Cyber Insurance Blog

The Limitations of Cyber Insurance for Businesses

The Limitations of Cyber Insurance for Businesses

In today’s technology-driven business landscape, cyber attacks are a constant threat. High-profile cases, such as the 2017 Equifax data breach, frequent ransomware attacks, intellectual property theft, and other cyber crimes, continue to make headlines, costing businesses trillions of dollars in fines, recovery costs, and lost revenues. As a result, organizations are turning to Cyber Insurance to mitigate threats and protect themselves as cyber risks persist.

 Insurance agent explains the details of a Cyber Insurance policy to a businessman.

While companies are beginning to see the importance of Cyber Insurance, investing in coverage alone is not a panacea. Unlike other forms of insurance where standardization provides complete coverage, Cyber Liability Insurance features little uniformity in terms, language, and definitions. Therefore, having Cyber Insurance coverage isn’t a complete solution for companies.

Let’s take a closer look at Cyber Insurance, its pros and cons, and what organizations can do to make the most of their Cyber policies.

Cyber Insurance: What Is It and What Does It Cover?

A Cyber Liability policy is an insurance product designed to help businesses mitigate the threat of cyber crimes such as ransomware, malware, DDoS attacks, social engineering, or any other methods used to compromise networks, confidential information, or intellectual property.

Cyber Liability Insurance typically covers the following:

Smiling lawyer preparing to give a consultation covered by Cyber Liability Insurance.

  • Network Security: In the event of network security failure, businesses can recover first-party costs from legal expenses, data restoration, identity restoration, and public relations with robust Cyber Insurance coverage.
  • Media Liability: This provides coverage for intellectual property infringement (excluding patent infringement) resulting from advertising a company’s services.
  • Privacy Liability: Data breaches can expose sensitive employee or customer data, and businesses can be held liable. Cyber Insurance can cover fines and legal fees when this happens.
  • Errors and Omissions: Cyber attacks can stop business activities, preventing service delivery and contract fulfillment. E&O in Cyber Insurance covers any claims arising from errors in performance or failure to perform these services.
  • Network Business Interruption: Technology-dependent businesses can be compromised by a cyber attack. Cyber Liability Insurance can cover losses arising from system failures and lost profits when the organization is affected.

While Cyber Liability Insurance can cover a combination of these elements, there is no one-size-fits-all policy that can eliminate the threat of cyber attacks. Insurance brokers play an important role in educating, informing, and helping commercial clients choose the coverage that matches their organization’s unique needs.

What Is Left Out? Cyber Insurance Pros and Cons

As businesses learn more about how dangerous cyber crime can be, an increasing number of them decide to invest in Cyber Insurance. According to projections, the global Cyber Insurance market will grow from $12.83 billion in 2022 to $63.62 billion in 2029. However, no matter how comprehensive a policy appears, Cyber Liability Insurance covers only some things. Rather than view it as the sole solution, businesses must adopt it as an additional cyber security measure to supplement their risk mitigation strategies. Let’s look at the benefits and drawbacks of Cyber Insurance.

The Pros of Cyber Insurance

Investing in Cyber Liability coverage provides the following advantages for businesses:

  • Business Interruption Reimbursement: A Cyber policy can cover loss of income due to interruptions caused by a cyber attack.
  • Legal Support: Seeking legal assistance after a cyber attack can be costly. Cyber Insurance coverage can help organizations afford legal help after a successful cyber attack.
  • Data Breach Coverage: Cyber Liability Insurance can cover the costs of security fixes and identity theft protection after a data breach.

The Cons of Cyber Insurance

While investing in a Cyber Liability policy is critical, it still poses the following limitations or disadvantages:

 Company IT team reviews security measures for preventing a data breach.

  • Non Standard Coverage: Not all policies are the same, and organizations will need different coverage depending on the nature of their business. For instance, companies in the health care sector will need a policy that protects confidential data. Moreover, some threats, such as data breaches, can be caused by third-party partners that are not necessarily covered by the policy.
  • Choice Limits: The coverage of a company’s policy can influence how management responds to cyber crime. For example, the policy may require consultation with specific third-party vendors, which can slow down response time during a breach.
  • False Sense of Security: Cyber Insurance coverage is important, but it differs from data protection and security. Organizations must understand that apart from investing in insurance, they must continuously assess their security systems, create effective risk management strategies, and take the initiative to improve security measures to protect themselves from evolving cyber threats. Moreover, their IT teams should create a robust incident response plan to prepare for future attacks.

Additionally, as stated earlier, Cyber Liability Insurance doesn’t cover everything.

Typical policy exclusions include:

  • Patent Infringement: As mentioned in our discussion of Media Liability, Cyber policies don’t cover allegations of infringing a third party’s patent. Patent infringement is a legal issue and an intellectual property (IP) risk, not a cyber risk. For protection against claims of patent infringement, businesses should look to IP insurance.
  • Loss of Future Profits: Although Cyber policies cover revenue lost due to business interruption, they generally only cover loss of revenue due to the reputational harm cyber incidents can cause for a few months. For example, a policy may cover lost revenue for the three months after an incident, but if profits are still down year-over-year, the policy will not help. Cyber policies help businesses return to the same financial position they were in just before an incident. Future profits are a matter of speculation. While cyber attacks can and do damage companies’ reputations—a reality Cyber Insurance recognizes by covering PR costs during recovery—other factors such as managerial decisions, product life cycles, and general economic conditions also affect profits.
  • War and Cyber War: Whether conventional armed attacks or computer attacks designed to disrupt and damage an enemy’s infrastructure, warfare is inherently unpredictable. Carriers cannot accurately calculate and manage the risks of war. In addition, the legal principle of sovereign immunity may make recovering losses due to state-sponsored conventional or cyber warfare all but impossible. Some Cyber policies do distinguish acts of cyber terrorism from acts of cyber warfare and may cover losses due to these events. But businesses with existing Cyber Insurance that wish to ensure coverage during a cyber warfare incident may need to acquire an additional, distinct insurance product.

Brokers can help businesses understand the pros and cons of Cyber Insurance and assist them in choosing a policy that supplements their current security policies.

The Role of Cyber Insurance in Risk Management

Cyber Insurance policies are a risk mitigation measure and a powerful complement to a company’s security management strategy. It helps companies fortify their risk management efforts by providing coverage for remediation costs, regulatory fines, settlement costs, and more. However, they cannot eliminate cyber risk and should not be a substitute for cyber security.

With all of Cyber Insurance’s benefits, it’s easy for organizations to get a false sense of security and think they don’t need to improve their security because the policy can cover costs and losses if they get hacked. However, even the most comprehensive policy has limitations, and every cyber attack will need a unique countermeasure. For instance, coverage might not necessarily handle cyber crimes committed by insiders or attacks on third-party vendors that can lead to a security breach.

Other challenges include the ever-evolving threat environment and the need for standardization in the insurance market. Alongside investing in a robust Cyber Insurance policy, companies should take steps to:

  • Ensure compliance with industry and regulatory standards (such as HIPAA and PCI-DDS)
  • Keep all software and systems updated
  • Have an in-house IT security staff to respond to attacks
  • Continuously assess and monitor their networks
  • Have comprehensive cyber security policies
  • Educate and train all members of the organizations with cyber security best practices
  • Perform regular backups to protect data

As a broker, you are uniquely positioned to help your clients enhance their cyber security systems and choose a suitable policy.

Be Your Clients’ Cyber Security Broker With ProWriters

Today’s threat landscape poses unique risks to organizations of all sizes. Cyber Insurance can help strengthen their defenses by compensating losses in a cyber attack. As a broker, you can educate your clients and assist them in adding this layer of protection.

At ProWriters, we help brokers like you be the cyber security expert on whom your clients can rely. We offer tools and resources that can aid you in educating clients about cyber security. Learn how we can make a difference in your broker services by signing up today!

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