Does CGL insurance cover cyberattack damages?
A restaurant chain was sued for more than $20M by its merchant bank after hackers stole customers' credit card information.
The U.S. Court of Appeals for the Fifth Circuit recently ruled that the policyholder is entitled to defense coverage under a commercial general liability (CGL) policy for a $20 million lawsuit after a cyberattack grabbed payment card information from its computer systems.
The decision is significant because it underscores how insurance coverage for cyber claims can come under different insurance products.
In Landry’s Inc. v. the Insurance Co. of the State of Pennsylvania, the Fifth Circuit reversed a trial court ruling that had favored the insurance company. Landry’s, a multi-brand restaurant and hospitality company, was sued for more than $20 million by its merchant bank Paymentech after Visa and Mastercard had assessed damages against Paymentech for payment card fraud charges and replacement expenses stemming from a hacker’s theft of payment card information at certain Landry’s locations.
After Visa assessed Paymentech’s liability for the data breach at $12.7 million and Mastercard at $7.8 million, the merchant bank sought to pass this liability on to Landry’s, which sought coverage under a CGL insurance policy. The Insurance Company of the State of Pennsylvania (ICSOP) denied coverage to Landry’s.
‘Personal injury’ and cyberattack damages
The policyholder asserted that it was expressly promised CGL coverage for the underlying merchant bank complaint because Paymentech was seeking damages “arising out of . . . [the] [o]ral or written publication . . . of material that violates a person’s right of privacy.” The insurance company fought the insurance claim on multiple grounds, including whether there was a “publication” of the sensitive payment card information that the hackers stole. In finding that there was a covered publication of sensitive payment card information alleged in the underlying complaint, the Fifth Circuit explained:
The Paymentech complaint plainly alleges that Landry’s published its customers’ credit card information — that is, exposed it to view. In fact, the Paymentech complaint alleges two different types of “publication.”
The complaint first alleges that Landry’s published customers’ credit card data to hackers. Specifically, as the credit card “data was being routed through affected systems,” Landry’s allegedly exposed that data, including each “cardholder name, card number, expiration date and internal verification code.”
Second, the Paymentech complaint alleges that hackers published the credit card data using it to make fraudulent purchases. Both disclosures exposed or presented the credit card information to view. And either one standing alone would constitute the sort of “publication” required by the policy.
Next, the panel rejected the insurance company’s argument that the CGL insurance policy’s personal injury coverage was narrow in scope, holding instead that the publication of the credit card information arose out of a violation of a person’s right to privacy. The Fifth Circuit found that “the policy instead extends to all injuries that arise out of such violations.” The Fifth Circuit also held that it’s “undisputed that a person has a right of privacy in his or her credit card data. It’s also undisputed that hackers’ theft of credit card data and use of that data to make fraudulent purchases constitute ‘violations’ of consumers’ privacy rights. And it’s still further undisputed that the Paymentech [underlying] complaint alleges such theft and such fraudulent purchases. Thus, the plain text of the policy anticipates ICSOP’s duty to defend in the underlying Paymentech litigation.”
The insurer also argued that even if there was a covered publication of stolen payment card information, insurance coverage was still not available because the personal and advertising injury coverage “only” applied to tort losses and not to losses arising from a breach of contract.
The Fifth Circuit rejected this argument, finding that the relevant insuring clauses did not say what the insurance company claimed they said: “ICSOP urges us not to follow the plain text of the policy and instead to alter it. In ICSOP’s view, the policy covers only tort damages “arising out of . . . the violation of a person’s right of privacy.” Thus, ICSOP suggests it might defend Landry’s if it were sued in tort by the individual customers who had their credit card data hacked and fraudulently used. But ICSOP thinks it bears no obligation to defend Landry’s in a breach-of-contract action brought by Paymentech. Of course, the policy contains none of these salami-slicing distinctions.”
The panel concluded that it “does not matter that Paymentech’s legal theories sound in contract rather than tort. Nor does it matter that Paymentech (rather than individual customers) sued Landry’s. Paymentech’s alleged injuries arise from the violations of customers’ rights to keep their credit-card data private.” The Fifth Circuit reversed and remanded the case, finding that the CGL insurance company “must defend Landry’s in the underlying Paymentech litigation.”
Risk management lessons
This case reminds policyholders to have insurance coverage for their cyber claims under insurance products beyond just their dedicated cyber insurance policies. Further, some policyholders may have had their personal injury coverage moved from their CGL policies in recent years and placed, instead, into their cyber liability insurance agreements or in their E&O insurance policies.
While there is no one-size-fits-all approach for assessing where and when cyber coverage will be available, there is one universal rule when it comes to dealing with cyber-related claims: give notice across the board to every possibly implicated insurance policy. And make that notice prompt. Cyber insurance claims tend to be hard-fought, given their size, increasing frequency, and novelty, so it’s best not to complicate them further by opening the door for an insurance company to exploit “late notice” arguments. Underwriters we have spoken with on panel discussions have themselves indicated that if they were in the policyholder’s shoes, they would give notice broadly.
Given that case law involving cyber insurance claims is limited and does not yet give a full and clear picture of how to navigate claims and dense policy terms, policyholders should act to keep their options open when it comes to determining what policies provide what coverage for each category of loss stemming from a cyber incident.
Joshua Gold is a shareholder in Anderson Kill’s New York office. He is chair of the Cyber Insurance Recovery Practice Group and co-chair of the Marine Cargo Insurance Group.
These views are the author’s own.
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