Among those firms that 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. In a growing number of commercial policies, they are specifically excluded. 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. Learn in this blog about Cyber Insurance: The basics of coverage.
However, before looking at cyber insurance, it would be a good idea to summarize the specific areas of risk that you may face in the event of a cyber attack. Before selecting a policy, you need to consider what areas of exposure are most threatening to your business. This blog will review the major areas of risk exposure that you face from cybercrime in order to provide guidance for selecting what you expect a cyber insurance policy to cover.
Before looking at your key areas of risk, let’s summarize what is generally meant by cybercrime or cyberattack. For the purposes of this general discussion only, 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. Cyber Insurance: The basics of coverage are here to protect you.
First-party and third-party coverage
When you start looking at cyber insurance, you are likely going to encounter discussions of first and third-party coverage. This is referring to the protection against losses incurred by first- and third parties as a result of a cyberattack. First-party is all about you. The term refers to all of the losses you suffer directly because of the event. Third-party refers to all of the losses suffered by others as a result of the cyber event which hit your business. Generally, this is going to refer to your clients and others whose data you handled and that was compromised in some fashion as a result of the cyber event.
So let’s take a high-level look at the risks that fall under these categories.
First Party losses – all about you
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 generally help you cover the expenses from a data breach only from a specified covered peril such as a DoS, hackers, virus, etc.
Following the risk that your data faces from a cyber event, first-party losses may also include the expenses that cascade down from that first event.
- 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 consequence of the data event.
- Extortion – Did you have to pay a ransom to get your data back? Ransomware is a popular form of 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.
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”.
- 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 that 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 were what led to the vulnerability.
As you can see, a cyber attack can create two primary categories of losses that cyber insurance can be used to address–what happens to you, and what happens to your clients. However, this is just a quick look at the major areas to address. There are a lot of weeds to get into when looking for a cyber insurance policy. Just for one example, some policies may create requirements and security standards you must meet before an event will be considered a covered loss. In short, cybercrime creates a large range of potential first- and third-party losses that few businesses can hope to absorb on their own. Protect yourself with Cyber Insurance: The basics of coverage.
* * Note: Insurance policies are legal contracts. The e-guide is just a general primer to some of the risks that you might look to have covered in a “cyber insurance” policy and in no way is to be considered legal guidance.
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