Insurance Law

Farella Braun + Martel LLP: Protect Your Business With Cyber Liability Coverage

   By Amanda Hairston, Senior Associate, Farella Braun + Martel LLP

Many insurers are now offering "cyber liability" or "cyber risk" policies designed to protect policyholders against electronic injuries that policyholders may either suffer themselves or cause to others. Most of these policies focus on protecting policyholders in the event of a data breach. According to a recent report, the finance and insurance industries experienced the largest percentage of data breaches followed closely by information technology, retail trade, manufacturing, public administration, transportation and warehousing as well as education, government, and healthcare. Virtually no company is immune from this type of risk.

It is worth looking at purchasing cyber liability coverage because insurers have argued that "traditional policies" do not protect against this type of harm. For example, insurers have argued that there is no advertising injury coverage where there is no "publication" of the data. Today, many policies also have language excluding from the definition of "property damage" loss of or damage to electronic information and/or data. Finally, policyholders should keep in mind that CGL policies do not cover the insured's own first-party losses, while a cyber liability policy typically does provide this type of coverage.

Policyholders may also face problems seeking coverage under E&O policies depending on what services they typically perform. However, where the cyber risk arises directly from the company's business, it may actually have coverage under such a policy. For example, in Eyeblaster, Inc. v. Fed Ins. Co., 613 F.3d 797 (8th Cir. 2010), the insured, an online marketing campaign management company, was sued by an individual who alleged that the insured's online advertising caused his computer to be infected with a spyware program that severely impaired the function of his computer, resulting in data loss, numerous pop-up ads, a hijacked browser, and frequent error messages. The Eighth Circuit found that the allegations triggered a duty to defend under the E&O policy. In that case, Eyeblaster had disclosed to the insurer that its core business activity was the technology used for interactive advertising content delivery and management, and thus any allegation that Eyeblaster intentionally served an ad would have been in the ordinary course of its business. The court found that Eyeblaster's activity of causing software (such as Flash and JavaScript) to be installed on the computer, while intentional, was not excluded under the policy as an intentional wrongful act and thus the claims were covered under the policy.

Although more insurers are offering this type of coverage, there is no standard policy language. Accordingly, policyholders should look closely at their existing coverage to determine what types of events may be covered. Cyber liability policies can cover everything from liability for permitting access to identifying information of customers to transmitting a computer virus or malware to a third party customer to failing to notify a third party of their rights under the relevant regulations in the event of a security breach. As a result, all companies should be looking closely at what type of coverage they currently have for these types of risks and examining what types of coverage are available in the marketplace.

Read additional articles on legal developments that affect policyholders at the Policyholder Perspective blog.

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