Let's get to the bottom line. Cybersecurity insurance is neither a fad, nor an issue for e-commerce platforms only. Instead, for most retail organizations, cybersecurity insurance will be an important part of the retail organization's risk management program designed to protect the privacy of personal information and the confidentiality of the retail organization's information. But that doesn't mean that there is one size that fits all. This article provides those involved in the retail industry with a primer on cybersecurity insurance, where cybersecurity insurance fits within a risk management program and what organizations can realistically expect from coverage.
Why do retail organizations need cybersecurity insurance?
Data is the lifeblood of modern commerce. No inventory or sales management system can run without data. But increasingly, modern retailers collect vast amounts of data to process payments, to develop insights about their customers, to personalize a shopping experience, to manage loyalty programs, to detect and prevent fraud, and to manage supply chains.
Cybersecurity is a program of administrative, technical and physical control measures that are designed to identify and protect against the risk of data being lost, accessed or used without authorization. Cybersecurity insurance is an important means of transferring some of the financial risk associated with a failure of those administrative, technical and physical control measures.
If you knew that it is virtually certain that eventually your alarm system was going to fail and your inventory would be stolen, would you obtain property insurance to cover your inventory? Your answer probably depends on the value of the inventory versus the cost of the premium for the insurance, rather than whether property insurance was a fad. So too with cybersecurity insurance: Most experts agree that the question is not "will your cybersecurity program fail?", but "when will it fail?" So it isn't a question of whether you need the insurance (or whether it is a fad), it is a question of the cost of the premium versus the probable financial loss occasioned by the breach that could be covered by insurance.
Assessing the probable financial loss is frustratingly difficult. There have been attempts to quantify the losses of data breaches. The IBM and Ponemon Institute 2015 Cost of Data Breach Study suggested that the average total cost of a data breach was more than US$3 million with a per-record average cost of more than US$150. In Canada, the per-record average cost was placed at about CA$250 per record. The Verizon 2015 Breach Investigation Report also estimated the cost of data breaches and came to the conclusion that the cost was highly variable and depended, in part, on the number of records because of certain fixed costs that may be incurred in every breach. For example, forensics and legal fees may not be as tightly correlated with the number of records lost in the same way that the cost of credit monitoring may vary depending on the size of the order being placed by the organization with the major credit monitoring companies.
What is clear is that a breach is costly. Retail organizations that suffer a breach should expect initial unplanned expenses within hours of detection of the breach. These costs will include:
- External security consultants to assist in containing the breach;
- Forensic imaging of hardware in order to preserve data for law enforcement investigations; and
- Additional hardware and/or software to restore service and to perform security upgrades.
It is wise not to underestimate the scale of potential costs and disruption to an organization's business in attempting to contain a breach and prevent its reoccurrence. Frequently, critical technology resources, including e-commerce platforms, must be taken offline. In the best case scenario, the sites can be taken offline for hours or days. However, we have had clients whose sites have been down for months. But disruption to online platforms is only one issue. Retail organizations may have to procure entirely new technology. It is very common to have to implement a long-deferred upgrade to hardware and software. Even in simple cases, extensive unplanned hardware or software expenses may be necessary or the most cost-effective solution. Even in a relatively simple case, one of our clients had to replace nearly every machine in use in its organization.
The costs do not end with the initial containment response. If personal information has been lost, the organization may incur expenses to:
- make mandatory reports to Canadian, US and other regulators;
- provide notice to affected individuals;
- offer identity theft and credit monitoring; and
- provide customer incentives to rebuild brand loyalty.
Think of the largest direct mail campaign your organization ever ran. Now imagine you are going to personalize the letter, include a unique code for identity theft monitoring services, and pay for a hotline to answer questions. This is an organization's reality if it has lost control of personal information and breach notification is required or is prudent. Since breach notification could potentially involve every one of an organization's customers for whom it has stored personal information, this could be an enormous financial strain. If the organization is also going to provide identity theft protection or credit monitoring to mitigate the potential harm to consumers, this will add up.
Losses and expenses may not end there. If confidential information of a business partner is lost, there may be reporting obligations and liability under confidentiality agreements with those businesses. And, once the dust settles, retail organizations may see a drop in revenue, a loss of confidence, class actions, and regulatory investigations.
Where cybersecurity insurance fits with risk management
A well-designed cybersecurity risk management program will have at least four goals:
- Identification and implementation of appropriate safeguards to prevent unauthorized access and use of data;
- Identification and implementation of controls to detect and contain breaches of safeguards in order to limit the time that will pass before the detection and containment of a breach of safeguards;
- Establishment of business continuity mechanisms; and
- Limiting financial risk through insurance and contractual arrangements with suppliers and outsourcers.
Cybersecurity insurance is a key means of transferring the risk of some losses and expenses associated with a breach. However, cybersecurity insurance does not replace a risk management program. Instead, cybersecurity insurance is a component of that program to partially mitigate financial risk from a breach of other controls.
What can you reasonably expect from cybersecurity insurance?
Generally speaking, cybersecurity insurance policies cover two types of risks: first-party coverage and third-party coverage.
First-party cover is for the losses to the retail organization's own business and direct expenses, including:
- Expenses in making breach reports to regulators and notifying affected individuals, including expenses to provide identity theft or credit monitoring;
- Expenses relating to crisis management, public relations and call centres;
- Extortion payments to unlock data that has been encrypted by a hacker's ransomware or to end other e-commerce attacks;
- Costs of data recovery; and
- Expenses relating to business continuity and losses resulting from business interruption.
Third-party cover relates to liability as a result of claims by third parties or expenses relating to regulatory investigations that occur as a result of the breach, including:
- Defence costs and the cost of settlements or judgments in proceedings brought by affected individuals or business partners; and
- Costs of regulatory investigations, audits or proceedings brought by governmental or self-regulatory bodies, and any associated fines or penalties.
When shopping for cybersecurity insurance, retail organizations should work with a knowledgeable broker and consider obtaining legal advice on whether the policy wording is appropriate for the risks that the retail organization is most likely to face. In our experience, there is often a mismatch between an organization's actual risks and the coverage obtained under a cybersecurity insurance policy. Here is a partial list of items retail organizations should watch out for:
Is the insurance product a total response solution or a claims-made solution?
There are many interesting products that provide not only insurance coverage, but the professional and expert resources required to respond to a breach. For small and mid-sized organizations or franchisees, this type of insurance may be ideal because it may provide access to dedicated lawyers, cybersecurity consultants, forensic expertise, public relations assistance, call centres, and identity theft and credit monitoring products. However, larger organizations may wish to have the flexibility to use their own advisors and consultants and, therefore, this type of arrangement may be counterproductive.
Is the trigger for coverage for individual breach notification expenses limited to situations in which the retail organization is legally obligated to provide notification?
In Canada, the practice and expectation may be to provide notification outside of a strict legal requirement. Failure to notify even where there is no strict legal requirement to do so adds risk to the organization by increasing regulatory scrutiny and the likelihood of class actions. Policy wording should be reviewed carefully to ensure that it is not limited to situations in which mandatory individual notification is required.
What are the limitations on business interruption coverage?
Typically business interruption insurance will not cover losses that result from a breach of a service provider's network. If you outsource all of your technology needs, you may require added coverage. The additional premium may be expensive relative to the coverage limit that is offered. There may be greater advantages for retail organizations in this situation to try negotiate being added as an insured to the service provider's policy (although this is frequently difficult). Careful attention should also be paid to the waiting period before insurance coverage will kick in, the retention amount and any sublimit. We have seen waiting periods of several weeks, coverage limited to 60 days and high retention amounts with low sublimits of coverage. These types of restrictions will devalue this coverage.
What is the scope of coverage for regulatory proceedings?
Many policies will offer coverage for investigations by Canadian Privacy Commissioners or foreign data protection authorities. This coverage may be inadequate for organizations operating in a regulated industry or that are members of self-regulatory organizations. At a minimum, if you are required to adhere to Payment Card Industry Data Security Standards, consider whether the policy provides coverage for investigations, penalties and recertification.
Is there coverage for computer fraud and funds transfer fraud?
Many forms of policy will exclude liability for the fraudulent transfer of money through vulnerabilities in your organization's network or other computer fraud. However, this may be a significant area of risk. Options should be discussed with your broker.
Is coverage limited to network security or does it encompass the loss of removable media such as laptops, smartphones, USB keys and portable drives?
While network security may be a focus of a cybersecurity insurance program, statistics on breaches suggest that many are the result of human error and loss of portable devices. Make sure these types of losses are covered.
Is there coverage for third-party confidential business information?
If your organization has a legal duty to protect confidential information, including trade secrets and other intellectual property, of third parties, consider whether the insurance policy provides any coverage for the exposure of this information for which your organization may be liable. Frequently these types of losses are excluded or narrowly restricted.
These are just some of the questions that you should be discussing with your broker or legal counsel. At Dentons, we have extensive experience in evaluating cybersecurity insurance policies and acting as preferred vendors for insurers. We would be pleased to assist you.
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