The annual exposure of Americans’ personal data has become so vast that it consistently outstrips the nation’s entire adult population, a clear signal that the existing framework for data security has collapsed under the weight of its own inadequacy. For two decades, consumers, corporations, and regulators have been trapped in a reactive and profoundly dysfunctional cycle where catastrophic breaches are treated as inevitable costs of doing business. The current system—a patchwork of tort law, contract obligations, and disparate regulations—has proven incapable of either preventing the escalating frequency of these incidents or meaningfully compensating the millions of victims left in their wake. As the problem grows from a series of isolated failures into a full-blown pandemic of insecurity, incremental reforms have shown themselves to be futile. This systemic failure calls for a paradigm shift, one that looks to historically successful public insurance programs for a blueprint to create a more just and effective solution.
The Unsolvable Data Breach Pandemic
The relentless stream of data breach headlines has desensitized many, yet the underlying statistics paint a picture of a crisis spiraling out of control. This is not merely a series of unfortunate events but a systemic breakdown, evidenced by the year-over-year surge in the number, scale, and severity of security incidents. The sheer volume of compromised personally identifiable information (PII) is staggering; annually, the number of exposed data sets now routinely exceeds the total adult population of the United States, often by a significant margin. This seemingly nonsensical figure highlights a grim reality: hundreds of millions of Americans are being victimized repeatedly, with the same sensitive information stolen from different corporate databases time and again. The pervasiveness of this issue is further confirmed by industry surveys, which reveal that a staggering 84% of organizations have experienced an identity-related breach within a single year. Recent massive breaches at corporate giants like AT&T, UnitedHealth, and Ticketmaster, which collectively exposed billions of records in just the first half of 2024, underscore that current corporate and regulatory efforts have barely made a dent in stemming the tide. The status quo is a costly cycle of failure, demanding a fundamental reevaluation of our approach.
Why the Current System Fails Everyone
Beyond the abstract numbers lies a landscape of tangible and devastating human suffering. The most direct consequence of a data breach is identity theft, a crime that now affects approximately one in four breach victims—a rate more than double that of the general population—at an estimated annual financial cost of over $20 billion. This harm is compounded by the profound difficulty victims face in remediation. They are often forced into a nightmarish, multi-year ordeal of proving their own identity to a labyrinth of credit bureaus, collection agencies, and original companies, all while dealing with the severe emotional toll of having their life and finances usurped. The system’s structural barriers to accountability are nearly insurmountable, as proving that a specific breach led to a specific instance of fraud is often impossible for the average consumer. Making matters worse, the industry’s standard responses are practically useless. Breach notifications frequently get lost, are mistaken for junk mail, or are simply ignored due to “data breach fatigue.” Offers of free credit monitoring are equally insulting, as many consumers already have such services from prior breaches, and accepting often requires entrusting even more data to the very entity that just failed to protect it. These measures do not compensate for financial loss or emotional distress; they often just compound the victims’ anger and vulnerability.
While consumers bear the brunt of the direct harm, the broken system is also exceptionally costly and inefficient for the very companies responsible for the breaches. The average cost of a data breach in the United States has soared to a staggering $9.5 million, more than double the global average. This uniquely American dysfunction forces businesses to spend over $181 for every single exposed record, yet critically, almost none of that money ever reaches the actual victims. Instead, these funds are consumed by a dysfunctional response process. A significant portion is spent navigating the burdensome patchwork of state and federal notification laws, a compliance nightmare for any national company. Another major cost driver is legal expenses, which account for nearly a quarter of all breach response costs as companies are forced to defend against private lawsuits built on ill-fitting common law theories. In a self-defeating move, companies often choose to pass these immense costs onto consumers through higher prices rather than making substantive investments in stronger security. This creates a damaging spiral: businesses are caught in a cycle of repeated breaches, customer attrition, and rising operational costs, all while failing to address the root causes of their chronic insecurity.
Learning from History: Proven Public Insurance Models
There is a growing consensus that the current legal landscape is untenable, as traditional legal avenues consistently fail data breach victims. Tort law is ill-suited due to the high bars for proving causation and concrete harm, while federal standing doctrines have become a major obstacle for consumers seeking justice in court. The statutory framework remains a confusing and incomplete patchwork of weak laws that offer little real protection. This reality has led to proposals for mandatory cyber-insurance, but private markets are structurally incapable of handling such a high-risk, high-liability environment without charging prohibitive premiums or writing policies with extensive exclusions that defeat the purpose. When private insurance fails in the face of risks that are socio-politically essential to cover, history shows that a public insurance institution is the only viable path forward. A powerful and directly analogous precedent can be found in the creation of workers’ compensation programs a century ago. Before this reform, workplace injury litigation was a long, costly, and uncertain process where over 80% of injured workers received no compensation. Workers’ compensation created a “grand compensation bargain”: workers traded their uncertain right to sue for guaranteed, no-fault benefits, while employers gained cost certainty and were shielded from unpredictable lawsuits.
The success of these historical models provides a clear blueprint for reform. The workers’ compensation system, for example, is built on an insurance mandate where employers pay premiums into a fund that, in turn, pays claims, thereby indemnifying companies from direct payout responsibility. Claims are handled efficiently by dedicated state agencies, dramatically increasing payments to workers while reducing employers’ overall accident-related expenses. The efficiency of this model is striking: between 63% and 80% of the money paid into the system is returned directly to beneficiaries, compared to just 46 cents of every dollar in the U.S. tort system. Another successful no-fault alternative, the National Vaccine Injury Compensation Program (VICP), was created to solve a different market failure where a surge in lawsuits threatened the nation’s vaccine supply. The VICP embraces a no-fault, largely causation-agnostic approach to resolve claims quickly and efficiently. While its specific structure is not a perfect match for the high volume of data breach claims, it offers a crucial lesson: such public insurance schemes can enjoy strong bipartisan support, as even the wealthiest industries will embrace them to smooth volatile litigation costs into predictable payments and de-link corporate culpability from consumer compensation.
A Blueprint for a Data Breach Arbitrator
Drawing lessons from these proven models, a state-level Data Breach Arbitrator (DBA) could be established to function as a public insurer. Companies that handle PII would be required to pay predictable, risk-rated premiums into a state-run insurance fund. These premiums would be calculated based on a company’s size, the volume and sensitivity of the data it handles, and, most importantly, its demonstrated data security performance. In exchange for these payments, businesses would receive broad indemnification from most liability for covered data breaches. When a breach occurs, a company’s sole responsibility would be to report the incident to the DBA. The DBA would then take over, operating on an “assumed breach” principle that presumes all data in a compromised system was exposed unless proven otherwise. This process would relieve companies of the immense financial and logistical burdens of consumer notification and litigation, allowing them to redirect those resources toward fixing vulnerabilities. The incentive structure is the core of the proposal: a company’s premiums would decrease if it maintains a strong security record and would rise sharply if it suffers repeated breaches, forcing it to finally internalize the true cost of its data insecurity. To prevent moral hazard, the DBA would have the authority to limit or even terminate coverage for egregiously irresponsible companies, exposing them to the full force of private lawsuits.
The DBA would completely overhaul the post-breach process for consumers, replacing the current confusing deluge of notices with a single, trusted source of information and support. By centralizing all consumer communication and leveraging public records to maintain accurate contact information, the DBA would dramatically increase the reliability of notifications while reducing costs for businesses. More importantly, it would be empowered to make automatic cash payments to all affected consumers, eliminating the friction and low response rates of the current claims-based system. To streamline the contentious process of calculating damages, the proposal adopts the workers’ compensation model of a fixed schedule of compensation rates. The DBA would maintain a schedule assigning a base monetary value to each specific type of PII, a task no more difficult than valuing a physical injury, given the availability of real-world pricing data from business cost analyses and dark web marketplaces. This schedule would be dynamic, incorporating multipliers for factors like encryption status and synergistic harm, where a combination of PII elements is more valuable to a thief. A staggered, pro rata rollout would ensure the system’s financial viability, prioritizing victims with concrete monetary harm initially and gradually expanding to provide automatic payments to all victims as the fund grows.
Forging a Path Forward
The analysis of a public insurance model revealed that, far from being a radical departure, it represented a logical evolution built on a century of successful American policy innovation. The legal and practical hurdles to implementing such a system were found to be surmountable. Concerns that a no-fault liability scheme would violate constitutional due process were addressed by the Supreme Court’s 1917 ruling that upheld the constitutionality of workers’ compensation, reasoning that it is reasonable for a state to replace an uncertain tort system with one guaranteeing definite compensation. Similarly, the system was designed to survive a federal preemption challenge, as existing federal privacy laws typically set a regulatory floor, allowing states to enact stronger protections. Standard insurance mechanisms like subrogation and assignment of rights were incorporated to handle suits brought under federal law, preventing double recovery for victims. While initial seed funding from a state legislature was acknowledged as necessary, it was framed as a sound investment. The Data Breach Arbitrator was designed to become financially self-sufficient quickly through premium collection. The long-term benefits to a pioneering state—including a significantly reduced burden on the court system, effective protection for millions of consumers, and the establishment of a groundbreaking national model—provided a compelling rationale for the initial capital investment. Ultimately, this approach offered a vision for a functional data breach landscape where consumers received reliable compensation and companies were finally given powerful, market-based incentives to become responsible stewards of the data entrusted to them.
