21 Aug 2014

The new frontier: Cyber risk management and insurance part 1

by David Gerber

Cyber risks can come from the malice of others, or the negligence of your own organisation.

Every day we share more information electronically, and companies handling this increasing volume of data face increasing risks from hackers, viruses and human error. These risks may lead to privacy breaches, system shutdowns or even electronic blackmail. This can have significant impacts on companies – practically and legally. Beyond the immediate costs to resolve these issues, there can be profound impacts on reputation and liability to third parties.

While companies usually can articulate these risks, they are often ill-prepared for them when it comes to insuring them. It may not be enough to rely on traditional property and liability policies to cover cyber risks. However with greater awareness of the risks, and of the benefits of bespoke cyber risk insurance, companies can limit their exposure against the unknown and unexpected. In this article we'll explore the growth of cyber risks.

Some varieties of cyber-attacks

There were numerous cyber-attacks throughout 2013 – targeting companies as large as Microsoft, Facebook, and Neiman Marcus. They have focused the business world's attention on a range of cyber risks, such as data breaches or denial of service, for criminal gain or simply for demonstrations of political 'hacktivism'.

A recent high-profile data breach involved US retailer Target Corporation in late 2013, and is estimated to have compromised 40 million credit and debit cards (including PIN numbers) across the company's 1,800 US stores. Further reports suggest that the parties responsible may also have taken the personal contact information for as many as 70 million customers as well, making this security breach one of the largest attacks in history.[1] Surprisingly, this was not a single strategic hack of Target's central database or website. Instead, there was an infiltration of malicious software ("malware") into Target's checkout machines activated once the Christmas holiday shopping period began.

Other recent cyber-attacks have involved "Denial of Service" raids exploiting small weaknesses in the infrastructure of the internet originally designed without malicious activity in mind.[2] These attacks can render websites inaccessible and shut down ongoing web traffic indefinitely.

These both appear to be sophisticated and orchestrated cyber-attacks. Large companies may be able to invest significant resources into system protection and early-detection software, but they must constantly be one step ahead of cyber-attackers who are quick to adapt their methods. Smaller companies are at even greater risk given their comparative lack of resources for managing these exposures.

Cyber risks: Not always from outsiders

Data breaches are not restricted to unwanted third-party activity. Internal errors, system failures and poor information handling policies can also lead to lost data. Any organisation is vulnerable to internal leaks involving fraudulent employees, although employee negligence can be equally significant.

This requires careful consideration of how networks can be compromised by lost or stolen hardware (such as computers and storage devices like USBs), ensuring only the right people have access to secure databases, and proper training to prevent inadvertent disclosures.

The impacts on the ground

So what is the potential cost of a cyber-attack or data breach? In most cases the first response will be to conduct investigations, audits and repairs to remedy the relevant vulnerability. What has happened? How do we fix it and get back online?

Then the focus will be external. It may be necessary to notify affected parties such as customers and partner organisations. Where the data lost is of a private or sensitive nature, the company may face possible claims by third parties and penalties as imposed by law or regulation. This inevitably requires legal advice and representation.

The immediate impacts are likely to be expensive external consultants, forensic investigators, lawyers and technical support hired to assist with whatever is needed to ensure business continuity.

The loss of a system that has been compromised by a virus or malware may impact day-to-day operations. There could be lost revenue from the business interruption.

However, perhaps the most acute damage will be to the company's reputation and future custom. The steps to repair a damaged reputation could involve extensive public relations campaigns. If credit card details are lost, the company may incur costs to offer complimentary credit monitoring services to customers. Often these public relations and communication efforts will be combined with a concerted campaign to demonstrate better network security.

Finally, the difficulty in quantifying loss of confidence and trust among customers may translate into long-term marketing efforts to rehabilitate and restore a company's goodwill over time.

Data breaches and Australia's Privacy regime

If the shifting cyber landscape is difficult to secure, it is also difficult to regulate. Lawmakers and supervisory organisations are sometimes found playing catch-up only after a breach or an attack.

Australia's privacy law has recently undergone significant reform to improve the protection of the growing amount of information held by government and business. The harmonisation of various privacy principles into Australian Privacy Principles (APPs), which came into effect on 12 March 2014, is part of a scheme under which "serious or repeated interferences with privacy" can lead to civil penalties of up to $1.7 million for companies or $340,000 for individuals. In cases involving data breaches, there are three potential ways that a company could be found to be in breach of the APPs:

APP 6 forbids businesses holding personal information from using or disclosing that information for any purposes other than those for which the information was collected. This principle may be breached by, for example, disclosure through the accidental publishing of information (as with Telstra in 2013).

APP 8 requires businesses to take reasonable steps to ensure that any overseas recipients of Australian personal information (such as a database host, or a cloud server) do not breach the APPs. This principle may be breached if a business fails to take reasonable steps and there is a breach involving data in the control of an overseas recipient.

APP 11 mandates that any business holding personal information take all reasonable steps to protect that information from misuse, interference and loss, as well as unauthorised access, modification or disclosure. The Office of the Australian Information Commissioner's (OAIC's) current Guide to information security – 'Reasonable steps' to protect personal information explains that the "inclusion of ‘interference’ in APP 11 is intended to recognise that attacks on personal information may not be limited to misuse or loss, but may also interfere with the information in a way that does not amount to a modification of the content of the information (such as attacks on computer systems)". A company would be well advised to consider its systems and OAIC's guidance in relation to this principle. An updated draft of the Guide to information security has recently been released for consultation.

The second set of reforms relate to the powers of the Australian Information Commissioner. These changes will now allow the Commissioner to conduct assessments of compliance with the APPs, accept enforceable undertakings, make determinations on its own investigations (without a complaint of external parties), seek civil penalties for serious or repeated breach of privacy and recognise external dispute resolution schemes for privacy-related complaints.

Finally, it is possible that Parliament will establish a mandatory notification scheme for serious data breaches under the Privacy Amendment (Privacy Alerts) Bill (Cth). The original version of this draft legislation lapsed in 2013 but was reintroduced into the Senate by the Federal Opposition on 20 March 2014. The Bill would amend the Privacy Act 1988 (Cth) to require companies to notify the OAIC and take reasonable steps to notify affected individuals of serious data breaches as soon as practicable. Failure to comply with these obligations would be deemed to be an interference with the privacy of an individual, thereby potentially engaging the Commissioner's powers introduced in March. The Bill is still before the Parliament.

In the second part of this article, we will look at the option to manage cyber risks using insurance.

Thanks to James Bai and Mark Wiese for their help in writing this article.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.