On January 9, 2015, New Jersey Governor Chris Christie signed new legislation that will require health insurance carriers authorized to issue health benefits plans in the state—including insurance companies, health service corporations, hospital service corporations, medical service corporations, and health maintenance organizations—to encrypt personal information. Triggered by a series of data breaches involving the health information of almost a million residents, Senate Bill No. 562 (“SB 562”) was passed unanimously by both houses of the state legislature and will take effect on August 1, 2015.

Under SB 562, health insurance carriers will be prohibited from maintaining computerized records that contain personal information unless the information is “secured by encryption or by any other method or technology rendering the information unreadable, undecipherable, or otherwise unusable by an unauthorized person.” The use of a password protection program that prevents general unauthorized access will not suffice to meet the encryption requirement. “Personal information” is defined as an individual’s first name or first initial and last name linked with at least one of the following: (1) Social Security number, (2) driver’s license number or state identification card number, (3) address, or (4) identifiable health information.

The law applies only to end user computer systems and computerized records transmitted across public networks. “End user computer systems” include desktop computers, laptop computers, tablets and other mobile devices, and removable media.

The requirement to encrypt makes the New Jersey law stricter in this regard than the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), under which encryption of electronic protected health information (“ePHI”) is an addressable specification. Nonetheless, given that encrypted ePHI is exempt from HIPAA’s breach notification requirements, it is considered a best practice to encrypt ePHI.

Violation of New Jersey’s encryption mandate will constitute a violation of the New Jersey Consumer Fraud Act, which imposes penalties of up to $10,000 for the first offense and up to $20,000 for any subsequent offense. The state Attorney General may also issue cease-and-desist orders to violators and award treble damages and costs to affected individuals. Given these potential penalties, health insurance carriers in New Jersey should carefully review their policies and procedures and ensure compliance with the new law.