Cyber Insurance And D&O Liability

Last Updated: September 19 2019

Article by Deepshikha Dutt

Introduction

In the past decade, there have been several reports of cybersecurity attacks and data breaches to large corporations.1 In many cases, those affected by the breach want to hold the directors and officers accountable, as they feel the corporation failed to implement the proper security measures to prevent a breach from happening or did not effectively handle the aftermath of the breach. However, directors and officers generally enjoy limited personal liability subject to a few exceptions.2 Nevertheless, as more specific guidance emerges for directors and officers handling cybersecurity issues, the scope of this liability may widen.3 Thus, directors and officers should not take comfort in the substantial barriers that prevent them from being held liable for issues relating to the organization.4 In fact, despite these substantial barriers, shareholders continue to pursue derivative actions against directors and officers.

This article will discuss the scope of personal liability directors and officers face relating to cybersecurity breaches, and recent actions pursued against directors and officers in Canada and the US. Following the article, key takeaways will be provided.

Scope of liability

Cybersecurity poses a significant threat to directors and officers as cyber threats continue to emerge, and the rules and regulations that guide cybersecurity continue to evolve. Directors and officers may be held liable in the event of a cybersecurity attack if they are found to have breached their duty of care or have failed to comply with any disclosure requirements. Moreover, directors and officers can be personally liable where a company fails to comply with Canada’s Anti-Spam Legislation (CASL).5

Directors and officers have a duty to exercise reasonable care and diligence, both at common law6 and under corporate statutes.7 Failure to oversee the company’s cybersecurity measures adequately, before and after a breach occurs, could be considered a breach of this duty.8 Moreover, failure to comply with federal and provincial disclosure requirements after a breach could lead to liability for secondary market misrepresentation.9

Therefore, having an appropriate response or compliance plan, and effective security measures to protect the company against future cyber threats is essential. This will help support any claim by a director or officer that all requisite care and diligence was met, and all regulations were complied with.10

Lastly, directors and officers can be held personally liable and receive fines where the company has violated CASL. Penalties for non-compliance with CASL carries a maximum fine of CA$1 million for individuals and CA$10 million for organizations.11 Moreover, directors and officers can be vicariously liable for non-compliance of an organization even where the regulator, Canadian Radio-television and Telecommunications Commission (CRTC), does not pursue the organization. In fact, the CRTC has made a public statement that directors and officers cannot hide behind their company’s structure or online entities to avoid liability.

Derivative actions in Canada and the US

Currently, there have not been any attempts at a lawsuit against directors and officers in relation to cybersecurity in Canada.12 However, given the amount of derivatives actions commenced in the US, it is possible that it could give rise to such claims in Canada. The US has seen several derivative action suits against directors and officers relating to cybersecurity over the past few years.13 All but one have been unsuccessful, largely due to technical and procedural reasons. However, in January 2019, a derivative action lawsuit settled for US$29 million, compensating the plaintiffs significantly.14 This is the first time shareholders have been awarded monetary damages for a breach-related derivative lawsuit. This settlement could spark the beginning of successful derivative action lawsuits, and inspire others to pursue civil actions against directors and officers for cybersecurity breaches. Moreover, this settlement can be used as a benchmark for future civil actions to compare to when deciding on the amount to be awarded. Effectively, this settlement may not only effect civil actions in the US, but also allow derivative actions to gain traction in Canada.

Penalties for violation of Canada’s Anti-Spam Legislation

More recently, the CTRC has held directors and officers personally liable for a company’s violation of CASL. On April 23, 2019, the CTRC found that a coupon marketing company, nCrowd, had violated CASL, and found the former CEO of the company to be personally liable.15 As a result, he received a CA$100,000 fine. Further, a different company that was also part of this scheme with nCrowd, had also violated CASL, and CRTC held this company’s CEO vicariously liable for the violation. As a result, he received a fine of CA$10,000. Ultimately, liability under CASL can extend beyond the corporation if the person authorized, acquiesced or participated in the commission of the violation.

Key takeaways

  • Directors and officers should familiarize themselves with all regulatory guidelines to protect the company from a data breach and to avoid being personally liable for the breach;
  • D&O liability insurance does not always offer protection for cyber-related incidents or threats. It is important to confirm whether this is protected and the scope of protection provided. Not having proper protection could expose directors and officers to liability and significant payouts;
  • There have been no derivative action attempts relating to cybersecurity breaches in Canada, but given the current climate in the US, it is possible this will encourage such claims to occur in Canada; and
  • Directors and officers can be held either personally or vicariously liable for a company’s violation of CASL if that individual played some role in the commission of the violation.

Conclusion

Cybersecurity attacks and data breaches are inevitable and can happen to any organization, thus remaining a significant threat to corporate governance. While a cybersecurity attack is a crime, directors and officers may still be held liable for a breach if they failed to oversee the company’s security measures prior to the breach, or failed to take the necessary course of action after the breach occurred. Ultimately, boards of organizations must recognize the current cybersecurity environment that exists, and assemble a reasonable response plan to respond to these threats when and if they occur. Our final article will provide key takeaways and best practices for both insureds and insurers in relation to cybersecurity risks.

A special thank you to Emeleigh Moulton (summer student) for her assistance with this article.

About Dentons

Dentons is the world’s first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world’s largest law firm, Dentons’ global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

Dispelling 5 Common Cybersecurity Myths

Dispelling 5 Common Cybersecurity Myths

There’s a lot of existing advice and information on cybersecurity out there, but don’t fall victim to any of these common misconceptions that give you a false sense of security.

Myth #1 – All your vendors maintain appropriate security controls

The reality is, your organization’s security is only as strong as your weakest vendor. Vendors can create unforeseen vulnerabilities by not adhering to their own policies. When you first contracted with a vendor, their cybersecurity controls may have been sufficient, but are they continuing to comply with and update them in response to the changing cybersecurity landscape? In the past, each cyberattack would be looked at individually, but now they’re being linked together, creating a domino effect. Many of the large breaches we’ve all heard about can be attributed to a hacker compromising a vendor and leveraging that access to pivot and attack the vendor’s customers. Make sure you’re checking in quarterly or annually to ensure that your partner’s policies and procedures are up to date, reflect current practices and are being followed. Additionally, request that they provide a copy of their cyber insurance policy.

Myth #2 – Cloud services have built-in cyber protections

Almost every company utilizes cloud services in one form or another. The security team for a cloud service company is on the front lines of the internet’s most critical information security issues and their domain continues to expand. Cloud services have responded by operating within a shared security model. The cloud service company controls the physical servers through to the configuration level that is accessible to users. The user retains responsibility for the actual data and services that are being run on the virtual server, unless otherwise stated in your contract. It’s essential that organizations thoroughly understand their responsibilities and how to best leverage the provided security features to ensure they’re taking necessary precautions to avoid an incident. A hybrid security plan that takes into account both on premise and cloud systems is critical.

Myth #3 – It’s possible to predict the next big cyber attack

Today’s headlines are full of cyber breaches that impact not only the companies that experienced the breach, but their customers and beyond. Though there’s a lot of dialogue around the devices, companies and systems that could potentially be attacked, there is no way to predict exactly when or where the next large-scale attack will occur. This is very similar to thinking we can predict earthquakes; despite monitoring seismic activity for patterns, there is no way to predict exactly when and where the next “big one” will occur. So how should businesses and consumers prepare for a cyberattack? If you lived in an earthquake-prone area you would purchase a house that is built to code, have emergency supplies and have earthquake insurance. Prepping for a cyber event is no different; you take precautions and put controls in place to mitigate your risk and reduce impact. Precautions include purchasing cyber insurance, implementing an effective cybersecurity program and developing incident response, business continuity, and disaster recovery plans. Insurance provides the peace of mind needed in the event of an attack and the support to help you get back up and running while reducing financial impact.

Myth #4 – What worked in the past is good enough

In this ever-changing cybersecurity landscape, traditional methods of securing your perimeter, protecting data and addressing privacy concerns are not enough. The main shift we’ve seen is more visibility into what actions a company is taking to reduce their risks. Cybersecurity cannot effectively operate in a silo; it’s the responsibility of every employee and department to incorporate security controls into their daily business operations. To do so, create a layered approach to securing both internal and external resources to properly address risk. Make sure you are increasing your security budget every year to continue to add to your infrastructure tools and ongoing training and education. Providing your team with continued education and new technology is critical in minimizing the risk and impact of a breach.

Myth #5 – My business is not a target

With the sheer amount of news coverage on large-scale cyber attacks, it can lead businesses to become numb to them and contribute to the notion that they’re not important enough to be the next target. In truth, smaller organizations are often a target because of the access they provide to a larger target. Acceptance of the fact that it’s generally a matter of when, not if, a cyber incident will occur is difficult for many companies to adjust to. In the past, breach prevention was the only goal, but today, having a security team that is realistic and accepts that a breach is likely will make them stronger and faster to respond. Companies will ultimately be judged on both the controls they had in place to prevent a breach and their response during and after an incident. Incorporating cyber insurance into your overall cybersecurity plan will not only provide peace of mind to your customers, but also help minimize the impact and downtime after an attack.

Managing Cyber Risk

Remain vigilant and protect your company with the most up to date cybersecurity and insurance options. Don’t fall for the myths or become numb to the countless news stories of breaches. As it’s commonly said, it’s not if your company will face a breach, it’s when.

Source:

Slice

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Cyber Risk Training

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PRINCE TOWNSHIP – ponders cyber liability insurance

Excerpted article was written By Marguerite La Haye | The Sault Star

PRINCE TOWNSHIP — With council braced for soaring expenses and fewer provincial dollars this year, the pressing issue at January’s meeting was whether the township could stretch its budget to include cyber liability insurance when it renews its municipal policy next month.

Carlo DiCandia, of Algoma Insurance, told council it would cost $2,500 extra to include cyber liability insurance in a policy whose premium is already poised to top $33,000 plus HST.

DiCandia said the township’s present policy with Jardine Lloyd Thompson Canada would cover damages to computer and telecommunications systems caused by virus infections and hacking events.

But it would not provide protection if residents and vendors had their privacy breached and decided to sue the township.

DiCandia said cyber liability insurance would not prevent information thefts; however, it would provide coverage for responses to cyber attacks, and for funds stolen from bank accounts.

It would also cover the cost of business interruption, and provide personnel to notify individuals whose data was in the municipal system of the privacy breach and to advise them to contact their banks and credit card companies.

“The new legislation that came in October … (requires) that you have to report hacking incidents immediately,” DiCandia said.

Cyber liability insurance would also cover the cost defending a municipality in court in case of a lawsuit, he added.

DiCandia noted too that cyber attacks on municipal computer systems are no longer rare events, citing incidents in Wasaga Beach and Midland, Ont., last summer, where cybercriminals encrypted their systems with ransomware, forcing them to pay huge ransoms in bitcoins to have their systems released.

“It cost Wasaga Beach roughly $35,000 to get their system back,” he said. “In Midland, it must have been a lot more, because they didn’t even disclose what it cost them.”

Closer to home, Wawa had its system disabled by ransomware in December.  DiCandia predicted the final cost would be “absolutely exorbitant,” as Wawa did not have cyber liability insurance.

Coun. Dave Amadio asked whether the township could scale back other items in its insurance policy to make cyber liability insurance more affordable.

DiCandia suggested opting for higher deductibles but cautioned against cutting back on coverage.

Coun. Michael Matthews asked whether the township could lower the $2,500 price tag for cyber liability insurance by installing specialized software on its system to reduce the risk of a cyber attack.

DiCandia said he would send the township information on how to enhance the security of its computer system.

Council agreed to review DiCandia’s information before the Feb. 12 council meeting, when the question of whether to purchase cyber liability insurance will be put to a vote.

In other council news:

— The result of this month’s poll on the topic of recycling pickup dates suggests that most residents want to continue recycling every two weeks instead of switching to 3-week or 4-week intervals.

Of the 47 residents who responded to the poll, 31 wanted to keep biweekly recycling, and 11 opted for monthly recycling.  Five thought three-week intervals would suffice, but Prince CAO Peggy Greco said GFL Environmental Inc. didn’t favour this option.

The poll was conducted via the township’s web site, its Facebook page and Instagram account as well as in the January Prince Township Newsletter.

Given the response, council agreed to maintain biweekly recycling for now, but to revisit the issue at budget time.

“If we went to (every) four weeks, it would save us $20,000,” Amadio said.

— The township’s Official Plan, which dates from 2014, is due for its five-year review. Council agreed to have township planner Steve Turco update the OP at an estimated cost of $2,800 once this year’s budget is approved.

The update will bring the OP into compliance with the Provincial Policy Statement and provide direction on whether the micro-cultivation of cannabis should be a permitted activity in rural areas.

Canadian banks look to in house hackers to improve and test cybersecurity

Hackers are targeting Toronto-Dominion Bank’s internal systems at all hours using cutting-edge techniques, but the bank’s head of cybersecurity isn’t losing sleep over them — they work for him, after all.

The bank established late last year an in-house “red team” of ethical hackers — cybersecurity professionals who attempt to hack a computer network to test or evaluate its security on the owners’ behalf — who conduct live attacks against its own networks continuously, said Alex Lovinger, TD Bank’s vice-president of cyber threat management.

“We’re doing it exactly how our adversaries would do it… So if we find a weakness or something like that, we can close it or address it before a real attacker,” he said.

Canada’s biggest banks are fortifying their defences by hiring their own ethical hackers to test their systems as the frequency and sophistication of cyberthreats increases.

A Senate report last month entitled “cyber.assault: It should keep you up at night” sounded the alarm about the potential consequences of major cyberattacks in Canada.

“While some progress has been made federally in the past year, there is much more that the federal government and Canadians must do to protect ourselves,” said the report of the Standing Senate Committee on Banking, Trade and Commerce. “We must take the appropriate steps now, or soon we will all be victims.”

Bank of Canada governor Stephen Poloz has also raised concerns about a cyberattack.

In 2017, 21 per cent of Canadian businesses reported that they were impacted by a cyber security incident which affected their operations, according to Statistics Canada. Banking institutions, not including investment banks, reported the highest level of incidents at 47 per cent, followed by universities and the pipeline transportation subsector, according to the agency.

New regulations that require Canadian businesses to alert their customers about privacy breaches or face hefty fines took effect at the beginning of this month.

In May, the Bank of Montreal and the Canadian Imperial Bank of Commerce’s Simplii Financial digital banking brand said thousands of their customers may have had their personal and financial data compromised.

BMO said hackers contacted the bank claiming to be in possession of the personal data of fewer than 50,000 customers, and that the attack originated outside of Canada. At the same time, Simplii also warned that “fraudsters” may have accessed certain personal and account information for about 40,000 clients.

BMO’s chief executive Darryl White said he could not comment on the details of the privacy breach, as an ongoing investigation is underway, but noted there was a “very immaterial impact from a fraud perspective” and no material financial fallout.

“We are a lot smarter as every event goes on. And there are events every day, there are events every hour of every day… It’s a continual improvement exercise,” White told reporters after the bank’s recent investor day.

Meanwhile, BMO is also turning to in-house ethical hackers to test their systems. According to a recent job posting, BMO is seeking a senior manager with a certification in ethical hacking and whose responsibilities include managing a team of “network penetration testing” specialists.

CIBC did not respond to questions about whether it utilizes ethical hackers.

“We leverage internal and external expertise, and work closely with industry and government to enhance cyber security resilience, threat intelligence and best practices,” a spokeswoman said in a statement.

Alberta-based bank ATB Financial in a recent job post said it was recruiting a “Senior Penetration Tester” with ethical hacking experience. An ATB spokeswoman said the posting is to fill a recently vacated role.

The Bank of Nova Scotia also established its own in-house “red team” of hackers to test its defences, said its chief information security officer Steve Hawkins.

“Scotiabank has used and continues to use third-parties to handle this penetration testing. However, because the volume of global cyber threats has significantly risen, the Bank wanted to have its own capabilities in-house and created its own red team this year,” he said.

With the string of data breaches in recent years, what does worry TD’s Lovinger is the cumulative amount of data that has been exposed.

“Hackers now sit on a wealth of information… That they can now leverage to do more targeted attacks,” he said.

Royal Bank of Canada has had in-house ethical hacking capabilities for a few years now, as part of its cybersecurity program, said Adam Evans, the bank’s vice-president of cyber operations and chief information officer.

“We want to make sure that we are testing our defences to make sure they stay relevant,” he said.

RBC has been upping its cybersecurity budget and adding to its team annually. It now has roughly 400 cybersecurity professionals, up 50 per cent from three years ago, but a talent gap looms, Evans said.

Demand for talent in Canada is climbing by seven per cent annually and there will be more than 5,000 roles to fill between 2018 and 2021, according to Deloitte. By 2022, the cybersecurity workforce gap is expected to reach 1.8 million, it said.

As of October, there were 1,024 cybersecurity vacancies for every million Canadian job postings, up five per cent over the past year, according to Indeed Canada. That’s up 73 per cent since the beginning of 2015, said Brendon Bernard, an economist for the job search platform.

Meanwhile, several Canadian banks have made recent investments in research or capabilities abroad or in universities at home to tap cybersecurity talent. For example, TD opened a cybersecurity-focused office in Tel Aviv, Scotiabank announced a partnership with an Israeli cybersecurity company and RBC made an investment in research at Ben-Gurion University.

“With the talent gap in cyber, it’s something that organizations are going to have to address,” said Evans. “Because there is just not enough qualified people out there.”

Privacy concerns over credit card use for legal online pot purchases

Canada’s privacy commissioner is planning to issue guidance for buyers and sellers of legal cannabis amid ongoing concern about potential fallout, such as being barred from the United States, if transactions become known by third parties.

The concern has been heightened in provinces where anonymously paying cash in-store is not possible in light of a controversial Statistics Canada initiative to obtain detailed bank records from all Canadians.

“Our office recognizes the sensitive nature of cannabis-related transactions _ particularly if information about those transactions is processed in a jurisdiction where cannabis consumption is not legal,” said Tobi Cohen, a spokeswoman for the federal privacy commissioner. “Organizations need to make it plain to individuals that their information may be processed in a foreign country, and that it may be accessible to law enforcement and national security authorities of that jurisdiction.”

British Columbia has already issued its own guidance and privacy-protection tips. For example, it notes that online sellers collect personal information such as name, date of birth, home address, credit card number, purchase history and email address.

“Providing personal information, especially through online formats, creates additional security risks,” the document by B.C.’s privacy commissioner notes. “Cannabis is illegal in most jurisdictions outside of Canada; the personal information of cannabis users is therefore very sensitive.”

Legal online purchases across Canada show up on bank statements in a variety of ways, depending on the retailer.

In Manitoba, for example, an order from the outlet Delta 9 shows up as “D9-2 -8675309 Winnipeg MB,” while purchases in British Columbia appear as `”BCS Online Vancouver.” Those in Nova Scotia are recorded as coming from the provincial liquor corporation _ “NSLC #2098/e-commerce Halifax.” Similarly, in Newfoundland and Labrador, orders register as NLC #700 St. John’s N.L.

In Ontario, where the only way to buy marijuana legally is online through the Ontario Cannabis Store using a credit card, transactions show up as “OCS/SOC.”

Jesse, 39, of Toronto, who’s in marketing and who asked his last name not be used, said he has mixed feelings about “OCS/SOC” appearing on his credit-card statement.

“I’m not crazy about being potentially profiled at the U.S. border because of a purchase that’s thrown up in my credit history,” Jesse said. “At the same time, I’m not losing sleep over it because there’s no precedent (for that) yet.”

In the pre-legal era, online outlets usually masked credit-card purchases, perhaps by using a generic notation such as “Organics,” and some still do so now. However, a spokeswoman for the Ontario Cannabis Store said such an approach doesn’t fly.

“As a legal business operating in Ontario, it is required that we operate with transparency,” Amanda Winton said. “This includes using our registered business name for payment services.”

Ontario’s privacy commissioner, Brian Beamish, said his office recommends redacting sensitive information in a case where, for example, a landlord might ask a prospective tenant for a credit card statement. Beamish also said a generic name used to record cannabis transactions could become widely known.

“The key issue here is the protection of bank information, whether it’s related to legal cannabis transactions or any other personal banking decision,” Beamish said.

Troy Patterson, who works with a licensed cannabis producer in Kincardine, Ont., said pot is legal and he wasn’t particularly worried about purchases showing up on credit card or similar statements.

“Now, if that info were to be weaponized against people, say for insurance or other purposes, that would be a huge issue,” Patterson said.

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