Cyber Insurance: Well Worth it but Beware of Exclusions

It’s what all sensible people do to mitigate the risk of catastrophic financial damage: Buy insurance. There’s not even a choice when it comes to auto and health risks – insurance is a legal mandate. And most people would agree that anyone with a house who does not carry homeowner’s insurance is a fool or fabulously wealthy.

So, why not use cyber insurance? Indeed, the case for it is compelling. The costs of data breaches are in the millions and rising fast. As the Ponemon Institute put it in a synopsis of one of its recent reports on the issue, “data breaches have become as common as a cold, but far more expensive to treat.”

In another report sponsored by HP Enterprise Security, Ponemon found that, “the average annualized cost of cyber crime incurred by a benchmark sample of U.S. organizations was $12.7 million,” up 96% since five years ago. The average cost to resolve a single breach was $1.6 million.

Most policies are nowhere near inclusive of all cost associated with breaches. So, as Wendi Rafferty, vice president of services at CrowdStrike, put it to CSO in an earlier interview, part of any prudent organization’s advance plan to respond to a data breach should include data breach insurance.

The biggest reason is that a general liability policy is no longer enough. It covers, “third-party claims of bodily injury or property damage, but the trend among insurance providers is to exclude electronic records and data,” said Jared Kaplan, executive vice president and CFO of Insureon.

Getting effective cyber insurance is not simple, however. Data breaches, in addition to being expensive, are notoriously complicated. They require a host of costly responses, including forensic investigation, notification of first and third parties, fulfillment of legal and compliance obligations, possible litigation, working with law enforcement, public relations, credit monitoring fees, crisis management – the list goes on.

As technology risks continue to evolve, many carriers are starting to pull back on the types of industries and risks they will cover.
Also different industries have different kinds of risks, health care is not the same as retail, which is not the same as buying for Education.
That means simply buying a “cookie-cutter, off-the-shelf” policy is asking for trouble since it will likely have exclusions for significant expenses.

According to a recent post in Dark Reading, many such policies exclude coverage for:

  • Breaches of protected information in paper files.
  • Claims brought by the government or regulators, including the Office of Civil Rights, the Department of          Health and Human Services, and the Office of the Attorney General.
  •  Vicarious liability, for data entrusted to a third-party vendor, when the breach occurs on the vendor’s system.
  •  Unencrypted data.

Some damages, of course, cannot be measured exactly. But there are ways to close coverage gaps. One of the most obvious is to practice good security “hygiene,” including end-to-end encryption of data and keeping software up to date with all recent patches.

Common exclusions in “off-the-shelf” cyber insurance policies:

  •     Breaches of protected information in paper files
  •     Claims brought by the government or regulators
  •     Vicarious liability, for data entrusted to a third-party vendor that is     breached
  •     Unencrypted data
  •     Negligence: Failure to install software updates or security patches
  •     First-party notification expenses for disclosure of PII or PHI
  •     Many of the policies, with premiums ranging from $6,000 to $37,000, limit coverage to just $1 million, which      in today’s world rarely comes close to covering the total expenses.

In short, cyber insurance can ease the pain, but it won’t eliminate it.  

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