The lawsuit filed Jan. 13 by state attorney general Richard Blumenthal also says that Health Net waited six months before notifying customers of the data breach.
"The staggering scope of the data loss, and deliberate delay in disclosure, are legally actionable and ethically unacceptable," Blumenthal said in a statement. "Even more alarming than the breach, Health Net downplayed and dismissed the danger to patients and consumers."
In a statement sent to InformationWeek on Monday, Health Net said it had just received a copy of the lawsuit and was in the process of reviewing it. Nevertheless, the insurance company said there is "no evidence that there has been any misuse of the data."
The company is offering people whose personal information was compromised two years of credit-monitoring services at no charge. The package includes $1 million of identity theft insurance coverage and enrollment in fraud resolution services for two years, if needed.
"Additionally, if members experience any identity theft between May 2009 and the date of their enrollment, Health Net will provide services to restore the member's identity at no cost to the member," the company said.
According to the lawsuit, the company discovered in mid-May that the portable computer disk drive was missing from Health Net's Shelton, Conn., office, but did not send letters to customers or post a notice on its Web site until Nov. 30.
The missing disk contained health information, Social Security numbers, and bank account numbers for 446,000 past and present customers. The data was contained in 27.7 million scanned pages of more than 120 different types of documents, including insurance claim forms, membership forms, appeals and grievances, correspondence, and medical records.
Despite the sensitivity of the information, the data was not encrypted, the suit says. An investigative report by Kroll, a computer forensic consulting firm hired by Health Net, said the data was viewable through commonly available software.
By failing to encrypt the data, Health Net violated the Health Insurance Portability and Accountability Act and its own company policies, Blumenthal said. Failing to promptly notify customers and state authorities of the data breach was also a HIPAA violation.
Contributing to the snafu was Health Net's alleged failure to effectively supervise and train employees on policies and procedures on the appropriate maintenance, use, and disclosure of protected health information.
Along with Health Net, the lawsuit names UnitedHealth Group and Oxford Health Plans. While the companies were not involved in the data breach, both have acquired ownership of Health Net of Connecticut. Blumenthal is asking for a court order blocking Health Net from continued violation of HIPAA. He is also asking for civil penalties.
Data breaches at companies are not unusual and the cost is rising. A study by the Ponemon Institute and security firm PGP found the average cost to businesses in 2009 was $6.75 million, the highest ever.