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Posts from October 2014.

I’m pleased to introduce guest author, Nick Montera, Vice President, Account Executive and head of the hospitality practice at Parker, Smith & Feek.  PS&F is an insurance and risk management brokerage firm headquartered in Bellevue, Washington, providing innovative insurance solutions to clients nationwide.  We appreciate Nick sharing his expertise and insights on this important and timely subject.  - Roger Hillman

HOSPITALITY INDUSTRY RISKS: DATA PRIVACY AND SECURITY

Most hospitality businesses allocate time and capital to efficiently collect and process data in order to improve sales, customer service and loyalty, and operations efficiency. Technological advances have made it easier to manage a wide range of information about customers, vendors, and employees. Virtually all businesses that use computer systems are to some extent vulnerable to costly exposures associated with system breaches.

Hotels and restaurants are no exception and, in fact, have much higher levels of exposure because they collect vast amounts of private data from customers as a part of their day-to-day operations through credit card transactions, online reservations, and rewards programs. Private data may be both personal (names, physical addresses, email addresses, social security numbers) and financial (credit card and banking). While technology helps your business run more efficiently, it also increases your risk for data privacy and security breaches, as well your liability to affected customers. Unfortunately, many hospitality companies have not upgraded their risk management plans to address the inherent exposures associated with today’s sophisticated data management. A breach can severely impact the financial stability and continuing success of a company, and so it’s important to understand the risks associated with data breaches and to develop plans to mitigate them.

Hospitality: A Targeted Industry

According to Nicholas J. Percoco, hospitality businesses often proves to be an easy target for criminals who are looking for high transaction volume, a large database of customer records, and low barriers to entry. In fact, organizations analyzing data breach trends consistently cite hospitality as the single most vulnerable industry:

Percoco, head of Trustwave Spider Labs, believes that the criminal element targets the food and beverage industry because of high transaction volume, which makes it possible to turn criminal activities into money very quickly. Trustwave Spider Labs found that food and beverage companies not only have systems that are vulnerable to infiltration, but often fail to detect a breach until long after it has occurred. Their study revealed that criminals stay undetected in a breached food and beverage system for an average of 173.5 days. The combination of high transaction volume and undetected breach time can prove devastating to a business.

A common misconception is that only large organizations need to worry about protecting against data breaches. In Verizon’s 2012 Report, two-thirds of the 855 investigated incidents occurred at businesses with 11 to 100 employees, a common size for many hospitality enterprises. However, no hospitality company is immune. Smaller, independent enterprises are vulnerable because they are small and may have systems that are easily breached. On the other hand, franchise operations often share a regional, national, or international data system that, once breached, can affect all or most of the individual franchisees.

Most businesses today have data privacy and security exposures, which may include 1) a presence on the Internet, 2) data on servers connected to the Internet, 3) file maintenance that contains personal and/or financial information, and 4) transmission, storage, or processing of data such as credit card payments. Businesses in the hospitality industry need to be particularly cognizant of these exposures. It is important to develop programs to reduce the possibility of a breach and take steps to mitigate the impact of a breach before one occurs.

Costs of a Data Breach

A company that experiences a breach can incur a range of costs that quickly add up to a substantial loss. When private data is compromised, your expenses could include notification and claims processing, credit monitoring services for affected individuals (to lessen the potential for civil suits), and employment of a public relations team (to assist with damage control and preservation of your reputation). There may be additional costs associated with finding and fixing the root cause of the breach, and recovery of lost data. Finally, you may have liability claims for failure to have reasonable safeguards in place to protect personal and financial data.

In the event of a breach, you are responsible for notifying the affected individuals. In fact, 46 states have enacted broad privacy laws pertaining to notification whenever personal or financial information might have been compromised, lost, or stolen. Furthermore, if private data of individuals from other states is affected, you must comply with each applicable state’s laws. For those in the hospitality industry, compliance can be costly and time consuming because it entails research into the privacy laws of the state of residency for every potential affected customer. Since many hotels and restaurants depend upon customers from all over the United States (as well as other countries), notification requirements and the related costs are of particular importance. The possibility of regulatory violations and fines can be drastically reduced if you have an adequate plan in place ahead of time.

Estimates of the average incurred cost for a breach vary between the studies, but one thing is evident: it’s expensive. According to the Ponemon Institute’s 2011 report, the average cost of a data breach in 2009 was $6.75 million per incident and $204 per individual record. The immediate financial cost of a data breach is only part of the story. It can cause a loss of customer trust and a tarnished reputation, which can be extremely difficult and expensive to rehabilitate. This is especially true for hotels and restaurants, which usually have high public profiles.

Data Security and Risk Management Basics

There is no doubt that the risks associated with data retention and transfer are real and significant. For a hospitality organization, it is of paramount importance to identify areas of exposure and develop adequate risk management programs that address data privacy and security. To help you get started, here is a list of questions (from Cyber insurance specialist Swett & Crawford) with my added commentary:

  • Is the corporation aware of all applicable state and federal privacy laws and notification requirements pertaining to customer data?

    • Due to the wide geographic dispersion of your clients, it is best to do this research upfront. If a breach occurs, you may not have adequate time to research and comply with state laws, which may be time sensitive. Missed deadlines could lead to costly regulatory fines and penalties.
    • Make sure that your organization is compliant with The Payment Card Industry Data Security Standards (PCI DSS) and any other standards that apply to your organization. Helpful information on PCI DSS can be found here.

  • Is any personal identifiable information (PII) or client confidential information stored on computers or in paper files on premises? If so, where specifically is the data stored, how is it secured, who has access and how many PII data files are there?

    • PII is often defined as unique information that can be used to identify, contact or locate a single person. In Washington state, PII is defined as an individual’s first name (or initial) and last name combined with one of the following: social security number, bank account number, credit or debit card number (including security code access code or password), driver’s license number, or a Washington identification card number.
    • Track personal data throughout your entire information infrastructure and identify all parties that have access to this data. Conduct an audit that gauges employee access to and use of personal data.
    • Make information security a written workplace policy.

  • Are all of the companies laptops encrypted? Are portable media devices like thumb drives prohibited or at lease encrypted?

    • Devices such as laptops, smart phones, external hard drives and flash drives all present possible data security threats if lost, stolen, or hacked. While most people assume that system hackers are the greatest threat, recent studies show that lost or stolen portable devices are the most common cause of data breaches.

  • Has the company implemented strong internal password controls and training to all employees?

    • Make sure passwords are strong. It is also a good practice to reset passwords periodically—90 days is a good timeline—and never duplicate passwords. It’s also a good idea to reset default passwords.

  • Are the company’s firewalls current and all security patches regularly updated?

    • A firewall can be the best defense when trying to isolate and contain breaches. Despite the expense, it is beneficial to invest in a robust set of firewalls that require user authentication.

  • Does the company outsource any services to third party vendors that may involve a client’s information? If so, do these vendors provide hold harmless and indemnification agreements with regards to any data breach involving personal identifiable information?

    • It’s a common misconception that outsourcing automatically transfers liability for data breaches to the vendor. It is vital that you have favorable hold harmless agreements and indemnification provisions in place with vendors, but even with these agreements in place, data owners can still be held responsible for compromised information.

  • Does the company have in force a detailed plan in case of a data breach?

    • In addition to developing and implementing a risk management program for data breach, risk transfer via insurance can be a cost effective risk management mechanism.

Data Breach Insurance Coverage Basics

Over 30 insurance carriers provide coverage that is tailored to specifically address exposures related to data breach. Naming conventions vary by insurance carrier, but some of the more common ones are Data Security, Data and Privacy, Cyber Liability, and Data Breach insurance. Coverage may be written on a standalone basis or combined with your Professional Liability or Media policy.

A properly structured policy will provide both first and third party coverage. First party coverage pays for direct losses incurred as a result of a breach including (but not necessarily limited to) notification costs, recovery of lost and destroyed data, forensic investigation expenses, credit monitoring and call center services for affected customers, business interruption losses, extortion demands, and public relations expenses. Third-party coverage protects companies from liability suits filed by individual customers, credit card companies, regulators, and various other third parties. Coverage should extend to defense costs as well as damages. Depending upon the carrier and insurability from a legal standpoint, it may also cover regulatory defense, fines, and penalties.

As a hospitality business, your financial stability and continuing success depend upon a proactive approach to data security risk management. Lax security practices or a security gap could result in a breach that encompasses massive amounts of stolen data, creating financial loss for your customers, vendors, and employees, as well as your business. It’s important to do all that you can to protect yourself from a breach. It’s equally important to devise a solid risk management plan, including insurance coverage, to mitigate the severity of loss when one occurs. If you have not yet done so, consult with your insurance professional about your data exposure and risk management solutions.

By Nick Montera, Vice President, Account Executive and head of the hospitality practice at Parker, Smith & Feek

 

Today’s post is co-authored by two of my colleagues in our state and local tax practice group, Michelle DeLappe and Miriam Woods.

It is not every day that Washington’s Department of Revenue issues a determination in which the taxpayer wins. In fact, it is a rare occasion when the Department decides that it was wrong; it is perhaps even rarer for it to publish that it was wrong. Happily, one of these rare occasions recently touched the hospitality industry—specifically, the very hospitable practice of giving free meals to guests.

The taxpayer in question is an extended-stay hotel that provides guests free breakfasts and dinners during their stay. The hotel does not have a restaurant and does not serve meals to the public. The Department audited the hotel and assessed it use tax on the food and beverages used in the meals based on the argument that the hotel uses them in their business.

Washington imposes sales tax on tangible property that a business uses. For hotels, this includes furnishings and amenities provided for guests’ use; hotels even have to pay sales tax on those little bottles of shampoo because they are deemed to have “used” them by simply placing them in the guests’ rooms. And in Washington, as in most other places with a sales tax, if you use something and don’t pay sales tax on it, then you still owe tax: hence, the “use tax.”

Here, when the taxpayer bought food ingredients and beverages, it paid no sales tax. The Department’s auditor, however, argued that the taxpayer was using the food and beverages just as it uses the little bottles of shampoo—even more so because it manipulates the ingredients into meals in the hotel kitchen. The Appeals Division disagreed based on Washington’s sales and use tax exemptions for food and food ingredients and for certain beverages.

So here’s the lesson for hotels and restaurants: if you are providing complimentary food, even prepared meals, you do not need to pay sales or use tax on the food or food ingredients or on exempt beverages. Note that sales or use tax apply to alcoholic beverages and soft drinks, though. There’s still no such thing as a tax-free glass of wine!

Kudos to the Department of Revenue for recognizing the error and publishing a taxpayer-friendly decision that provides helpful guidance.

For more information, the tax determination is available here.   If you have any questions, please feel free to contact me or Michelle or Miriam directly.

Marriott International, Inc. found out the expensive way that it should not disable customers’ mobile hotspots.  It entered a Consent Decree with the Federal Communications Commission (“FCC”) in which it agreed to pay $600,000 to the U.S. Treasury.

A number of mobile devices, such as smart phones, can serve as a wireless access point to the Internet, sometimes called Wi-Fi hot spots.  Consumers use these devices to connect their laptops to the Internet through their smart phones. Marriott employees at Gaylord Opryland, which Marriott manages, were using Wi-Fi monitoring systems with containment features to de-authenticate guest-created Wi-Fi hotspots in their conference facilities, ballrooms, guest rooms or public areas. Meanwhile, Marriott had been charging conference exhibitors and attendees from $250 to $1000 per device to use the Gaylord Wi-Fi service in its conference facilities.

An individual complained to the FCC that he could not use his mobile hotspot in the convention space at a function at Gaylord Opryland. The FCC investigated Marriott’s compliance with Section 333 of the Communications Act, which prohibits any person from interfering with any radio communications equipment licensed or authorized by the Communications Act. To resolve that investigation, Marriott agreed to enter into a Consent Decree with the FCC requiring Marriott to pay the U.S. Treasury $600,000 and to file compliance reports for the next three years. A copy of the Order and Consent Decree is available here.

Marriott has since instructed the properties under its management to cease using containment equipment in any way to block consumer’s mobile hotspots. More information about impermissible Wi-Fi blocking practices is at www.fcc.gov/jammers.

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Greg Duff, Editor
Greg Duff founded and chairs GSB’s national Hospitality, Travel & Tourism group. His practice largely focuses on operations-oriented matters faced by hospitality industry members, including sales and marketing, distribution and e-commerce, procurement and technology. Greg also serves as counsel and legal advisor to many of the hospitality industry’s associations and trade groups, including AH&LA, HFTP and HSMAI.

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