February 22, 2021 Articles

Data Security for Owners

Owners need to be proactive in protecting a very important asset on their construction projects—the project data—from catastrophic loss.

By Kelly Ruane Melchiondo

Even before the COVID-19 global pandemic, the construction industry has been “going global” using available technology and cloud-based data storage and file sharing on all phases of projects. For example, an owner might hire a London-based architect to design a transportation hub in the United States. The London architect might delegate its building information modeling (BIM) work to a company in New Zealand. Cloud- and internet-based platforms make all this possible, enabling the general contractor or construction manager to offer as part of its services one-stop paperless project management, stored on the cloud and protected by password.

In addition to BIM, other digital tools and devices, such as radio frequency identification trackers, wearable cameras, and drones, have become more prevalent in the industry, marketed to enhance the safety and efficiency of construction projects. All of these tools require data storage. As more project data go digital, the likelihood of remote access to the data increases.

The world’s “new normal” because of COVID-19 has only accelerated the industry’s reliance on remote access. In a recent article, McKinsey & Company observed that the construction industry will likely continue to devote resources over the long term to research and development of standardized building technology systems and automation of elements of design and construction.

Increased reliance on cloud data storage, email, and file sharing platforms raises exponentially the risk of catastrophic data loss. The construction industry has yet to address the threat of data loss as a real element of risk. High-profile projects are prime targets for cyberattacks.

Industry-wide, very little discussion and negotiation occur relative to cybersecurity provisions in contracts between project owners and their construction professionals. Even less discussion appears to occur downstream with subcontractors and suppliers. For example, the American Institute of Architects (AIA) generally issues new contract documents on a 10-year cycle. The AIA did not address cybersecurity until 2017 and, even then, only “advised” parties to discuss whether first-party cybersecurity coverage was appropriate on a project. What little discussion does occur appears to relate to contractors’ access to the owner’s systems, such as building controls and networks, or general discussions regarding whether the owner will require the contractor to carry cybersecurity insurance and, if so, the levels of coverage.

Owners can, of course, acquire their own cybersecurity insurance policies on projects or supplement their builders’ risk coverage with cybersecurity endorsements. Owners should never assume that their general liability, fraud, or crime coverage will provide cybersecurity protection. To avoid what the insurance industry terms “silent coverage,” insurance carriers are writing specific policy exclusions for cybersecurity into their general liability policies.

Cybersecurity policy insurers will typically pay for data or network damage or destruction as a result of a “covered cause of loss,” which typically includes viruses, malware, cyber extortion, or invoice manipulation, which involves the release of funds to a third party as a result of a fraudulent invoice. Insurers typically will not cover damage caused by an insured’s employees or by third parties that an insured retains. These third parties might be cloud-based platform operators, consultants, or subconsultants who perform work on projects from remote access points.

Because all construction data are an asset that the owner must protect, cybersecurity awareness goes far beyond merely insuring against data breaches and making an effort to protect the owner’s computer networks. The practical reality is that recovery of available insurance funds related to a data breach will likely not cover all of the losses. Most importantly, insurance, no matter how robust, is unlikely to cover the impacts of the loss of time on a project when project data are compromised. Oftentimes in larger contracts, there is some combination of waivers of consequential damages, liquidated damages that may be less than the actual loss suffered, and limitations on liability. Insurance payments are unlikely to replace millions of dollars in delay, consequential losses, or even liquidated damages while a project team works to either recover or re-create compromised, stolen, or maliciously encrypted data or project files.

Owners must be proactive about their own data security and that of every project. During contract negotiations, owners should insist on the right to approve any cloud-based project management platforms and file-sharing platforms. Owners should insist on a uniform and secure method of data transmission and file sharing and should include in contracts or project manuals strict prohibitions on the use of unsecured file-sharing platforms. Owners should also consider requiring mandatory and routine data security training for anyone on their projects who will ever have access to project data. Finally, owners should bridge the gap in project cybersecurity insurance coverage by insisting that all project contracts include robust indemnification provisions that indemnify and hold the owner harmless from all losses and damages arising from data security incidents of any kind, from breaches to accidental losses. Though these efforts may seem onerous at the outset of a project, they may prevent, or at least mitigate, disaster later.

Kelly Ruane Melchiondo is a partner at Bilzin Sumberg Baena Price & Axelrod, LLP, in Miami, Florida.

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