A Buyer’s Guide to Cyber Insurance

October 2, 2013

No business is safe from privacy breaches and cyber attacks, and hackers grow more sophisticated each day. The demand for cyber insurance has grown as a result, and a recent study found that 31 percent of companies have purchased some type of cyber policy. Approximately 25 insurers now offer this type of insurance, and all these carriers offer coverage for both first-party and third-party losses. The market is very dynamic; the coverage available varies from insurer to insurer, and in some instances the policy offered is not even named a “cyber policy.”

Insurers offer both first- and third-party insurance for cyber losses. First-party coverage insures for losses to the policyholder’s own data or lost income or for other harm to the policyholder’s business resulting from a data breach or cyber attack. Third-party coverage insures for the liability of the policyholder to third parties — including clients and governmental entities — arising from a data breach or cyber attack.

Available third-party coverages include:

  • Litigation and regulatory. Covers the costs associated with civil lawsuits, judgments, settlements or penalties resulting from a cyber event.
  • Regulatory response. Covers the legal, technical or forensic services necessary to assist the policyholder in responding to governmental inquiries relating to a cyber attack, and provides coverage for fines, penalties, investigations or other regulatory actions.
  • Notification costs. Covers the costs to notify customers, employees or other victims affected by a cyber event, including notice required by law.
  • Crisis management. Covers crisis management and public relations expenses incurred to educate customers concerning a cyber event and the policyholder’s response, including the cost of advertising for this purpose.
  • Credit monitoring. Covers the costs of credit monitoring, fraud monitoring or other related services to customers or employees affected by a cyber event.
  • Media liability. Provides coverage for media liability, including coverage for copyright, trademark or service mark infringement resulting from online publication by the insured.
  • Privacy liability. Provides coverage for liability to employees or customers for a breach of privacy.

The types of first-party coverage available include:

  • Theft and fraud. Covers destruction or loss of the policyholder’s data as the result of a criminal or fraudulent cyber event, including theft and transfer of funds.
  • Forensic investigation. Covers the legal, technical or forensic services necessary to assess whether a cyber attack has occurred, to assess the impact of the attack and to stop an attack.
  • Business interruption. Covers lost income and related costs where a policyholder is unable to conduct business due to a cyber event or data loss.
  • Extortion. Provides coverage for the costs associated with the investigation of threats to commit cyber attacks against the policyholder’s systems and for payments to extortionists who threaten to obtain and disclose sensitive information.
  • Computer data loss and restoration. Covers physical damage to, or loss of use of, computer-related assets, including the costs of retrieving and restoring data, hardware, software or other information destroyed or damaged as the result of a cyber attack.

These coverages are not equally available. Insurance for losses arising from a breach of customer or employee privacy is easier to find, and there appears to be substantial capacity in the insurance marketplace for this type of coverage. On the other hand, insurance coverage for the ancillary financial loss arising from data or privacy breaches, such as lost business income and loss of the value of destroyed information assets, is harder to find.

Premiums for cyber insurance can vary widely. Gartner, Inc., reported recently that cyber insurance premiums range from $10,000 to $35,000 for $1 million in coverage. While the coverage has become more available, insurers continue to develop their understanding of cyber risks. Some carriers have underwriters with knowledge and experience regarding cyber losses, while other carriers do not. As a result, insurers have had difficulty pricing this insurance, and there can be large differences (as much as 25 percent) between the premium charged by two different carriers to insure the same risk.

The number of United States companies purchasing cyber insurance has increased with the availability of the insurance products. The national insurance broker Marsh recently reported that the number of Marsh clients purchasing cyber insurance increased 33 percent in 2012 over 2011. Marsh noted that the services industry, which includes professional, business, legal, accounting and personal services firms, experienced the largest uptick in the number of clients purchasing cyber insurance — a 76 percent jump over 2011.

The limits of liability purchased by U.S. businesses vary widely. Chubb reports that the average policy limits purchased by its clients are between $1 million and $5 million, while Marsh reports that its clients purchased an average of $16.8 million in limits across all industries, an increase of nearly 20 percent over 2011. The maximum limit available from a single insurer ranges from $10 million to $20 million, but policyholders are able to stack limits of liability to create towers of insurance up to $350 million.

Small and midsize businesses are ideal candidates for cyber insurance, because they may be less prepared for a data breach and less able to absorb the costs associated with a breach. Larger companies, with more substantial risk management and legal departments, are better equipped technically and financially for a data breach, which could make insurance a less effective risk management tool.

Insurers also are responding to insurance claims arising from cyber losses. NetDiligence reports that the insurers who have been in the cyber insurance business the longest — ACE, AIG, Beazley and Hiscox — have large books of claims and are handling several claims per week.

Recommendations for Buying Cyber Insurance

  1. Identify Your Unique Risks. The first step in buying cyber insurance is to understand the nature and the extent of the risks facing your company. For some businesses, like banks and retailers, the primary concern is the theft of personal financial information. On the other hand, the major risk to a utility or energy company is the disruption of critical businesses or physical operations through attacks on networks. Businesses should tailor their coverage to the risks that they face.
  2. Understand Your Existing Coverage. Your company’s standard first- and third-party policies may provide some protection from cyber risks, and it is important to understand what coverage, if any, may be available under your existing policies. For example, standard financial institution bonds provide coverage for third-party claims arising from a fraudulent computer instruction to transfer customer funds. Understanding your existing coverage will enable you to purchase the type of cyber insurance that your company needs.
  3. Buy What You Need. With the variety of coverages offered by insurers in the market today, it is important to focus on the basics. You should consider whether your business needs all the coverages being offered and decline to purchase those that you do not need. Likewise, if an insurer is not willing to remove an objectionable exclusion or limitation from its policy, ask your broker to obtain a quote from a carrier who will offer the coverage without the limitation.
  4. Secure Appropriate Limits and Sublimits. Perhaps the most important step a company can take to assess the value of cyber insurance is to compare the anticipated costs associated with a data breach with limits of liability available and the related costs. The costs of responding to a data breach can be substantial. Estimates vary, but in 2011 the average cost of a breach was $5.5 million, and the cost per lost electronic record was $194. Your company should try to match its limits of liability with its realistic exposure in the event of a cyber loss. Also, most cyber insurance policies also impose sublimits on some coverages, such as for crisis management expenses, notification costs and regulatory investigations. These sublimits are often inadequate, but many carriers are willing to negotiate on the size of the sublimit, often with no increase in premium.
  5. Beware of Exclusions. Often, coverage for a loss or claim depends on the language in policy exclusion as opposed to the language in the grant of coverage. Because cyber insurance is a new product, the policy language is not standardized. Policies may contain exclusions that have been cut and pasted from other insurance forms, and the exclusion simply may not belong. When this happens, negotiate with the insurer, or seek other quotes.
  6. Get Retroactive Coverage. Cyber policies sometimes restrict coverage to breaches or losses that occur after a specific date. In some forms, this is the inception date of the policy. This means that there would be no coverage for breaches that occurred before the inception of the policy. Because breaches may go undetected for some period of time, it is important to purchase coverage with the earliest possible retroactive date.
  7. Consider Coverage for Acts and Omissions by Third Parties. Many companies outsource data processing or storage to a third-party vendor. It is important that your cyber insurance policy provide coverage for claims that arise from misconduct by one of your vendors.
  8. Evaluate Coverage for Data Restoration Costs. Many cyber insurance policies do not provide coverage for the costs to replace, upgrade or maintain a computer system that was breached. Data restoration costs are potentially prohibitive. Any company that faces the risk of a data breach should take steps to ensure that its policies provide coverage for the costs of putting the company back in the position it was in before the breach.
  9. Involve All Stakeholders. As you consider the purchase of cyber insurance, be certain to involve all the potential constituencies within the company, including IT, treasury, finance and risk management. You are more likely to purchase the right policy with the right limits if you include all the divisions within the company who should have input into the insurance-buying decision.
  10. Take Advantage of Risk Management Services. Many insurers offer cyber risk management services; you should consider whether your company needs these services, and if so, whether you should work with a carrier that offers a robust risk management program.
  11. Dovetail Cyber Insurance with Indemnity Agreements. You should ensure that your company’s indemnity agreements work hand-in-hand with your cyber insurance. For example, many cyber insurance policies have retentions and require that the retention be satisfied by the insured. Insurers may interpret this language to require that the insured pay the retention out of its own pocket and that a payment by a third party under an indemnity agreement would not satisfy the retention. This is a subject for negotiation with the insurer during the underwriting process.
  12. Understand The “Triggers.” It is important to understand what activates coverage under your cyber policy. Some policies are triggered on the date the loss occurs, while others are triggered on the date that a claim is made against the insured. In order to provide proper notice, you need to understand how coverage applies under each policy you purchase.
  13. Consider Coverage for Loss of Information on Unencrypted Devices. Many professionals today work on computers and tablets outside the office. Although many firms encrypt company-owned laptops, personally owned computers and storage devices are not. It is important for firms facing a loss of data through personal computers to buy insurance that provides coverage for such losses.
  14. Consider Coverage for Regulatory Actions. A data loss may cause not only the loss of information, but also could result in regulatory actions against your company. State and federal agencies have become more active in responding to data and privacy breaches. You should consider whether your company’s insurance policy provides coverage for a regulatory investigation or a regulatory action arising from a cyber incident.

Because the market for cyber insurance is not mature and the scope of coverage available and the cost can vary significantly from insurer to insurer, it is important to involve in the insurance-buying process both outside counsel and an insurance broker with experience and knowledge about cyber insurance. Counsel can assist the company in evaluating the risks that it faces from cyber losses and can evaluate the scope of coverage offered under cyber policies. An experienced broker can identify the insurers who offer the product most suited to your company’s needs and help negotiate favorable terms and price. Working together, a team including your broker and outside counsel can ensure that you purchase the right coverage with appropriate terms and conditions.