Enterprise adoption of the public cloud hinges on liability policies

Of all the potential showstoppers to enterprise adoption of the public cloud — including such well-touted concerns as security, interoperability and portability — liability policies have emerged as the one most likely to derail progress. It doesn’t take an actuarial degree to predict that at some point, the cloud is going to go down — whether for routine service or by malicious intent. The question is, who is responsible for damages?

Because they are designed to serve the masses, large clouds like Amazon.com’s Elastic Compute Cloud, or EC2, have standard service level agreements that may refund businesses for time lost; but that’s pennies compared to the business that could be lost during an outage. Enterprises want to shift some of the financial risk to public cloud providers, but with increasing interest in cloud services, providers have little incentive to change their business models, according to Drue Reeves, director of research for the Burton Group in Midvale, Utah. The issue was brought home by Eli Lilly’s decision last week to walk away from Amazon Web Services (AWS) after its negotiations failed to push some accountability for network outages, security breaches and other forms of risk to AWS inherent in the cloud. In the article, an AWS spokesperson denied that Eli Lilly was no longer a customer.

At the moment, there isn’t enough jurisprudence to decide who pays for what, Reeves said, so he gathered a panel of lawyers and cyber insurers to comment on what has been deemed the Wild West of computing at the Burton Group’s Catalyst conference in San Diego last week. Heck, Rich Mogull, analyst and CEO of Securosis LLC, a consultancy in Phoenix, even called the public cloud a seedy bar.

“We don’t really have cloud law,” said Tanya Forsheit, founding partner of the Information Law Group in Los Angeles. “It’s going to happen. . . .[S]ome big breach involving a large provider will result in a lawsuit, and we might see principles coming out of that,” she said. Until then, negotiation is the order of the day around liability policies, she added.

Indeed, there have been 1,400 “cyber events” since 2005, according to Drew Bartkiewicz, vice president of cyber and new media liability at The Hartford Financial Services Group, a financial services and insurance company in New York. “If you had an event in 2005, you’re lucky,” he said. “The severity over the last two years is starting to spike. This is an exponentially growing risk.” With so much information flowing around the clouds, supply chains become liability chains, he added. “The question is, who is responsible for information that’s flowing from one cloud to another when a cloud goes down?”

The answer comes down to contracts, and what should be considered a reasonable standard of care, Forsheit said. “Have we reached a point where encryption is the standard?” she asked.

But enterprises aren’t the only ones at risk in the cloud: If the large providers are forced to indemnify businesses, the game will be over, Reeves predicted. The industry needs to figure out how to share the risk in order for the cloud market to mature. “Otherwise, the cloud becomes this limited place where we put noncritical applications and data,” he said. “If we don’t address this issue of liability, we’re stuck.”

SearchCIO.com will be following the issue of liability policies in the cloud. Do you have a story that needs to be told? Contact me at [email protected].