I was on a “Smart panel” discussing smart technology yesterday at the LSTAR Economic / Smart Technology Summit. Our panel had a good discussion around the benefits and privacy aspects of smart tech and the internet of things.

The context was in part the inclusion of smart tech in new homes. I made a brief comment about the possibility of liability to home builders, and thought it might be worth exploring that in more detail. IoT devices are notorious for their potential to be hacked. So much so that I’ve referred to them before as a gateway to mayhem. For various reasons, IoT devices (such as security cameras, door bells, water leak sensors) are often not properly secured. Once a hacker gets through one of these devices, they are inside the network and can do many nefarious things (such as stealing information, ransomware, and using the system to mine cryptocurrency).

How could a builder be liable if a breach happened on a house/condo/apartment they built?

Privacy torts are an emerging area, and the possible result is not certain. But it would be plausible for a class action to name the builder amongst the defendants. The cost to defend can be significant even if there is ultimately no liability.

How can builders reduce the risk?

Builder sale agreements include limitation clauses that limit their liability. But they may not be drafted broadly enough to limit liability for this kind of exposure. After all, they were drafted by real estate lawyers with physical building materials and equipment in mind, not this kind of risk. Builders should have their counsel review and revise if needed their limitation clauses to try to limit their liability for this risk.

New home warranty plans also tend to apply to physical items. Perhaps those plans should consider how this risk should be addressed.

Cyber risk insurance is also something to be considered.

On the practical front, builders should choose devices wisely. They should educate their buyers on the security and privacy issues around whatever devices and services are included. Either set up the devices properly, or instruct or help the buyers do it. That will both reduce the chances of a problem happening, and if a problem does occur, will reduce the chances that buyers will blame the builder.

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