Does Directors Insurance Cover Liability From Data Breaches?
Why Ask Does Directors Insurance Cover Liability From Data Breaches? Does directors insurance cover liability from data breaches is one of the many questions that directors of Canadian organizations should be asking with the goal of ensuring they are appropriate protecting the organization they have a fidcuciary duty to serve, but also to protect their own personal assets. Directors in all industries across Canada are having to deal with the reality of a legal legislatitve and technologifical environment so ensuring their is clarity on what is and isn’t covered by your organizations insurance program and asking questions like “Does directors insurance cover liability from data breaches” is important.
The insurance, risk management and financial implications of data breaches extend far beyond, data breach, cyber and privacy policies. As D&O Compass coeditor Bob Bregman discussed before, the risk of cyber-related shareholder derivative lawsuits against directors and officers is an exposure worthy of attention. Unfortunately, there is a split in the courts, and much-resulting confusion, with regard to a critical element of data breach lawsuits: the issue of standing to sue.
Essentially, as was discussed recently in Business Insurance, the courts are split on the issue of whether the risk of future harm (i.e., the risk that compromised information could be used at some point in the future to steal one’s identity, take money from a bank account, harm a credit score, etc.) is sufficient for a class of data breach claimants to pursue legal action against the breached company. While some US courts have each ruled in various cases that the risk of future harm is sufficient to establish standing, other courts have ruled that this is not the case.
So Does Directors Insurance Cover Liability From Data Breaches?
“As the issue of standing to sue in the event of a data breach becomes more clear, there may be secondary effects on both the frequency and the chances of success of breach-related shareholder derivative lawsuits. In other words, if the risk of future harm is more commonly interpreted as sufficient to establish standing, then more class action lawsuits will likely follow. If more class actions follow, companies will have a greater chance of suffering significant financial losses. If companies have more significant financial losses, especially when those losses are significant enough to impact their stock prices, then it is more likely that they could be exposed to a shareholder derivative lawsuit.
In these lawsuits, directors and officers, and the entity as a whole, could face allegations such as:
- failure to timely disclose a breach to shareholders and customers,
- failure to implement internal controls to prevent the compromise of the data,
- failure to protect data after discovery of the breach
- failure to be properly insured against the financial consequences of the data breach. “
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