• Ron Kulik

Should I look into cyber insurance?



Among those firms who take risk management seriously, there is a growing awareness of the need to consider some manner of insurance to protect against the costs of cybercrime. Standard commercial property insurance policies do not generally include provisions for the damages from cybercrime. Cybercrime can be thought to include any digital or internet-based attack that compromises you and/or your customers' data and/or causes disruption to business operations.


A non-inclusive list might include Denial of Service (DoS) attacks, phishing scams, adware, ransomware attacks, system/website cloning, viruses, and other malware, and viruses. So, what is it that so worries business leaders? In a growing number of commercial policies, cyber events are specifically excluded. The consequences can be serious. Fines and penalties, loss of customer confidence, and liability lawsuits can shut a business down for good, especially smaller businesses that lack the deep pockets to hold out until the worst of the storm passes.


Cybercrime creates a broad range of potential first- and third-party losses that few businesses can hope to absorb on their own. As a result, executives who recognize the catastrophic damage that a cyberattack can inflict on their business are looking at cyber insurance to transfer the financial losses to a third party.


Because of the severe consequences of cybercrime, businesses are now exploring cyber insurance policies in hopes of protecting themselves against financial ruin. However, these policies represent a bit of a minefield as this is a new and unsettled area of insurance. Insurance firms trying to write policies face a lot of unknowns at this point, which means coverage may differ dramatically between insurers and there may be many areas where you remain exposed to considerable risk. Just two examples to get you thinking. Some policies may create requirements and security standards you must meet before an event will be considered a covered loss.


  • How would you handle those requirements internally to keep your company in compliance? And what about ransomware?

  • If you had to pay the ransom, would the policy cover that payout?

There are a lot of weeds to get into when looking for a cyber insurance policy and it is important you recognize the complexity of the issues. Cyber insurance has a lot of moving parts. In the meantime, cyber insurance doesn't absolve you of the ongoing need to be vigilant about network and data security. Contact a managed service provider to learn more about what you can do to keep your business safe.


Cyber insurance: What is first-party and third-party coverage


When you start looking at cyber insurance, you are going to encounter discussions of first- and third-party coverage. This is referring to the protection against losses incurred by first- and third parties because of a cyberattack. First-party is all about you. The term refers to all the losses you suffer directly because of the event. Third-party refers to all the losses suffered by others because of the cyber event which hit your business. This is going to refer to your clients and others whose data you handled and that was compromised in some fashion because of the cyber event.


So, let’s take a high-level look at the risks that fall under first-party losses


First Party losses - all about you


First-party is all about covering the direct and indirect losses that create economic loss for your business because of the criminal cyber event. Let’s start with the immediate consequence to your business from a cyber-attack: that is the loss or damage to the electronic data you hold. That can be any electronic data that you possess, including the data of your clients. The compromising of customer data is of special concern when it includes Personally Identifiable Information (PII). PII can identify a specific individual. Examples include full name, address, social security number, birth date, etc. Cyber insurance would help you cover the expenses from a data breach only from a specified covered peril such as a DoS, hackers, virus, etc.


However, breaking out all the first-party losses reveals quite a complex list of expenses. In our next blog, we will give you a breakout of the major expenses that can result from that initial criminal event.


What does your cyber insurance cover? 6 possible coverages.


If you are looking to buy cyber insurance, you are going to encounter discussions of first- and third-party coverage for a cybercrime. As mentioned in our last blog, first-party coverage is all about purchasing coverage to handle the direct and indirect losses that create economic loss for your business because of the criminal cyber event.


Following the loss or damage to your data faster from a cyber event, first-party losses may include the expenses that cascade down from that first event. Here six significant expenses that you may want to have covered.


  • Forensic expenses - You will find it necessary to use resources to find out what happened. The ‘when, where, why, how,’ the breach or event occurred and most importantly, who is affected. You can’t begin to fix anything until you find out what is broken.

  • Recovery costs - These are all the extra resources you may expend working to recover lost or damaged data. Depending on the complexity and the resources of your in-house staff, recovery and forensic efforts may require outside consulting support.

  • Loss of income - This would be akin to the business interruption insurance you may have under your commercial property insurance policy. It refers to the income lost as a because of the data event

  • Extortion - Did you have to pay a ransom to get your data back? Ransomware is a popular form of cyber cyber-attack and while governmental authorities strongly recommend against giving in to ransom demands, many entities end up finding that is the only path to data recovery.

  • Notification - Keep in mind that under various piecemeal state and federal regulations, you may have specific notification requirements to alert anyone whose data was compromised. This may require media ads, mailings, etc.

  • Public relations - Because data breaches often require public notification, a cyberattack can be a branding nightmare. For small businesses, it can be fatal. You will certainly need to expend considerable resources to recover the confidence of your clients or customers.


Cyber Insurance: third party liability coverage is key


So, we talked in the last blog about cyber insurance coverage for first-party losses. Fine, but that crime will have impact on outsiders, such as your customers.


Third-party losses refer to your liability for the consequences of the data breach to others. For simplicity’s sake, this most often will be those customers whose data was “hacked.” Without question, the biggest issue here is the damage to someone’s data. It may be released to the public, used for criminal purposes such as identity theft, financial fraud, or even to create public scandal. (remember the dating website for married people looking to have affairs?) There is no end to the mischief and the damage cyber criminals can cause. We can identify at least three main areas where you would want coverage.


  • Network Security - Lawsuits may occur alleging that you failed in some way to provide adequate security for the data. If the data was compromised, or the data could not be accessed as required because of the event, the claim would be you were in some way negligent regarding network security and failed to protect PII.

  • Network Privacy - This refers to lawsuits alleging damage from the exposure of PII. Examples would be identity theft, damage to credit ratings, invasion of privacy, etc.

  • Errors and Omissions - Suits could also claim that mistakes in your software design or a coding error was what led to the vulnerability.


Cyber policies: Not every risk may be covered


If there is one thing for certain in business, every firm, large or small, regardless of industry or sector, is vulnerable to cybercrime. It is less of an “if” and more of a “when.”


In response to this growing risk, insurance companies are offering a product known as cyber insurance, with the goal of protecting businesses from the consequences of cyber, internet-based attacks. You want to be protected from cybercrime, denial of service attacks, malware and viruses, and phishing scams that suck your employees into opening infected emails. Especially, those sudden ones that pop up and affect large swathes of users, such as the WannaCry Malware. Any one of these can present a clear risk to your business, just like fire and theft. However, before you assume that protecting yourself from the direct and indirect losses of a cybercrime event is simple and straightforward, it is important to understand that cyber insurance is a relatively new field of coverage; in many ways, fluid and ill-defined. Determining what solid, adequate protection against cyber criminals looks like is a bit of a moving target. The cyber insurance market remains a bit unsettled, not least because the risk itself keeps shifting and that makes insurers uneasy about what they are underwriting.


The takeaway here is that you need to be aware that cyber insurance is a relatively new field of coverage and insurance firms trying to write policies face a lot of unknowns at this point. As a result, coverage may differ dramatically between insurers and there may be many areas where you remain exposed to considerable risk. Explore carefully. In the meantime, cyber insurance doesn't absolve you of the ongoing need to be vigilant about network and data security. Contact a managed service provider to learn more about what you can do to keep your business safe.

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