, plaintiff incurred significant expenses as a result, paying over $5.3 million for customer communications; public relations efforts; customer claims and lawsuits; attorneys' fees in connection with state and federal investigations; and, most significantly, fines imposed by Visa and Mastercard. Plaintiffs paid the two credit card companies over $4 million as a result of the data breach and aftermath. Plaintiff sought coverage from its insurer, defendant National Union Fire Insurance Company of Pittsburgh, PA ("National Union"). National Union denied coverage, asserting that the loss was excluded under the computer fraud rider because it was related to the theft of confidential customer information. Moreover, National Union asserted that plaintiff's loss did...

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