Retailer Sues Insurance Company over Data Breach Defense Costs
A Houston-based food and beverage retailer, Spec’s Family Partners Ltd., has filed suit against its insurance carrier, the Hanover Insurance Co., for costs relating to two data breaches suffered by the retailer in 2012 and 2014, respectively. The data breaches cost Spec’s almost $4 million in fees and costs to its card processor, which withheld money from the retailer to account for a portion of assessments levied against the processor by the payment networks in relation to the breaches.
Spec’s claims that Hanover agreed to cover Spec’s defense expenses in relation to the dispute with its processor. As evidence of this claim, Spec’s points to both its policy with Hanover and a separate Defense Funding Agreement entered into by Spec’s and Hanover, in which Hanover agreed to pay the retailer’s defense expenses related to the processor’s claims. However, when Spec’s filed suit against the processor in Tennessee over the withheld funds, Hanover refused to pay. Hanover based its refusal on the belief that Spec’s had not suffered any “defense expenses.” Rather, according to Hanover, the fees incurred by Spec’s in its litigation with the processor were done in pursuit of Spec’s affirmative claims and not a defense. Unsurprisingly, Spec’s disagreed with this characterization and filed suit against the insurer for breach of contract.
As data breaches become more common, the issue of which party bears the ultimate responsibility for costs and assessments stemming from a breach become a much larger issue. The suit filed by Spec’s highlights the importance of not only clearly delineating the responsibility for such losses in agreements between processors and merchants, but also of ensuring that any insurance coverage meant to account for costs and assessments stemming from a breach is also adequate.
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