United States: Cyber Insurance. Am I Covered Now?

The cybersecurity breaches rippling through the global economy create enormous costs for the affected businesses and organizations. As a result, many companies are focusing increased attention on obtaining insurance coverage for these risks; and a recent report from PricewaterhouseCoopers estimated that the annual gross value of cyber insurance premiums will increase from around $2.5 billion in 2015 to $7.5 billion by 2020. Clearly, there is a growing need for these kinds of insurance products, and a growing demand too. However, as with any insurance product, it's critical to know what you're buying, and this article aims to provide some general information to inform and refine your cyber insurance purchase. Let's start with why you need to have it.

Why your other insurance policies will not do the job.

As a starting point, it's important to realize the limitations of the insurance policies you already have and where they leave you unprotected for cyber events:

Your general liability insurance may cover a few of the risks resulting from a cybersecurity incident, but its reach is limited:

One part of a typical general liability policy covers property damage and loss of use of tangible property. This might be helpful when a natural disaster wrecks a computer system, but it provides no coverage for the loss of data or system function triggered by a cyber event when there is no physical damage.

Another standard component of a general liability policy covers oral or written defamation, but this offers no protection for improper disclosure of a person's confidential information, and the government fines, internal remediation costs, and liability to individual victims that can result.

Likewise, a premises insurance policy also may cover physical damage to your computer system but not damage caused by a cybersecurity incident that results in no physical harm.

Errors and omissions insurance, or professional liability insurance, can cover an injury to a third party, but this coverage is limited to situations where the injury results from the delivery of a professional service. So there is no protection under these policies for the malicious actions of a computer hacker or damage to your data caused by a careless or disgruntled employee.

Thus, some of the traditional insurance coverage you have may provide spotty protection for a few of the risks encountered in the cybersecurity world (and it's always worth checking to see if your other policies do provide coverage) but these policies can't be stretched to cover the full range of cyber risks. Moreover, insurers are increasingly moving towards limiting coverage for cyber events under these traditional policies by imposing limits or flatly excluding certain cyber-related risks.

What risks can a cyber insurance policy actually cover?

To start with, it's important to realize that cyber insurance is a very dynamic market, and insurance companies are being very cautious in the products they are offering. As noted in Marsh & McLennan's September 2015 Emerging Risks Report, "[T]he level of historical data that has been used to build probabilistic models for natural catastrophes does not yet exist for cyber risk." This explains the tendency of insurers to limit coverage by excluding coverage for some types of risks and imposing sub-limits for other risks, so it's crucial to understand exactly what your policy covers, and how much coverage you have for each type of risk. To understand the full dimensions of a cyber insurance policy, we need to review the types of risks that data systems encounter and who suffers the harm in each case.

First Party Cyber Coverage

First Party Coverage in any insurance policy covers the loss and expenses of the party who buys the insurance. That's you, and a cyber policy should address several key risk areas:

Business Interruption and resulting loss of income, including:

Insurance against any form of cyber extortion (the so-called "ransomware"), as well as any other attack that results not just in a breach of data but to actual loss of your data; and

Denial-of-service attacks on your website that interrupt your business.

Internal Breach Response All the costs of a forensic investigation of the breach and recovering full function of the affected systems; as well as the costs to remediate the breach. This should include costs of breach notification to the customers whose data was breached and other related response and recovery measures, including setting up call centers and providing credit monitoring.

Loss and expense due to regulatory actions and penalties: This should include expenses that you will incur during an oversight agency's investigation of your business, and not be limited to just the cost of any fines that may be imposed at the end of the process; and keep in mind that if a resolution agreement is reached with a regulatory agency, that agreement probably will include a period of compliance monitoring and reporting, with added operating costs.

Crisis Management/Public Relations: It will be important to get coverage for the costs of obtaining good PR advice to handle media inquiries and to limit damage to your company's reputation and brand.

Third Party Cyber Coverage

Of course, any cybersecurity incident also has the potential to cause damage or injury to your clients, patients, or customers and to your vendors when their confidential information is compromised. In some cases the data breach may lead to identity theft, but in other situations, the data may be confidential business plans of clients and its exposure will cause embarrassment or other business losses. As noted, the first party coverage for breach response can address costs of identity theft protection and other costs incurred by you to limit damage to a client, patient customer or vendor, including the critical initial step of notifying the affected persons and applicable regulators. But, in many cases, some damage has already been done and these third parties have incurred losses, so it is important to have coverage for external breach costs that those third parties will experience.

Another aspect of third party coverage addresses damages to a third party's computer system. Any malicious code that roosts on your system can be transmitted to customers, business partners and others, resulting in damage to their data, or disruption in the operation of their computer systems, so it's important to have coverage for these losses, in addition to coverage for exposure of their information.

Analyze your needs and your cyber policy carefully.

Not all cyber policies are created equal, and one size definitely does not fit all, so you need to identify the specific risks that a cybersecurity incident would pose to your data and the impact on your business. Keep in mind that as courts construe the limits of coverage in cyber insurance policies, they will continue to apply traditional insurance law principles developed in interpreting the limits on coverage, as the P.F. Chang's restaurant chain found to its chagrin. When a breach of P.F. Chang's systems led to the exposure of about 60,000 of its customers' credit card numbers on the Internet, the restaurant chain's insurance company covered almost $2 million of losses for forensic work and defense costs in class action litigation by affected customers. However, the insurance company denied coverage for another $2 million in assessments that P.F. Chang's was contractually obligated to pay to reimburse its credit card processor. Following a classic insurance law principle, the insurer denied coverage for those assessments because they arose from P.F. Chang's contract with the processor, rather than directly from the breach itself. The court upheld this denial of coverage.

When it comes to insurance coverage, the devil is always in the details. You and your broker should look carefully for a number of issues that will affect the levels and the types of protection you are buying. Here are some specific things to avoid:

Sub-limits within the policy that limit coverage for particular kinds of risks or losses, including regulatory fines, breach remediation, or credit monitoring and call centers

Definitions that may limit the types of data that is covered—you want coverage for any exposure of, or damage to, all the types of data that your business uses;

Exclusions or limits for damage to your system that are caused by a vendor. You'll want contractors with access to your computer system to show you evidence of their own coverage before you give them any access, but you don't want to be left "high and dry" if their coverage is denied for some reason;

Exclusions or limits for breaches or damages that result when your data is held by another enterprise, like a cloud storage company; and

Limits on coverage for responses to regulatory agencies—for instance, a requirement that coverage only comes into play when an agency has charged that a violation of law has occurred. You'll want to have coverage for all of the costs you incur in responding to an agency investigation from the point where it starts.

Last but not least, note that when you apply for a policy, you'll be asked a series of questions about the policies, procedures and security features that you have in place to protect your data. In order to answer those questions, you will need to carefully assess your systems, your data, your risks, and the active protection measures that you have in place. Doing so at the outset will help in identifying the coverage that you need and will allow you to provide an accurate response to the insurance company's questions so you avoid disputes and denials of coverage later. There has been at least one case where discrepancies in the response to an insurance company's questionnaire led to a denial of coverage. Obtaining cyber coverage that adequately covers your risks and that you can rely on in time of need will require you to invest time and effort on the front end but can pay enormous dividends in the long run.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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