Cyber Insurance: The case of P.F. Chang

Cyber Insurance: The devil is in the details

In P.F. Chang’s China Bistro, Inc. v. Fed. Ins. Co., (U.S. Dist. Ct. LEXIS 70749, 2016) the U.S. District Court for the District of Arizona ruled in favor of the Federal Insurance Company in holding that the cyber insurance policy did not cover fees or penalties levied by the credit card processor (Bank of America).

An article in Business Insurance indicates the 2016 P.F. Chang case was one of the first rulings focused on cyber insurance and has some important implications.  The article indicates that the assessments imposed by MasterCard on Chang’s credit card processor, Bank of America, were not covered under Chang’s cyber insurance policy.  Thus, Chang’s was solely responsible for the $1.9M assessed by Bank of America against Chang’s.  While, Federal Insurance Company did reimburse Chang’s for $1.7M related to the breach, litigation associated with the breach, and a forensic investigation, the $1.9M in fees from Bank of America were above and beyond that amount.

The court in Chang’s held that Bank of America Merchant Services (BAMS) had a separate agreement with Chang’s and that there was no evidence that Chang’s, ever attempted to include potential BAMS fees in the cyber insurance policy or that Chang’s even raised this as a concern during negotiations.

While Chang’s does attempt to use the reasonable expectation doctrine, the Court found that this doctrine relies on two predicate conditions: (1) the insured’s expectation of coverage must be objectively reasonable; and (2) the insurer must have reason to infer that the insured would not have purchased the policy if it included the now offensive provision.  The Court found that there was nothing to support Chang’s contention that they believed that assessment fees would be covered by the insurance policy, they provided no proof to suggest that this had been an element of the negotiations or that this was ever discussed during the underwriting process. Consequently, the court found that a failure to discuss coverage in the context of credit card assessments fails to meet the first condition of the doctrine and thus the doctrine is inapplicable.

Take-away:

While cyber insurance policies are relatively new they are likely to be governed by existing interpretations of traditional insurance policies.  Consequently, it is important that the policies are carefully reviewed and that in the case of data breaches that the insured carefully evaluates the policy and understands any potential pecuniary losses that could be incurred either directly or indirectly from a data breach.  As P.F. Chang’s found out, had they negotiated the ancillary fees from BAMS they could have saved millions.  Furthermore, while neither this case nor the article addressed this, entities need to understand any exclusions related to pre-existing conditions. Thus, a complete and thorough cybersecurity assessment and audit should be undertaken to ensure that an insurer will not be able to deny coverage based on a previous breach (which should be uncovered during an assessment and audit review process).

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Authors

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Professor William Snyder

Professor William C. Snyderis a member of the faculty of the Institute for National Security and Counter-terrorism at Syracuse University after fifteen years with the United States Department of Justice.

Ryan D. White

Ryan D. WhiteRyan is currently a third year law student at Syracuse University College of Law, and is also pursuing a Master of Public Administration degree from Syracuse’s Maxwell School of Citizenship and Public Affairs. Ryan spent time with Homeland Security Investigations while pursuing his undergraduate degree at Wesleyan University, and spent his first summer of law school as clerk for the U.S. Attorney’s Office in the Western District of New York. He is a member of Syracuse Law Review, the Journal on Terrorism and Security Analysis, and participates in the Veteran’s Legal Clinic. Full biography

Shelby E. Mann

Ryan D. WhiteShelby is a second year law student at the Syracuse University College of Law. During her final year at the University of Missouri, she served as a full-time news producer for ABC 17 News. Shelby spent her first summer of law school at the Shelby County District Attorney General's Office in Memphis, Tenn., in the Public Corruption and Economic Crimes Unit. She is a member of Syracuse Law Review, the Journal on Terrorism and Security Analysis, and the senior editor for the Syrian Accountability Project. Full biography

Christopher w. FolkChristopher W. Folk

is a 2017 graduate of SU College of Law. A non-traditional student, Christopher returned to academia after spending nearly twenty years in the high tech industry. Christopher served in the Marine Corps, graduated from Cornell University with a B.S. In Applied Economics and Business Management, attended Northeastern University’s High-Tech MBA Program and received a M.S. In Computer Information Systems. Christopher previously worked in Software Engineering. Christopher is currently serving his second term as Town Justice for the Town of Waterloo. Christopher externed with a Cybersecurity firm in the Washington, D.C. area between his first and second year at SU College of Law. Full biography

Anna Maria Castillo

is 2016 graduate of Syracuse College of Law. She also holds a Master of Arts in International Relations from Syracuse University's Maxwell School of Citizenship and Public Affairs. She has interned at a London-based think-tank that specializes in transnational terrorism and global security and at the legal department of a defense contractor. She served as an executive editor in the Syracuse Law Review. Full biography

Jennifer A. CamilloJennifer A. Camillo

is a 2015 graduate of Syracuse College of Law and is a prosecutor. She has served as a law clerk in the United States Attorney’s Office for the Northern District of New York and the Cayuga County District Attorney’s Office and as an extern in the Oneida County District Attorney’s Office. She was a member of the Syracuse National Trial Team and was awarded the Tiffany Cup by the New York Bar Association for her trial advocacy achievements.

Tara J. PistoreseTara J. Pistorese

holds Juris Doctor and Masters of Public Administration degrees from Syracuse University's Maxwell School of Citizenship and Public Affairs and its College of Law. She wrote for this blog when a student. She is now a member of the U.S. Army Judge Advocate General's Corps.

Benjamin Zaiser

is both a scholar and a Federal Agent of the Federal Criminal Police Office of Germany. (Opinions expressed here are his own and not any part of official duty.) Full biography

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