Insurance industry takes protective stance against constant threat of data breaches

Over 1,000 Medicaid identification numbers may have been compromised in a recent breach of security protocol in North Carolina. An employee of the North Carolina Department of Health and Human Services inadvertently sent an email without first encrypting it, which contained protected health information for Medicaid recipients, including the individual’s first and last name, Medicaid identification number, provider name, and provider identification number. While the Department has no reason to believe that any information was compromised, the Department advised affected patients to take steps to protect themselves, such as putting a fraud alert on their credit files and monitoring their financial statements for unauthorized activity.

Individual insurance companies have also fallen victim to cyberattacks. The National Association of Insurance Commissioners (NAIC) has made efforts to strengthen the insurance industry’s security position by launching the Cybersecurity Task Force, which is creating a framework for insurance companies to follow in the event of a security breach. The NAIC recently proposed a Cybersecurity Bill of Rights, which outlines the expectations of insurers when a data breach occurs and remedies for consumers who have suffered harm due to a breach. Consumer advocates, as well as insurance groups representing life, health, and property/casualty carriers, support the Cybersecurity Bill of Rights, but are pushing for changes, arguing that the document may create confusion for consumers because currently it implies that certain rights, which are not contained in all applicable state and federal laws, exist for all consumers. While the Cybersecurity Bill of Rights will not likely become a binding document, the Cybersecurity Task Force has been working alongside state insurance regulators, conducting examinations of insurance carrier’s protocols to determine whether sensitive data and confidential information are properly protected. One thing is for certain – the increase in data breaches nationwide will lead to more regulations affecting all areas of industry and eventually leading to additional lawsuits in compliance with said regulations.

3rd Circuit Ruling in FTC v. Wyndham Affirms Broad Governmental Authority Under Section 5

In a much anticipated decision, the Third Circuit recently upheld the Federal Trade Commission’s exercise of authority to fine and take other measures against businesses that fail to abide by the “standard of care” for data security. Federal Trade Commission v. Wyndham Worldwide Corporation, No. 14-3514 (3d Cir. Aug. 24, 2015). Wyndham challenged the FTC’s actions arguing that negligent security practices were not an “unfair practice” and that the FTC failed to provide adequate notice of what constituted the standard of care in this context. The Third Circuit, like the trial court before it, disagreed. It held that Wyndham’s negligent data security practices were an “unfair” business practice under 15 U.S.C. § 45(a), otherwise known as § 5 of the FTC Act, because it “publishe[d] a privacy policy to attract customers who are concerned about data privacy, fail[ed] to make good on that promise by investing inadequate resources in cyber security, and thereby expose[d] its unsuspecting customers to substantial financial injury, and retains the profits of their business.”

The Third Circuit rejected Wyndham’s due process, lack of notice of standard of care argument, holding that Wyndham was not entitled to know with ascertainable certainty the FTC’s interpretation of what cyber security practices are required by § 45(a) – to know what practices are required by the standard of care. The Court explained that Wyndham had adequate notice of the standard of care because § 45(n) of the Act defines it using usual tort cost-benefit analysis. See United States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir.1947). Nothing more is required to satisfy due process concerns in this context.

Prior to the Wyndham decision, courts generally held that the economic loss rule precludes a claim for negligent data security practices. E.g., Sony Gaming Networks & Customer Data Sec. Breach Litig., 996 F. Supp. 2d 942, 967-973 (S.D. Cal. 2014) (dismissing such claims under both Massachusetts and California law on the basis of lack of a “special relationship”). The question remains open whether Wyndham defines a special relationship and tort duty that would preclude application of the economic loss rule. Keep an eye on this space for further developments.

Fiat Chrysler Recall Highlights Potential Need for Regulatory Changes

Last week, Fiat Chrysler issued a recall of more than 1.4 million vehicles after security researchers from Wired Magazine exposed major security flaws that would allow potential hackers to take over a vehicle’s crucial systems remotely.

In a controlled demonstration, Charlie Miller and Chris Valasek hacked into a Jeep Cherokee as it was traveling 70 m.p.h. down a St. Louis highway. The hackers were able to take control of the vehicle’s air conditioning, entertainment system, and at one point were able to cut the Jeep’s accelerator. The hackers also revealed the capability to cut the Jeep’s brakes, as well as the ability to track a targeted vehicle’s GPS coordinates via its navigation system.

The experiment revealed vulnerabilities contained within Fiat Chrysler’s Uconnect system, the internet-connected computer feature that controls navigation, enables phone calls, and even offers a Wi-Fi hot spot in hundreds of thousands of Fiat Chrysler vehicles. According to Wired Magazine, a hacker need only know a car’s IP address in order to potentially gain access to the vehicle from anywhere in the country.

Last week’s recall illustrates how the rapidly-developing “Internet of Things” (i.e., the increasing use of interconnected devices in everyday life) can implicate not just issues of personal privacy and data security, but physical safety. It also raises serious questions of accountability for both automakers and government regulators. On July 21, 2015, Senators Edward J. Markey (D-Mass) and Richard Blumenthal (D-Conn.), who followed Miller and Valasek’s research, introduced legislation that would direct the National Highway Traffic Safety Administration (NHTSA) and the Federal Trade Commission (FTC) to establish federal performance standards that would protect drivers’ privacy and secure vehicle software systems. The Security and Privacy in Your Car (SPY Car) Act would establish a rating system that would inform consumers about how well the vehicle protects drivers’ security and privacy beyond the minimum standards set forth by the Act. The SPY Car Act also contains proposed limitations on automakers’ disclosure, retention, and use of information collected by the on-board software systems featured in most modern vehicles.

Whether or not the SPY Car Act becomes law, it is not difficult to imagine that future real-world data breaches or injuries resulting from vulnerabilities in on-board computer systems could result in significant liability for car manufacturers, especially if they were to occur on a widespread scale. Accordingly, the auto industry should be cognizant of these vulnerabilities and take steps to ensure their vehicles are secured from digital attacks.

Gordon & Rees LLP’s Privacy & Data Security Group will continue to monitor and report on the implications of vehicle security breaches.

Privacy and Security on the Internet of Things

Like it or not, technology is becoming inextricably entwined with the fabric of our lives. Our cars, our homes, even our bodies, are collecting, storing and streaming more personal data than ever before. In 2015, Gartner, Inc. forecasts the number of connected “things” will reach 4.9 billion, up 30 percent from 2014. By the year 2020, that number is expected to reach 25 billion.

5-22We are moving toward a world where just about everything will be connected. Yes, this will include smartphones, computers and tablets. It will also include everyday objects like car keys, thermostats and washing machines. Google is even developing ingestible microchips that could serve as “electronic tattoos.” This disruptive shift, known as the Internet of Things (IoT), will be a powerful force for business transformation. Soon all industries and all areas of society will be impacted directly by the transition.

As companies evolve to adapt to meet the consumer expectations in this new uber-connected world, they must be aware of the risks involved. No, I’m not talking about machine turning on man in a Terminator-like scenario. But make no mistake, the challenges and risks for both businesses and consumers are no less scary than a shape-shifting cyborg.

In the rush to jump into this connectivity, companies will face multiple considerations. Strategic decisions might involve an upgrade in technology, a move to cloud-based storage, or network integration of all new products or services. However before taking any action, it is essential to weigh the privacy and security risks that go hand in hand with the collection of personal data.

While data breach might be the first risk that comes to mind, there are a number of legal issues that could become major problems if not addressed.

Data Security

The IoT will create massive amounts of data that will necessarily be linked to personal identifying information to be useful. Employees, customers and affiliates will be interacting with countless devices all day long, usually without being aware they are doing so. There will be many new and perhaps unforeseen opportunities for data breaches.

Unintended Consequences

Designers and manufacturers of devices for the IoT may be accountable for unintended consequences. We have already seen instances of persons taking over video cameras connected to computers to “spy” on people. It’s not a stretch to think that these spies will also monitor devices connected to the internet to find out when a home is unoccupied.

Liability

The IoT will rely on devices to perform many tasks that are now subject to the risks of human error. Even with the best of designs there will be issues of where liability falls when, for example, a self-driving car or some other automatous device malfunctions or is otherwise involved in an untoward outcome. There will likely be an evolving body of law establishing the allocation of fault in such circumstances.

Regulation

The federal and perhaps state governments will regulate the IoT. Such regulations will impact how organizations design and use IoT devices. As in other fields, regulation can both strengthen and impair an organization’s position in its market. Proactively addressing such issues can save an organization considerable expense and allow it to better control its risk.

Companies and organizations must plan for the regulations, potential liabilities, and consumer privacy issues related to the IoT now to avoid crippling legal nightmares later. In the absence of regulations, corporations will need to be cognizant of the need to self-regulate by developing and enforcing an effective set of best practices. While the “Internet of Things” may sound futuristic, in reality… the future is now.

Leon Silver is a co-managing partner at Gordon & Rees’ Phoenix office, Chair of the firm’s Retail & Hospitality Practice Group and a member of the firm’s Commercial Litigation, and Privacy & Data Security Practice Groups. Andy Jacob is a member of the Appellate and Commercial Litigation Practice Groups.

Security Threatening Dating Apps and its Affect on Employers

PVCY BLOG_online datingIBM released a study this month after reviewing 41 percent of the most popular dating apps for cyber security. According to the study, 60 percent of the apps are “vulnerable to potential cyberattacks that could put personal user information and organizational data at risk.” The study showed that hackers could have access to users’ locations, photos, contacts, microphone, billing information, and even the ability to change one’s dating profile. Even more concerning, the study revealed that 50 percent of companies have employees who use dating apps on their work devices, putting potentially confidential company information at risk.

Companies and online daters should be aware of the security risks these apps may pose. Companies may want to consider policies prohibiting or limiting the use of dating and other potentially risky apps on work devices to prevent exposure to confidential company information. Online daters should remember to keep their profiles vague, review app permissions regularly, and delete their profiles once they have found that special someone.  Those who do not use dating apps should consider similar self-protective privacy measures when using any app.  At a minimum, companies and their employees should have a set policy and procedure in place to counter the risks associated with these personal apps to prevent the potential breach or loss of both personal and company information.