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Cyber Insurer Seeks to Void Data Breach Coverage Because of Purported Misstatements in Policy Application

Cyber insurers commonly require insureds to complete detailed applications, often including extensive technical disclosure and risk self-assessments. The complaint recently filed by the insurer in Columbia Casualty Co. v. Cottage Health System illustrates the pitfalls in these requirements.

Cottage Health, an operator of a hospital network, suffered a data breach in 2013 resulting in thousands of its patients’ private medical information being publicly disclosed. In addition to other losses, Cottage Health paid $4.125 million to settle a putative class action in 2014 and faces additional proceedings arising from the breach. Columbia’s lawsuit denies all coverage for the breach and seeks to rescind its policy due to the insured’s alleged failure to comply with the cybersecurity practices described in its application.

In its complaint Columbia contends, first, that the “Failure to Follow Minimum Required Practices” exclusion in its cyber policy—applying to losses from, among other things, the Insured’s failure “to continuously implement the procedures and risk controls identified in the Insured’s application”—precludes coverage for Cottage Health’s losses.

Columbia further contends that it has a right to void its policy altogether due to alleged misstatements in the “Risk Control Self Assessment” that Cottage Health completed as part of its cyber insurance application. For example, Columbia alleges that Cottage Health misrepresented:

  • “that it replaced factory default settings to ensure that its information security systems were securely configured”;

  • “that it regularly checked and maintained security patches on its systems”; and

  • “the degree of due diligence Cottage exercised with respect to [its information security management vendor’s] safeguards.”

Relying on its broadly worded “Application” condition and “Minimum Required Practices” warranty, Columbia asserts that even if Cottage Health did not intend to deceive, a negligent misrepresentation or omission of material fact is enough under these clauses for Columbia to deem its cyber policy “null and void.

One lesson for policyholders from the Cottage Health lawsuit is that the cyber insurance application process and its relation to policy conditions and exclusions must be managed with care, not only to avoid potential misstatements and omissions, but also to close off potential opportunities for the insurer to engage in “post-loss underwriting”; that is, after receiving notice of a loss, to search for inaccurate application responses—even those innocently made, and even those unrelated to the loss—to support a denial of coverage.  Both risk managers and IT personnel, with the assistance of cybersecurity experts if necessary, must actively engage in preparing the responses to cyber insurance application questionnaires and risk self-assessments.

In addition, any new cyber policy wording requires expert legal scrutiny before purchase, because these specialty insurance products can contain gaps or hidden traps. For example, Cottage Health might have averted its dispute with Columbia if the policy’s potentially onerous “Failure to Follow Minimum Required Practices” exclusion had been modified or deleted. Similarly, the policy’s strict “Application” and “Minimum Required Practices” clauses might have been moderated—for example, by limiting the right of rescission to cases of intentional misrepresentation of material facts.

© 2019 Covington & Burling LLP

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About this Author

John G. Buchanan III, Covington, Insurance litigation attorney
Senior Counsel

John Buchanan, senior counsel in Covington's Washington office and the firm's first Insurance Practice Group Coordinator, has represented policyholders in insurance coverage advocacy, dispute resolution and counseling for over three decades. His career has ranged from the early DES and asbestos coverage litigation to claims for some of the largest cyber losses in history. Mr. Buchanan has litigated, arbitrated or negotiated a wide variety of complex property and casualty insurance claims, from railroad derailment claims to satellite-in-orbit claims, and from silver-theft...

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P. Benjamin Duke, Covington, Litigation attorney
Partner

Ben Duke advises and advocates for insurance policyholders in a broad range of complex litigation, arbitration and other matters involving all types of insurance, from general liability to D&O, professional liability, fidelity bond, and other specialized coverages.

Mr. Duke has helped obtain significant insurance recoveries on behalf of clients in many industries, including the financial services, technology, energy, and pharmaceutical industries. He is currently handling major coverage litigation in New York courts and has nationwide experience litigating in state and federal courts and in numerous arbitration forums. As co-lead trial and appellate litigation counsel, Mr. Duke recently helped a major technology company recover over $150 million in coverage for a massive government-mandated environmental remediation in Wisconsin’s Fox River.

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Scott Levitt, litigation attorney, Covington
Special Counsel

Scott Levitt has twenty years of experience representing policyholders in numerous types of insurance coverage claims. These matters include cyber-risk, mass tort, asbestos, silica, mixed dust, environmental, product liability, employment discrimination, errors and omissions, first-party losses, crime and employee dishonesty. Mr. Levitt has successfully represented policyholders in insurance recovery proceedings in federal and state trial and appellate courts around the U.S., as well as in mediation and international and domestic arbitrations. Mr. Levitt's practice often...

202 662 5661
Albert (Bert) Wells, Covington, Insurance Litigation Attorney
Partner

Bert Wells is a partner in the insurance coverage and litigation practices of Covington & Burling LLP. He began representing commercial policyholders in connection with complex insurance recovery matters in 1995, and regularly represents policyholders, including Fortune 100 and 500 companies, in a wide range of insurance coverage matters. He advises policyholders on assessing and maximizing the value of claims, developing and executing insurance recovery strategies, negotiating settlements, and resolving large claims through litigation, arbitration and mediation. He...

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