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Covington Internet of Things Update: Promise and Peril — IoT and Your Insurance

Two hundred billion IoT devices could be in use by 2020, according to one estimate cited in the World Economic Forum’s recent report, Mitigating Risk in the Innovation Economy.  This rapid integration of the digital world and the physical world presents unprecedented opportunities for businesses in a wide array of industries.  But it also creates unprecedented risks.  Despite ongoing efforts to create security standards for IoT devices — for example, the National Institute of Standards and Technology’s recent draft paper to this end — the security of such devices currently remains wanting.  With the cyber and physical worlds so closely intertwined, future hacking incidents may threaten not only electronic data, but also property and lives.

Policyholders adopting IoT and related technologies may face uncertainty over coverage for these so-called “cyber-physical” harms under commonly available insurance policy forms.  Most cyber insurance policies have expressly excluded coverage for bodily injury and property damage, while standard-form general liability and property policies may have exclusions that some insurers invoke to dispute coverage for cyber-related harms.  In recent years, however, new insurance policies and endorsements have emerged to address this coverage uncertainty by giving policyholders options for explicit coverage for physical damage from cyber attacks.

As policyholders adopt technology that links their physical systems to digital components, they should consider what potential real-world harms could result from their cyber-networked things — and whether their existing lines of insurance cover them.  Such policyholders may conclude that it is time to explore the newer insurance products specifically geared towards cyber-physical risks.  Even these purpose-built policies and endorsements call for careful scrutiny and potential negotiation, however, because they are not standardized. Not only do policy wordings vary, but so do individual policyholders’ risk exposures. For example, a policyholder that may be an especially attractive target for state-sponsored hacking may need to pay particular attention to the wording of exclusions such as the common “war” and “terrorism” exclusions.  Guidance from experienced coverage counsel and sophisticated insurance brokers is useful, if not essential, for those exploring this relatively novel territory.

© 2018 Covington & Burling LLP


About this Author

John G. Buchanan III, Covington, Stress Injury Lawyer, Dispute Resolution Attorney

John Buchanan, a partner in Covington & Burling's Washington office, has been engaged in insurance coverage advocacy, dispute resolution and counseling since the early 1980s. He served as the firm's first Insurance Practice Group Coordinator for a decade. Mr. Buchanan's coverage litigation career began with DES and asbestos claims and has subsequently extended to environmental, hearing loss, repetitive stress injury, "deleterious substance" and other mass tort claims; broadcast, intellectual property and competition-related liability coverage claims; D&O, E&O...

202 662 5366
Dustin Cho, Covington, technology industry lawyer, commercial litigation attorney

Dustin Cho represents clients in the media, sports, and technology industries in commercial litigation. Mr. Cho has represented his clients in trial and appellate courts, mediations, and arbitrations, and before federal agencies such as the FCC and the Copyright Royalty Board. Mr. Cho also advises clients on policy and regulatory issues that affect the media, sports, and technology industries.

Patrick Raswthorne Insurance Lawyer Covington

Patrick Rawsthorne is an associate in the Insurance Recovery Practice Group. Before joining Covington, Mr. Rawsthorne clerked for the Honorable David W. McKeague of the United States Court of Appeals for the Sixth Circuit.

Mr. Rawsthorne is a member of the Bar of Michigan. District of Columbia bar application pending; supervised by principals of the firm.