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Insurance Law

Coverage for Cyber Risks

Louis Chiafullo and Brett Kahn   By Louis A. Chiafullo and Brett D. Kahn, Attorneys, McCarter & English, LLP

In their article appearing in the May/June 2011 issue of Coverage, "Coverage for Cyber Risks," Louis Chiafullo and Brett Kahn first observe that the costs arising from data breaches are escalating exponentially.  This can be particularly problematic for corporations as individuals (sometimes in class action suits), shareholders (in securities suits) and other entities frequently commence very expensive and highly public litigation.  In addition to those third-party claims to a corporation, there are also first-party claims such as data losses.  The article notes that corporations often tender claims for data breaches to their commercial general liability, directors and officers, or errors and omissions insurers under policies that they previously purchased without data breaches in mind.  The article examines what coverage may be available under each of what it calls "these more 'mainstream' insurance policies."  In reviewing the requirements that must be met for coverage under these policies, the article finds that they may be problematic when applied to data breaches, but coverage under those policies is still possible.  The article then considers a more recent product, a "Cyber Coverage" policy, which may be preferable, despite being relatively expensive, because of its more focused coverage for cyber risks.  The article finds that a corporate policyholder of Cyber Coverage is likely to have some of its first-party data losses covered and third-party data breach claims defended.  However, the article notes that not all cyber insurance is identical.  It concludes with practical tips for policyholders confronting data breach claims and needing to analyze their coverage to meet those claims.

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