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Perimeter

10/6/2014
11:30 AM
Kevin Smith
Kevin Smith
Commentary
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How Cookie-Cutter Cyber Insurance Falls Short

Many off-the-shelf cyber liability policies feature a broad range of exclusions that won't protect your company from a data breach or ransomware attack.

The growing exposure from data breaches and ransomware, along with the tightening of federal and state privacy laws, is creating a tsunami of risks and loss that few companies would have contemplated just a few years ago. These are losses that can impact a wide range of organizations -- from giant retailers to manufacturers and small and midsized businesses.

For information security teams working to stay ahead of the curve with the best and most sophisticated cyber defense strategies, it’s a constant battle. But in the face of a massive breach, like recent attacks against Target, Home Depot, and JPMorgan Chase, companies are also starting to look seriously to cyber insurance as the ultimate in infosec liability protection. Whether cyber insurance is adequate to address these multiple risks is another question.

What’s in your existing insurance?
A robust risk management assessment is the first step to uncover the coverage gaps in your company’s insurance program. A general liability policy is an industry standard, and it provides liability coverage for bodily injury, property damage arising out of an insured’s operations, products, or premises, as well as personal and advertising injury. However, these policies were never intended to provide coverage for liability and first-party notification expenses resulting from the disclosure of personally identifiable, confidential corporate, or personal health information. In fact, insurance carriers have recently begun adding exclusionary endorsements to ensure that their policy language does not provide coverage for any of these potential claims.

In response to this gap in coverage, the insurance industry developed cyber liability policies. The structure of these policies mirrors a standard business automobile policy in that they provide coverage for both third-party liability claims against the insured and first-party claims the insured make against their own policies. However, many off-the-shelf cyber liability policies feature a variety of broad exclusions companies should be aware of, including:

No coverage for breaches of protected information in paper files. Despite the name, a cyber liability policy can and should cover breaches of protected information on paper files in addition to electronic records, yet some policies don’t.

No coverage for claims brought by the government or regulators. A large exposure for most companies is the potential legal action brought by the Office of Civil Rights, the Department of Health and Human Services, and the Office of the Attorney General, among others. Failure to provide at least defense cost coverage or coverage for fines and penalties can leave a gap in protection.

No coverage for vicarious liability. When a company entrusts data to a third-party vendor (e.g., a third-party processor or cloud provider) and the breach occurs on the vendor’s system, you’d expect to be protected. However, some cookie-cutter cyber liability policies won’t cover this.

No coverage if you fail to encrypt data. This exclusion forces encryption of data or else no coverage is provided.

CISOs are well aware of the fact that it’s not a matter of if but when their companies will be hacked, and to what degree. In an era of tightening security budgets and heightened risk, it’s critically important to take a hard look at whether current cyber liability policies can both help companies get out of tough situations and keep them moving in the right direction.

Kevin Smith holds the Chartered Property and Casualty Underwriter (CPCU) designation and the Associate in Risk Management (ARM) designation. He joined The Graham Company in 1999 and is responsible for new business development and is the Team Leader for the Real Estate ... View Full Bio
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soozyg
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soozyg,
User Rank: Apprentice
10/6/2014 | 12:13:39 PM
that much trouble?
potential legal action brought by the Office of Civil Rights, the Department of Health and Human Services, and the Office of the Attorney General,

Do that many companies have issues with these offices that the clause needs to be included?
Marilyn Cohodas
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Marilyn Cohodas,
User Rank: Strategist
10/6/2014 | 2:07:43 PM
Re: that much trouble?
That's a good question @soozyg, how rigorous is the enforcement of those agencies. And does the same exclusion for legal actions stemming from breaches due to failures of security standards of, for example, HIPAA, apply?
soozyg
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soozyg,
User Rank: Apprentice
10/6/2014 | 8:27:33 PM
Re: that much trouble?
@Marilyn, I supposed a main reason why the clause would be there is that IF one of those agencies take legal action against a company, the amount of time and money spent to fight the charges is so scary, and brings such bad publicity, that it behooves a company to protect itself against that action.
MercyK249
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MercyK249,
User Rank: Apprentice
10/6/2014 | 2:53:39 PM
Re: that much trouble?
HIPPA can affect all employers that have health nsurance for their employees and the States Attorney Generals can level fines in 47 states for not promptly notifying "records" that there may have been a breach.   Many policies provide coverage for fines, but you have to specifically ask to make sure.
Marilyn Cohodas
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Marilyn Cohodas,
User Rank: Strategist
10/6/2014 | 3:18:59 PM
Re: that much trouble?
Thanks, @MercyK249. I would assume that the same probably applies for Sarbones-Oxley and other regs...
Sara Peters
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Sara Peters,
User Rank: Author
10/6/2014 | 3:36:01 PM
not too surprising, really...
They're insurance companies. Of course they're going to do their best to take a lot and pay out a little.  :)   Great post! Hopefully companies -- CISOs, CIOs, CFOs, risk officers, legal departments, etc. -- will begin to get smarter about what these policies do and don't do. And hopefully, as more players enter the market, competition between all companies will make them try harder to get business.  
DavidL814
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DavidL814,
User Rank: Apprentice
10/15/2014 | 4:39:07 PM
Re: not too surprising, really...
In some product lines, insurance companies have been known to be quick to collect premiums and stingy on the coverage.  The modern day cyberliability insurance policy is the exception.  If you bought coverage when there were limited insurers 5-10 years ago, you might have had some coverage gaps as highlighted in this article.  There were very recognizable insurance companies offering substandard coverage.  At the same time, there were lesser known insurers giving very real and broad coverage at a great price.  Most policies (from 50 insurers now) will cover paper records, regulatory actions, regulatory fines and penalties, a whole host of risk management services, hotlines, call centers, forensics work, penetration testing and more.  Failure to encrypt exclusions are very rare.  The insurers that didn't clean up their act were quickly replaced by new entrants.  I wouldn't be too cynical about this product anymore.  It's cheaper than ever and more broad than you could have imagined 5-6 years ago.  The exception might be if you are a major retailer, the insurers are rightfully very cautious about that class right now.
MercyK249
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MercyK249,
User Rank: Apprentice
10/6/2014 | 4:06:51 PM
Cookie-Cutter Cyber Insurance Falls Short
There are some really good policies that provide the coverages and rather competitively.  But you do need an agent who has really looked at a lot of them and tracked the coverages.  Some are very bad for retailers and health care.  If anyone needs to know about specific coverages from specific companies, let me know and I will be happy to get the information for you. 
Sara Peters
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Sara Peters,
User Rank: Author
10/6/2014 | 4:24:54 PM
Re: Cookie-Cutter Cyber Insurance Falls Short
@MercyK29  Thanks for the offer! And you make a point I hadn't even thought of: It isn't just the people buying insurance that need education, it's the people selling the insurance too. Compared to other forms of insurance, cyber-liability insurance is new, different, and covering the kinds of incidents that most people don't even think about. There's got to be a learning curve for agents as well as would-be policy-holders.
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