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New York Attorney General Report Finds Data Breaches Are Serious Business

By: Aaron Krowne

On July 14, 2014, the New York Attorney General’s office (“NY AG”) released a seminal report on data breaches, entitled “Information Exposed: Historical Examination of Data Breaches in New York State” (the “Report”). The Report presents a wealth of eye-opening (and sobering) information on data breaches in New York and beyond. The Report is primarily based upon the NY AG’s own analysis of data breach reports received in the first eight years (spanning 2005 through 2013) based on the State’s data breach reporting law (NY General Business Law §899-aa). The Report also cites extensively to outside research, providing a national- and international picture of data breaches. The Report’s primary finding is that data breaches, somewhat unsurprisingly, are a rapidly growing problem.

A Growing Menace

The headline statistic of the Report is its finding that data breaches in or effecting New York have tripled between 2006 and 2013 the original source. During this time frame, 22.8 million personal records of New Yorkers were exposed in nearly 5,000 breaches, effecting more than 3,000 businesses. The “worst” year was 2013, with 7.4 million records exposed, mainly due to the Target and Living Social “mega-breaches,” which the Report revealed are themselves a growing trend. However, while the Report warned that these recent “mega breaches” appear to be a trend, businesses of all sizes are effected and at risk.

The Report revealed that hacking instances are responsible for 43% of breaches and constituted 64% of the total records exposed. Other major causes of breaches include “lost or stolen equipment or documentation” (accounting for 25% of breaches), “employee error” (totaling 21% of breaches), and “insider wrongdoing” (tallying 11% of breaches). It is thus important to note that the majority of breaches still originate internally. However, since 2009 hacking has grown to become the dominant cause of breaches, which, not coincidentally, is the same year that “crimeware” source code was released and began to proliferate. Hacking was responsible for a whopping 96.4% of the New York records exposed in 2013 (again, largely due to the mega-breaches).

The Report notes that retail services and health care providers are “particularly” vulnerable to data breaches. The following breaks down the number of entities in a particular sector that suffered repeated data breaches: 54 “retail services” entities (a “favorite target of hackers”, per the Report), 31 “financial services” entities, 29 “health care” entities, 27 “banking” entities, and 20 “insurance” entities.

The Report also points out that these breach statistics are likely on the low side. One reason for this is that New York’s data breach law doesn’t cover all breaches. For example, if only one piece of information (out of the two required types: (1) a name, number, personal mark, or other identifier which can be used to identify such natural person, combined with (2) a social security number, government ID or license number, account number, or credit or debit card number along with security code) is compromised, the reporting requirement is not triggered. Yet, the compromise of even one piece of data (e.g., a social security number) can still have the same effect as a “breach” under the law, since it is still possible for there to be actual damage to the consumer (particularly if the breached information can be combined with complementary information obtained elsewhere). Further, within a specific reported breach, the full impact of such may be unknown, and hence lead to the breach being “underestimated.”

Real Costs: Answering To The Market

Though New York’s data breach law allows the AG to bring suits for actual damages and statutory penalties for failure to notify (all consumers effected, theNY AG’s office; and for large breaches, consumer reporting agencies is required), such awards are likely to be minor compared with the market impact and direct costs of a breach. The Report estimates that in 2013, breaches cost New York businesses $1.37 billion, based on a per-record cost estimate of $188 (breach cost estimates are from data breach research consultancy The Ponemon Institute). However, in 2014, this per-record estimate has already risen to $201. The cost for hacked records is even higher than the average, at $277. The total average cost for a breach is currently $5.9 million, up from $5.4 million in 2013. These amounts represent only costs incurred by the businesses hit, including expenses such as investigation, communications, free consumer credit monitoring, and reformulation and implementation of data security measures. Costs on the consumers themselves are not included, so this is, once again, an under-estimate.

These amounts also do not include market costs, for which the cases of the Target and Sony Playstation mega-breaches of 2013 are particularly sobering examples. Target experienced a 46% drop in annual revenue in the wake of the massive breach of its customers’ data, and Sony estimates it lost over $1 billion. Both also suffered contemporaneous significant declines in their stock prices.

Returning to direct costs, the fallout continues: on August 5, 2014, Target announced that the costs of the 2013 breach would exceed its previous estimates, coming in at nearly $150 million.

Practices

The Report’s banner recommendation, in the face of all the above, is to have an information security plan in place, especially given that 57% of breaches are primarily caused by “inside” issues (i.e., lost/stolen records, employee error, or wrongdoing) that directly implicate information security practices. An information security plan should specifically include:

  • a privacy policy;
  • restricted and controlled access to records;
  • monitoring systems for unauthorized access;
  • use of encryption, secure access to all devices, and non-internet connected storage;
  • uniform employee training programs;
  • reasonable data disposal practices (e.g., using disk wiping programs).

The Report is not the most optimistic regarding preventing hacking, but we would note that hacking, or the efficacy of it, can also be reduced by implementation of an information security plan. For example, the implementation of encryption, and the training of employees to use it uniformly and properly, can be quite powerful.

Whether the breach threat comes to you in the form of employee conduct or an outside hack attempt, don’t be caught wrong-footed by not having an adequate information security plan. A certified privacy attorney at OlenderFeldman can assist you with your businesses’ information security plan, whether you need to create one for the first time, or simply need help in ensuring that your current information security plan provides the maximum protection to your business.