Neiman Marcus case a reminder to check your cyber coverage

In a decision that should send major corporations to double-check their cyberinsurance, a federal appeals court ruled Monday that retail customers could go ahead and file a class-action lawsuit against Neiman Marcus in the wake of last year’s data breach.

Previously, such cases were dismissed because the customers hadn’t suffered any actual damages.

In the decision, the judges ruled that breach posed a substantial risk of harm to the customers.

“Why else would hackers break into a store’s database and steal consumers’ private information?” they said.

They also pointed to the fact that Neiman Marcus offered the victims a year of credit monitoring. “It is unlikely they did so because the risk is so ephemeral that it can safely be disregarded,” the judges said in the ruling.

“If similar decisions follow suit, the likelihood is that the cost of a cyber breach for retailers will increase,” said Tim Francis, enterprise cyber lead at Hartford, Conn.-based Travelers. “With this in mind, it is more important than ever that businesses ensure that they have cyber liability coverage, and, if they do, that they have adequate limits in place.”

Cyberinsurance costs are also rising because of the price of business disruption, revenue loss, equipment damages, legal fees, public relations expenses and forensic analysis, as well as notification costs that are legally mandated in 47 states, he added.

“With this recent decision, defense costs can add up quickly and can exhaust the policy aggregate limit,” said Christine Marciano, president at Cyber Data-Risk Managers.

That could leave a company without enough funds to pay out to plaintiffs.

“A company should consider purchasing a cyber insurance policy that offers defense costs outside of the policy limit in order to ensure the company can sustain the aftermath in such instances as Neiman’s lawsuit reversal,” she said.

However, the Neiman Marcus case is just one decision, cautioned attorney Scott Vernick, head of the data protection and privacy practice at Philadelphia-based Fox Rothschild LLP. Other courts may or may not follow, he said.

There also have been other cases that went in favor of the victims of a data breach, he said, though in most instances they were dismissed because the plaintiffs had not suffered actual damages, so had no standing to file suit.

This could be an opportunity for companies to double-check their policies and make sure they’re covered for litigation, in addition to sending out notices to the victims and paying for credit protection.

In addition, he said, companies should check that their cyberinsurance is tailored to the needs of their particular business, since the level of potential risk is different for different industries.

“And depending on what kind of business you have, you certainly want to make sure that it will cover any response to any investigations by law enforcement and regulatory agencies and any fines that might be imposed,” he added. “That’s something a lot of companies overlook.”

In addition to checking what the policies will cover, companies should also check the other fine print — what they have to do in order not to void the coverage, said Eric Cole, fellow at SANS Institute.

“For example, many policies state that organizations must apply all patches to all systems within a set period,” he said. “Many organizations fall short on a few servers which will allow the insurance company to not have to pay on the policy.”

Cyberinsurance is a rapidly-evolving field, experts say, very different from auto insurance or fire insurance. Instead of a hundred years of data, the number of breaches is tiny by comparison, and records only go back a few years. Plus, with technology changing as rapidly as it is, data points from a couple of years ago will be out of date tomorrow.

“Companies should always be re-evaluating cyberinsurance,” said Dan Weedin, president at Toro Consulting. “In order to be protecting what they want to protect, it’s important to be reviewing this coverage on a minimum of an annual basis, if not more often.”

Every business is different in how it uses technology and how much sensitive data is collected and stored, and the situations change quickly if, say, a company decides to start offering its customers a new payment channel.

“This causes an increased exposure that can be missed,” he said. “Insurers are getting much better at identifying areas of concern.”

The situation is certainly better than it was 10 years ago, he added, with insurance agents becoming more knowledgeable about these policies.

“They are better now, yet not what I would consider cutting edge,” Weedin said.