Wrongful Data Collection Endangers Every Business

Wrongful collection has become a core data privacy risk for companies of every size and in every sector.

The term refers to the unauthorized or improper gathering of personal data—collecting information without consent, collecting more data than users knowingly disclose, or collecting data in violation of applicable privacy laws and regulations.

Regulations from Australia to Europe to the United States and beyond impose strict rules and heavy penalties for mishandling data. Headlines tend to focus on fines against large corporations—including Amazon, Apple, and LinkedIn—but small and midsize enterprises (SMEs) also face serious exposure. For example, a U.K. marketing firm was fined £140,000 for selling data later used for political outreach. In the United States, a midsize clothing retailer was fined over $345,000 for, among other things, failing to process opt-out requests properly. Over half of Coalition’s 2025 wrongful collection claims involved policyholders with less than $100 million in revenue.

Mistakes Create Sizable Financial Risk

Consumers and regulators expect companies to protect data and respond swiftly when they fail to meet their obligations. Wrongful collection incidents attract not only regulatory scrutiny but also costly litigation. Lawyers routinely file lawsuits that result in settlements or judgments sometimes reaching hundreds of thousands or even millions of dollars. Class action lawsuits are especially common in the United States and plaintiffs’ firms pursue these claims aggressively.

U.S. litigation relies on both legacy and modern privacy laws. For example, long-standing statutes like the federal Video Privacy Protection Act and the California Invasion of Privacy Act have recently been applied to cases involving online tracking and sharing of user-level data, even as courts and regulators continue to debate the reach of these rules.

More contemporary laws, such as California’s Consumer Privacy Act and Illinois’ Biometric Information Privacy Act, pose risks for collecting consumer data and biometrics without clear notice or consent. Companies’ main exposure comes from unauthorized collection, sharing, or misuse of user data without clear notice, transparency, or an opt-out opportunity for the user. Even technical violations that do not result in harm can lead to litigation, highlighting the need for strong privacy practices and clear user disclosures.

A single error like mishandling a data deletion request or sharing personal information with the wrong party can lead to lawsuits and regulatory investigations. Even companies that win in court still incur large legal defense costs. For SMEs, these expenses can quickly become unmanageable and threaten the company’s survival.

The Evolution of Wrongful Collection Coverage

Data privacy risks appear to be following a similar path in the industry as cyber extortion coverage—a previously secondary feature in policies that has become a central concern for risk managers, brokers, and insurers. While wrongful collection claims may never reach the frequency or severity of cyber extortion, the risks are real and growing. Modern businesses must navigate a patchwork of data privacy laws and can face exposure if they misinterpret the rules even when making a good faith effort to comply. Severe fines and lawsuits affect organizations of all sizes and have made risk transfer through insurance a strategic necessity.

Cyber insurers continue to refine how they assess and price data privacy risk. While measuring cyber risk often focuses on technical controls like firewalls and multifactor authentication, underwriting data privacy coverage requires a deep understanding of a company’s data practices and processes. Underwriters must understand the types and purposes of personal data a business collects, the reasons for collection, and whether the business gathers only what is truly necessary. They also assess how clearly a company discloses its data practices to customers, how well it handles data management and consumer requests, and the way it shares data with vendors or third parties. Website activity, the use of tracking pixels, and the quality of privacy disclosures all face scrutiny.

Insurers offer more favorable policy terms to companies that maintain strong, up-to-date privacy policies and transparent data practices. Companies in higher-risk industries, such as healthcare, media, or retail, may require more stringent reviews before qualifying for full coverage limits.

Cyber insurers are primarily responding to wrongful collection exposures in three ways:

1. Silent Coverage: Some insurers use policy language that offers data liability coverage generally but does not explicitly address risks such as wrongful collection, sharing, or misuse of information. In these cases, insurers typically do not underwrite those exposures specifically, leaving brokers and policyholders uncertain about the policy’s response, especially regarding exclusions.

2. Exclusions: Other insurers exclude coverage for certain data privacy exposures, including wrongful collection practices.

3. Affirmative Coverage: Some insurers provide explicit coverage for wrongful collection. They may offer this protection at a sublimit rather than the full policy limit. Within this approach, insurers differ in determining the level of coverage:

a. Some insurers only offer coverage, or higher limits, after reviewing the insured’s privacy practices, such as their use of tracking technology, disclosures, and opt-in/opt-out procedures. This approach encourages businesses to improve their privacy standards, benefiting both the insurer and the insured in the long run.

b. Other insurers provide coverage without evaluating the insured’s privacy practices. This approach may become unsustainable if insurers grant large limits to companies with weak privacy controls, given the threat of class action lawsuits and harsh penalties. Without requirements to improve, clients miss opportunities to manage privacy risks effectively.

Modern coverage may include:

• Financial protection for investigations, legal defenses, fines, settlements, and judgments.
• Access to expert legal counsel in the privacy field. This is especially valuable for SMEs that may lack those existing relationships and may struggle to find the right counsel independently.
• Pre-incident data privacy guidance, assessments, and compliance support to help businesses reduce risk proactively.

Businesses with strong privacy practices and partnerships with experienced brokers and insurers gain both protection and a competitive advantage.

Privacy failures can lead to steep financial losses from disruptions, regulatory actions, lawsuits, and reputational damages—costs that can exceed what many companies can absorb without insurance protection.

Today’s best cyber insurance policies offer affirmative coverage, recognizing wrongful collection as a core risk. Underwriters look at how a company collects and manages data through everyday business practices and operational controls. Businesses that take wrongful collection risks seriously and invest in effective privacy management not only protect themselves from significant losses but also demonstrate reliability to customers and partners in a competitive business environment.