Read this warning on release day, went to read this myself and haven't found such statement neither in ToS, nor in Privacy Policy.

This paragraph (about private communications and files in private folders) seems to be gone from their Privacy Policy. Google cache confirms it was present (in PP, not ToS), but I suppose MS spotted had this insane statement and removed in a hurry - or hid somewhere else, deeper in small fine print and with another wording.

(Or maybe I had totally missed something, scrolling through the document and my browser's search function malfunctioned.)