Recent California Decision Upholds Data Breach Coverage

The text of this article was first published by Law360 on November 19, 2013.

The U.S. District Court for the Central District of California recently upheld coverage under a commercial general liability policy for a hospital data breach that compromised the confidential medical records of nearly 20,000 patients.

In that case, Hartford Casualty Insurance Company v. Corcino & Associates et al.,[1] the plaintiffs in two underlying class actions sought, among other relief, statutory damages of $1,000 per person under the California Confidentiality of Medical Information Act ("CMIA")[2] and statutory damages of up to $10,000 per person under the California Lanterman Petris Short ("LPS") Act.[3]

The hospital sought coverage under a CGL policy, which stated that the insurer, Hartford, would pay “those sums that the insured becomes legally obligated to pay as damages because of… ‘personal and advertising injury’”[4] and defined “personal and advertising injury” to include “[o]ral, written or electronic publication of material that violates a person’s right of privacy.”[5]

Hartford initiated litigation seeking a declaration that the statutory relief sought by the claimants was barred under an exclusion for “Personal And Advertising Injury... [a]rising out of the violation of a person’s right to privacy created by any state or federal act.”[6] The hospital moved to dismiss Hartford’s complaint, arguing that the exclusion did not apply “because the plaintiffs in the underlying cases seek statutory remedies for breaches of privacy rights that were not themselves ‘created by any state or federal act,’ but which exist under common law and the California state Constitution.”[7]

Applying established rules of insurance policy construction, the court concluded that the hospital’s interpretation of the policy was reasonable and, therefore, “any relief awarded under the LPS and CMIA would be covered, rather than excluded, under Hartford’s Policy.”[8] In reaching this conclusion, the court noted that “medical records have been considered private and confidential for well over 100 years at common law.”[9] The court also found that “[t]he legislative history of the LPS and CMIA, under which the plaintiffs seek relief against [the insured], demonstrates that these statutes were intended not to create new privacy rights, but rather to codify existing rights and create effective remedies that would encourage affected individuals to enforce them.”[10] The court reasoned that “because the LPS and CMIA do not create new privacy rights and because the policy exclusion by its terms ‘does not apply to liability for damages that the insured would have in absence of such state or federal act,’ the relief sought under these statutes can reasonably be interpreted to fall outside of Hartford’s policy exclusion.”[11] The court also rejected Hartford’s argument that statutory penalties are not covered “damages” because of “personal and advertising injury,” finding that “[t]he statutes… permit an injured individual to recover damages for breach of an established privacy right, and as such, fall squarely within the Policy’s coverage.”[12]

The Corcino decision underscores that there may be valuable data breach coverage under so-called “traditional” or “legacy” policies that should not be overlooked. Numerous decisions in addition to Corcino have found coverage for a wide variety of claims alleging breach of privacy laws and regulations.[13] While some companies carry specialty “cyber” insurance policies that are specifically designed to afford coverage for data breaches and other cyber risks, most companies have various forms of “traditional” insurance policies that may cover various types of cyber risks, including CGL, D&O, E&O, property and crime policies, among others. Insureds that refuse to take no for an answer may be able to secure valuable coverage if they effectively pursue their claim for coverage.

Unfortunately, however, even where there is a good claim for coverage under the policy language and applicable law, insurers can be expected to argue that data breaches and other types of “cyber” risks are not covered under CGL or other “traditional” or “legacy” insurance policies — as illustrated by the Corcino coverage litigation. In addition, as recently described in Law360,[14] in response to decisions upholding coverage for data beach, privacy, network security and other “cyber” risks, the insurance industry has added various limitations and exclusions purporting to cut off the “traditional” or “legacy” lines of coverage. Most recently, ISO has filed a number of data breach exclusionary endorsements for use with its standard-form primary, excess and umbrella CGL policies. These are to become effective in May 2014. By way of example, one of the endorsements, entitled “Exclusion - Access Or Disclosure Of Confidential Or Personal Information” adds the following exclusion to coverage B:

This insurance does not apply to:

Access or Disclosure of Confidential or Personal Information

“Personal and advertising injury” arising out of any access to or disclosure of any person’s or organization's confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of non public information.

This exclusion applies even if damages are claimed for notification costs, credit monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense incurred by you or others arising out of any access to or disclosure of any person's or organization's confidential or personal information.[15]

Although the full reach of the new exclusions ultimately will be determined by judicial review, and it may take some time for the new or similar exclusions to make their way into CGL policies, the exclusions provide another reason for companies to carefully consider specialty “cyber” insurance products.

Many “cyber” policies provide defense and indemnity coverage for lawsuits arising out of a data breach. By way of example, the AIG Specialty Risk Protector ("SRP") specimen policy[16] states that the insurer will “pay… all Loss” that the “Insured is legally obligated to pay resulting from a Claim alleging… a Privacy Event.”[17] “Privacy Event” includes “any failure to protect Confidential Information…,” which in turn is defined to include, among other things, “information from which an individual may be uniquely and reliably identified or contacted” as well as information protected by Gramm-Leach Bliley and the Health Insurance Portability and Accountability Act.[18]

In addition to providing defense and indemnity coverage in connection with lawsuits arising out of a data breach, many “cyber” policies respond to regulatory investigations. By way of example, the SRP specimen policy defines a “Claim” that triggers coverage to include “a Regulatory Action,” which in turn is defined as “a request for information, civil investigative demand or civil proceeding brought by or on behalf of a governmental agency….”[19]

Importantly, “cyber” policies also typically provide coverage for costs and expenses associated with “crisis” or “event” management in the wake of a data breach incident, including, for example, breach notification, credit monitoring and counseling services, public relations efforts and forensics to determine cause and scope of a breach. By way of example, the SRP specimen policy covers “all Loss… that an Insured incurs solely as a result of an alleged… Privacy Event”[20] and defines “Loss” to include the following “reasonable and necessary expenses”:

1. to conduct an investigation (including a forensic investigation) to determine the cause of the Security Failure or Privacy Event;
2. for a public relations firm, crisis management or law firm agreed to by the Insurer to advise an Insured on minimizing the harm to such Insured, including, without limitation, maintaining and restoring public confidence in such Insured;
3. to notify those whose Confidential Information is the subject of the Security Failure or Privacy Event and advise of any available remedy in connection with the Security Failure or Privacy Event, including, without limitation, those expenses and costs for printing, advertising and mailing of materials;
4. for identity theft education and assistance and credit file or identity monitoring;
5. for any other services approved by the Insurer at the Insurer's sole and absolute discretion;
6. to restore, recreate or recollect Electronic Data; or
7. to determine whether Electronic Data can or cannot be restored, recollected or recreated.[21]

This aspect of the coverage is important. The Ponemon Institute’s 2013 Cost of Data Breach Study reports that U.S. organizations spend on average $1,412,548 overall in post-breach response costs — with $565,020 spent on post-breach notification alone.[22]

As well as data breach related coverage, many “cyber” policies offer coverage for, among other things, liability and exposure arising out of the transmission of malicious code, denial of third-party access to the insured’s network (DDoS attacks), media liability (for claims for alleging, for example, infringement of copyright and other intellectual property rights and misappropriation of ideas or media content), first-party asset management coverage (covering, for example, damage to, loss or use of, or theft of the insured’s own computer systems and data), network/supply chain interruption (covering business interruption and extra expense caused by network security incidents) and cyber extortion.

There are numerous specialty “cyber” products on the market, sold by over 30 insurers, and the coverage can be extremely valuable. It is important, however, that organizations embrace a team approach when purchasing “cyber” insurance. Because of the nature of the product and the risks that it is intended to cover, successful placement requires the involvement and input, not only of a capable risk management department and a knowledgeable insurance broker, but also of in-house legal counsel and IT professionals, resources, treasury and compliance personnel — and experienced insurance coverage counsel. The terms and conditions must be analyzed carefully to ensure that the coverage provided matches the organization’s risk profile and to ensure that important facets of coverage are not vitiated.

[1] No. CV 13-3728GAF(JCx), Minutes (In Chambers) Order Re: Motion To Dismiss (Oct. 7, 2013).

[2] Cal. Civ. Code §§56-56.37.

[3] Cal. Welf. & Inst. Code §§ 5328-5330.

[4] Hartford’s First Amended Complaint For Declaratory Relief, filed on June 18, 2012, at ¶ 18.

[5]Id. at ¶ 19

[6]Id. at ¶ 20.

[7] Defendant Stanford Hospital And Clinics’ [Corrected] Notice of Motion to Dismiss Complaint, at 1 (filed Aug. 19, 2013) (original emphasis).

[8]Corcino, No. CV 13-3728 GAF (JCx), at 7-8.

[9]Id. at 6-7.

[10]Id. at 7.

[11]Id.

[12]Id.

[13]See, e.g., Netscape Commc’ns Corp. v. Federal Ins. Co., 343 Fed.Appx. 271 (9th Cir. 2009), aff’g 2007 WL 1288192 (N.D. Cal. Apr. 27, 2007) (upholding coverage for claims alleging that the insured’s “SmartDownload” software violated the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act by, among other things, “collecting, storing, and disclosing… claimants’ Internet usage,” which was “used… to create opportunities for targeted advertising”).

[14]See Roberta D. Anderson, ISO's Newly-Filed Data Breach Exclusions Provide Yet Another Reason To Consider “Cyber” Insurance, Law360 (Sept. 23, 2013), available at http://www.law360.com/articles/473886/yet-another-reason-to-consider-cyber-insurance

[15] CG 21 08 05 14 (2013).

[16]See AIG Specialty Risk Protector® Specimen Policy Form 101014 (11/09), Security and Privacy Coverage Section.

[17]Id. Section 1.

[18]Id. Section 2.(d).

[19]Id. Section 2.(b, l).

[20]Id. Event Management Coverage Section, Section 1.

[21]Id. Section 2.(h).

[22] Ponemon Institute, 2013 Cost of Data Breach Study: Global Analysis, at 16-17. (May 2013).