Fintech Insurance Products: OMEGAFINTECH and NOVAFINTECH

Privacy and network security breach

PlatformTrading.com’, an online platform for buying and selling currencies, including crypto currencies receives a tip-off that a large amount of its customer data is for sale on the dark web. It immediately calls the 24-hour incident response team and notifies Relm of possible claims.

• Privacy breach: OMEGAFINTECH provides an incident response team to assess the incident, taking immediate action to mitigate further losses and investigating its root causes. Over the coming months, the team provides legal and regulatory advice and practical support — for example notifying data subjects in accordance with local requirements. Liability cover is in place in case claims are made against the company.
• Network security breach: It turns out that the data was obtained by a network security breach. Cover remains in place with OMEGAFINTECH to restore compromised systems and lost data and indemnifies lost profits arising from any business interruption.
• Financial services liability: At around the same time, several customers bring claims against the company alleging that their funds have been misdirected. It is unclear whether this was related to the network security breach, caused by human error, 
 a failure in the technology, or a corrupt employee. If the funds have been stolen while in PlatformTrading.com s custody, OMEGAFINTECH’s crime coverage can respond to indemnify client funds before the claims escalate. OMEGAFINTECH provides cover remains regardless of the cause.
• Management liability: Financial services and data protection regulators become involved. OMEGAFINTECH ensures the company is well advised. Despite the best efforts of the PR team, the company s stock plummets. A group of shareholders blame the directors and threaten a derivative action. Recent investors claim that they were misled as they were not informed about cyber vulnerabilities. OMEGAFINTECH mitigates financial risk to company and its directors.

AI-induced violation of financial regulation

‘GlobalEdge’, a multinational investment firm leveraging AI for client portfolio management and automated trade execution, deployed a portfolio management system that uses natural language processing and deep learning to generate customized investment strategies for clients based on financial profiles, behavioral data, and public data scraping (including social media and forums).

However, the AI system was not adequately trained to distinguish between public and non-public material information and began incorporating potentially material non-public information from leaked documents scraped from insecure sources.

Regulatory investigations and inquiry costs:

GlobalEdge receives a formal notice from its regulator informing of an upcoming investigation into the following allegations

• GlobalEdge executed trades based on material non-public information, violating insider trading laws.
• GlobalEdge recommended and executed trades for retail clients without proper suitability checks.
• GlobalEdge altered risk profiles dynamically without client consent, breaching fiduciary and regulatory obligations.

In this situation, GlobalEdge would start incurring expenses to respond to the investigation, and key individuals may need to defend their professional conduct in any subsequent inquiry. OMEGAFINTECH would pay these expenses to ensure that GlobalEdge’s position is well defended.

Financial services and artificial intelligence liability:

As a result of the above allegations, GlobalEdge receives claims for damages from retail clients who argue that GlobalEdge was negligent in performing its financial services. As a result of the dynamic risk profile changes, some clients are alleging that these changes were discriminatory in nature — they impacted some and not others. As a result, there are also claims that GlobalEdge violated the EU AIA. OMEGAFINTECH responds to these claims which are overlapping in nature, providing coverage for both the damages and defense costs.

Management liability:

GlobalEdge and its directors and officers are subsequently accused of ‘AI washing’ by shareholders who feel that they misrepresented the efficacy and compliance of the portfolio management system. OMEGAFINTECH’s management liability coverages would support both the company and the individual directors and officers to defend themselves against the lawsuit, protecting both GlobalEdge’s balance sheet and personal assets.

Privacy and network security breach

‘MarginCall’ is a company that provides software to banks and other financial institutions, allowing them to manage their counterparty exposures on a live basis and thus optimize the collateral posted. MarginCall does not provide financial services itself. Its institutional customers frequently require it to have liability insurance in place as a procurement condition.

• Financial technology failure: ‘LendCo’ has a fractious relationship with one of its counterparties, which has accused it of breaching loan conditions by not posting enough collateral. LendCo brings a claim against MarginCall, alleging that its software is not performing to specification. NOVAFINTECH steps in, providing cover for legal costs to defend the claim, irrespective of the ultimate outcome.
• Incident response costs: While investigating the claim by LendCo, it emerges that there may have been a network security breach of MarginCall’s computer system two years ago. As this was discovered during the policy period, NOVAFINTECH provides cover for incident response costs to determine the scope and impact, and then remediate.
• Regulatory investigations: It turns out that LendCo has deeper troubles and is subject to a regulatory investigation. Although MarginCall is not itself a regulated financial institution, it is dragged into the investigation and must cooperate fully. NOVAFINTECH provides cover for MarginCall’s costs of responding.
• Inquiry costs: The regulators are targeting one individual for an apparent error. NOVAFINTECH provides cover to ensure the individual is properly represented, giving them peace of mind, but in many circumstances also protecting the company’s interests.

AI-induced liabilities

‘VerifiSure’, a fraud prevention and identity verification service provider to financial institutions, deploys a new tool that uses AI to improve identity verification speed and reduce manual review time. The tool uses deep learning and biometric analysis, including facial recognition and voiceprint matching. However, issues arise within two months of release.

Financial technology services and AI liability:

The tool incorrectly flags a large number of legitimate users (especially minorities and women) as potential identity fraud risks, which results in the financial harm of end-customers. These customers bring claims against their banks as a result of the impact. In turn, VerifiSure is sued by the banks for its errors in the performance of its services, but also for the failures of its AI technology — primarily its discriminatory output and its subsequent violation of AI regulations. NOVAFINTECH responds to these liability claims, providing the company and its employees with legal costs to defend against the claim and any damages they may need to pay.

Incident response costs and privacy liability:

In a rush to release the tool to market, VerifiSure doesn’t undergo rigorous testing and ultimately contains a vulnerability that malicious actors exploit to obtain the PII of individuals whose information has been processed by VerifiSure’s platform in the past 30 days. NOVAFINTECH provides the immediate incident response services to understand, mitigate, and remediate the network security and privacy breach, to notify any required individuals and regulators, and provide any ongoing identity monitoring services. The damages and legal costs arising from the subsequent consumer class actions are also picked up by NOVAFINTECH.

Regulatory investigations and inquiry costs:

The financial services regulators aggressively investigate the financial institutions that utilize VerifiSure’s services, and also subject VerifiSure to investigation. Inquiries are commenced against key individuals. NOVAFINTECH goes above and beyond a standard cyber and technology errors and omissions policy to cover the expenses required to robustly respond to the investigations.