There seems to be a pattern in data breach and other cyber-attack cases. After a data breach, a company often turns to its insurer for coverage. Some companies have specialized cyber insurance and sometimes it does not. Yet, even if businesses have paid for what they believe to be comprehensive cyber security risk insurance, the insurer may refuse to pay the claim. Insurers often have many reasons for refusing coverage such as a failure to notify in a timely fashion, failure to mitigate costs, hacks resulting from employee misconduct or criminal activity or simply that the losses were due to actions of a non-covered party. This is true whether a company is relying on terms in a general casualty or liability policy (GCL) or where, as in the case recently considered by an Ohio Appeals court, the insured had purchased specialized cyber liability insurance that covered damage to its electronic assets.
On 5 November 2021 an Ohio Appeals Court considered an insurance company’s denial of a claim made by a medical billing company that its costs responding to (and ultimately paying a ransom for) a ransomware attack that locked up its access to its billing platform, as well as the costs of restoring the system which contained protected health information (PHI) on its customers’ patients. The Appeals Court reversed the findings of the lower court and allowed the insurance claim to go forward. The legal issue was whether the ransomware constituted “physical damage” to the electronic media and whether the ransomware attack constituted a covered “data compromise” under the terms of the policy.[1]
EMOI is an Ohio company that helps hospitals complete medical bills. Medical bills have personal data, financial data and personal health information (PHI.) In September 2019, EMOI was the victim of a ransomware attack where attackers locked up files and demanded a ransom. Eventually EMOI obtained a “test key” from the hackers which enabled them to unlock a single data file. Once that worked, EMOI paid the ransom, regained control over their data and verified that it was safe. They also filed a claim with their insurer.
EMOI’s policy with Owner’s Insurance covered “data compromise”, which included coverage related to “the compromise of an individual’s ‘personal data’ but excluded from coverage “[a]ny threat, extortion or blackmail.” The policy noted that the exclusion included, but was not limited to, “ransom payments and private security assistance.”
Generally, companies may have cyber insurance that covers the cost of “data breaches,” which is: the unauthorized access to certain kinds of information (typically personal data). Data breach policies cover the cost of investigation, forensics, breach remediation, breach notification and possible litigation as a result. Think of a “breach” as a loss (or a potential loss) of protected data.
Companies may also have coverage for loss of access to data. This is similar to “critical documents insurance” for electronic records. So if there is a fire, flood, hurricane or another event that destroys documents or records (including electronic records), that may be covered by insurance. EMOI did had coverage for “direct physical loss or damage to ‘media.’”
The policy EMOI had noted that the insurance company: “…will pay for direct physical loss or damage to “media” which you own, which is leased or rented to you or which is in your care, custody or control while located at the premises described in the Declarations. We will pay for your costs to research, replace or restore information on “media” which has incurred direct physical loss or damage by a Covered Cause of Loss. Direct physical loss of or damage to Covered Property must be caused by a Covered Cause of Loss.”
So a legal question is posed, “is a ransomware attack a data breach? Is it a physical loss or damage to electronic media?” The carrier for EMOI is Owner’s Insurance, who said “no” to both of these questions. The carrier asserted that the data compromise coverage only covered the personal data of EMOI, not data of EMOI’s customers. In their denial letter, Owners told its customer, “Since the data belongs to another party that is not your customer it does not meet the definition of ‘affected individual.” Owner’s also denied the claim asserting that the data on the ransomed drives was not EMOI’s “personally identifying information.” Owner’s also claimed no responsibility for the cost of restoration, asserting that “[n]o film, magnetic tape, disc, drum, card, etc., [the contractual definition of “covered media”] has been identified as physically damaged in this claim.” But the insurance company went further, asserting that it did not have to pay the claim because: “(1) [t]he policy covers only items with a physical existence, i.e., tangible items; (2) “physical loss or damage” does not occur when the insured merely loses access or use; and (3) “physical loss or damage” does not occur when the item can be restored by cleaning.”
Owner’s Insurance claimed that the policy did not cover ransomware situations because “the software and data have no physical existence and thus are not susceptible to physical loss or damage” and because “EMOI merely lost access to its data and software due to the ransomware attack, and the data and software were readily restored with the decryption program [for which they paid a ransom to the hacker].”
This is a common argument made by insurance companies when they seek to deny ransomware claims. Recently a State of Maryland court held that an insurer had to pay a T-shirt printing company’s cost of restoration of software after a ransomware attack and rejected the insurer’s claim that the software itself was not “damaged” and that, therefore, the claim not covered.
The Ohio court also came to a broader definition of covered media and damage and destruction and permitted the claim to proceed (reversing a lower court’s summary judgment order).
This reflects a current trend in cyber insurance coverage for insurers to read terms like “loss” or “damage” or “destruction” or “physical damage” narrowly when ransomware claims are filed. This is just one of the potential pitfalls in cyber insurance policies. As an example, as companies move to cloud services, their data on the cloud may not be covered by insurance. To the extent that ransomware payments are considered unlawful, an insurer may not be willing to pay or reimburse such payments. An insurer may conclude that data that is “locked up” by ransomware is not “breached” under a data breach policy, and therefore refuse to pay the costs of remediation or restoration. An insurer may be unwilling to pay the costs of rebuilding a ransomed system when the insured could have (as the insured here did in Ohio) pay a modest sum for the restoration key; a duty to mitigate damages.
The best approach for companies is to conduct a comprehensive review of the language of their cyber insurance (and traditional) policies to make sure that the language reflects what coverages the company is likely to need. Words have meanings and interpretations. It is better to get all that resolved before you have a damage claim, rather than afterward.
Red Sky Alliance is a Cyber Threat Analysis and Intelligence Service organization. For questions, comments or assistance, please contact the office directly at 1-844-492-7225, or feedback@wapacklabs.com
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[1] https://securityboulevard.com/2021/11/are-ransomware-payments-covered-by-cyberinsurance/
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