As organizations of all stripes increasingly rely on cloud computing services to conduct their business, (with many organizations entering into cloud computing arrangements with multiple cloud providers), the need to balance the benefits and risks of cloud computing is more important than ever. This is especially true when it comes to data security and privacy risks. Cloud providers are sitting on reams of data from thousands of customers, including sensitive information such as personal information, trade secrets, and confidential and proprietary information. To criminals Cloud providers are prime targets. At the same time, based in large part on the amount of risk aggregated by Cloud providers, most Cloud customers are unable to secure favorable contract terms when it comes to data security and privacy. While customers may enjoy some short term cost-benefits by going into the Cloud, they may be retaining more risk then they want (especially where Cloud providers refuse to accept that risk contractually). In short, the players in this industry are at an impasse. Cyber insurance may be a solution to help solve the problem.
A Short History of Cyber Insurance Coverage*
*This section ended up longer than I anticipated. If you already have a base knowledge of cyber coverage or don’t want to bother with some historical background, please skip ahead to this section: "Where Privacy and Security Risk Breaks Down in Cloud Computing Contracts"
In the early 2000s, just around the “DotCom Bust”, some insurers began developing a product designed to address the financial loss that might arise out of a data breach. This was a time where most “brick and mortar” companies were just beginning to leverage the economic potential of the Internet. At that time insurers wanted to target the big “dotcom” companies like Amazon, Yahoo, eBay, Google, etc., and other companies pioneering e-commerce and online retailing. At some point, somebody dubbed this type of insurance “cyber insurance.”
The early cyber policies included liability and property components. The liability coverages addressed claim expenses and liability arising out of a security breach of the insured’s computer systems (some early policies only covered “technical” security breaches, as opposed to policy violation-based security breaches). The property-related components covered business interruption and data asset loss/damage arising out of a data breach (during the holiday season many online retailers suddenly developed a tasted for business interruption coverage after realizing just how negatively their business would be impacted by a denial of service attack). Additional first party coverages included cyber-extortion coverage and crisis management/PR coverage.
Unfortunately for the carriers, it was not easy to get people to understand the need for this coverage (and that is still a challenge today, but certainly a lesser challenge with all of the security and privacy news constantly streaming). Early on there were very few lawsuits and regulators were just beginning to consider enforcement of relatively new statutes like GLB and HIPAA.
Two things changed that made cyber insurance much more relevant. One was a rather sudden event, and the other more gradual.
First, in 2003, California passed SB1386, the world’s first breach notification law. The reality then (as now) is that companies suffer security breaches each and every day. Prior to SB1386, however, breaches of personal information simply went unreported. With SB1386 and the subsequent passage of breach notice laws in 45 other states (and now coming internationally), the risk profile changed for data breaches. Instead of burying the breaches, companies were required to incur significant direct expenses to investigate security breaches and comply with applicable breach notice laws, including the offering of credit monitoring to affected individuals (which is not legally required by existing breach notice laws, but is optionally provided by many companies or "suggested" by state regulators). As a result, the plaintiffs’ bar now had notice of security breaches and began filing class action lawsuits after big breaches (usually involving high-profile brand name organizations). As such, cyber insurance coverage went from coverage addressing a hypothetical risk of future lawsuits, to a coverage addressing real-life risk (and now we have lawsuits getting deeper into litigation and public settlements of these types of cases). Moreover, shortly after the passage of SB 1386 many cyber insurance policies began covering the direct costs associated with complying with breach notification laws, including attorney fees, forensic investigation expenses, printing and mailing costs, credit monitoring expenses and call center expenses. Breach notification costs are direct and almost unavoidable after a personal information breach. Regardless of lawsuit activity, a direct financial rationale for cyber insurance coverage now existed.
The other change that occurred more gradually over time, but which has had a significant impact concerning the frequency and magnitude of data breaches was organized crime. In the early 2000s hacking was more of an exercise in annoyance or a used for bragging purposes. Hackers at that time wanted their exploits talked about and know. They wanted credit for hacking into or bringing down a sophisticated company (or better yet a division of the Federal Government or military). As such, when an attack happened it was discovered and remediated, and that would be the end of it.
True criminals, of course, are less interested in such notoriety. In fact, when trying to steal thousands/millions of records to commit identity theft or credit card fraud it is much better to NOT be detected. Lingering on a company’s network taking information for months or years is a much more profitable endeavor. Recognizing that this type of crime is low risk (it can be performed from thousands of miles away in Eastern Europe with almost no chance of getting caught) and high reward, organized crime flooded into the space. And in this context the word “organized” is truly appropriate – these enterprises retain very smart IT-oriented people that use every tool possible to scale and automate their crimes. They leverage the communication tools on the Internet to fence their “goods” creating, for example, wholesale and retail markets for credit cards, or “eBay”-like auction sites to hawk their illicit wares (e.g. valuable information). The change in orientation described above has essentially resulted in a 24/7/365 relentless crime machine constantly attacking and looking for new ways to attack, and always seeming to be one step ahead of those seeking to stop them. That is why we read about security and privacy breaches practically every day in the newspaper.
Fast-forward to present time. Cyber insurance is a much more established market with more carriers entering on a regular basis. There are primary and excess markets available for big risks, and companies of all sizes are looking at cyber more as a mandatory purchase rather than discretionary. As the world continues to change at seemingly light-speed and cyber risks increase (with the advent of hacktivism, social media and the consumerization of IT/BYOD ) the need for cyber is also growing. With competition pushing cyber insurance prices down, and significant security and privacy risk being retained by organizations, risk transfer is becoming very attractive (and from an overall big picture systemic point of view, spreading risk is also attractive). Another area where cyber may help smooth out security and privacy risk is with cloud computing.
Where Privacy and Security Risk Breaks Down in Cloud Computing Contracts
As we have written extensively of in the past, Cloud computing raises significant privacy and security risks that are often difficult to hammer out in a Cloud computing contract negotiation (to the extent a Cloud customer gets a chance to negotiate at all). The net result of these contract negotiation difficulties and Cloud provider unwillingness in many cases to take on meaningful risk contractually, is that the risk is retained solely by the Cloud customer. The following examples outline the privacy and security-related Cloud issues that impact the Cloud customer’s risk:
- a Cloud provider failing to maintain reasonable security to prevent data breaches;
- a Cloud provider failing to comply with privacy and security laws applicable to the Cloud customer;
- a Cloud provider refusing to allow a Cloud customer to conduct its own independent forensic investigation of a data breach suffered by a Cloud provider;
- potential conflict of interests with respect a Cloud provider’s handling a data breach that may have been the fault of the Cloud provider, including failing to cooperate with its Cloud customers if that cooperation could adversely impact the Cloud provider;
- the Cloud customer’s potential obligation to comply with breach notice laws, including absorbing expenses for legal fees, forensic investigators, printing and mailing, credit monitoring and maintain a call center;
- lawsuits and regulatory actions against the Cloud customer because of Cloud provider security and privacy breaches, and the legal fees, judgments, fines, penalties and settlement costs associated with them; and
- Cloud providers seeking to leverage and data mine Cloud customer information being processed in the Cloud.
The justification used by Cloud providers to avoid responsibilities for these risks and the costs associated with them is essentially risk aggregation. Cloud providers maintain that, because they serve hundreds or thousands of customers on shared computing resources, a single attack could expose Cloud providers to liability from all of those customers at the same time. In fact, we already have one example involving a business interruption of a Cloud provider that demonstrates how multiple customers can be affected by a security breach. They also claim that independent forensic investigations by customers in the wake of a data breach are not possible because they cannot accommodate multiple customers at one time, and even if they could a forensic assessment would essentially expose each Cloud customer’s data to every Cloud customer conducting such an investigation.
Cyber Insurance: Addressing Retained Risk in the Cloud
So how does cyber insurance fit into this picture? As it currently stands, cyber insurance can be a very valuable tool for Cloud customers who are not able to get their providers to contractually take financial responsibility for security and privacy risk. Most cyber insurance policies cover data security and privacy breaches of not only the computer networks directly under the control of the insured, but also those computer networks operated by third parties for or on behalf of the insured. What this means in the Cloud context is that most cyber insurance policies may cover data breaches of the Cloud provider’s systems where the Cloud customer’s/insured’s data is stored and processed on those systems. This coverage will typically include most of the expenses listed above, including those direct expenses to comply with breach notice laws and costs to defend lawsuits and regulatory actions arising out of Cloud provider data breaches. As such, in the event a Cloud customer cannot get reasonable contract terms, assuming it has purchased the correct cyber coverage, it will have a fallback risk transfer and will not be retaining that risk solely on its own.
Is there a catch? Not really currently, except of course the premium that must be paid and the fact that most cyber insurance policies have a self-insured retention that must be satisfied by the insured before the carriers is required to pay. However, there may be longer term problems that arise for the carriers.
At this point, whether they like it or not, carriers whose cyber insurance policies cover security and privacy breaches of third party service providers are already beginning to aggregate their risk when it comes to Cloud providers. Imagine a world with a relatively small number of Cloud providers serving a much larger customer base (to some degree we may already live in such a world considering the dominance of Google, Amazon, Rackspace and other big cloud players). Many insureds/Cloud customers are going to be dealing with this relatively small number of Cloud providers. For example, I am sure that for most cyber insurance companies, if they were to check their books, would find that many of their insureds already use the same Cloud providers and/or other third party service providers to store and process the insureds’ data. Further consolidation of Cloud provider, should that occur, will only increase the aggregation of risk.
However, as long as cyber insurance is more widely adopted, the aggregation risk may be manageable. The entire purpose of insurance is to spread the risk across a wide community of insureds, and by doing so hopefully individual insureds that experience a breach are not catastrophically impacted. At the same time carriers can build reserves and achieve reasonable profits. The long term question is whether there are enough insureds purchasing cyber insurance to spread the risk and allow for the building of reserves to cover a breach of a major cloud provider that impacts a wide audience of insureds.
We probably are not there yet, and unless demand increases, we may not get there. One thing that may happen, perhaps, is a push from the Cloud provider/customer community to somehow make cyber insurance more of a mandatory condition of doing business in the Cloud. Time will tell as to whether the cyber insurers view this aggregation issue as serious, and whether they will take steps to mitigate it (hopefully those steps will not involve narrowing the coverage). In the meantime, companies that are going deep into the Cloud should quantify the risk they are retaining and seriously consider Cyber insurance coverage. The price may be right, and the peace of mind priceless.