Facing ever-mounting cyberthreats, enterprises are increasingly turning to cyber insurance to address the potentially severe financial damage a successful attack can inflict. Unfortunately, cyber insurance presents its own risks, particularly for cybersecurity leaders who tend to pay more attention to evolving threats than insurance fine print.
Sharon Polsky, president of the Privacy and Access Council of Canada, an organization dedicated to the development of access-to-information, information privacy, and the data protection profession, notes that several common cyber insurance omissions and loopholes can lead to a sense of complacency that can limit or even nullify a policy’s perceived benefits.
Is your enterprise risking its financial foundation with a cyber insurance policy that contains potentially devastating trap doors? Check your policy — and your assumptions about it — for these six common cyber insurance “gotchas.”
1. Assuming cyber insurance covers all risks
In reality, many insurance policies offer narrow definitions, hidden exclusions, or strict conditions that can leave organizations exposed after a breach. “It’s not like an auto liability policy, where every policy provides the same coverage,” says William J. Lindsay III, founder of insurance broker Tri Pack Insurance Services. “With cyber liability, the terms and conditions will differ from one insurance policy to another.”
Before committing to a specific insurer, Lindsay recommends consulting an attorney with experience in cyber insurance contracts. “A policy is a legal document with complex definitions,” he notes. “An attorney can flag ambiguous terms, hidden carve-outs, or obligations that could create disputes at claim time,” Lindsay says. “Once the policy is purchased, and a loss occurs, no changes can be made to fill the coverage gap.”
2. Misinterpreting the fine print about coverage, interruptions, or threats
It’s hardly surprising, but important to remember, that the language contained in cybersecurity policies generally favors the insurer, not the insured.
“Businesses often misinterpret the language from their perspective and overlook the risks that the very language of the policy creates,” Polsky warns. “For example, business interruption coverage that’s limited to interruptions caused by ‘system failures’ might exclude cyber incidents, such as ransomware.” Meanwhile, “threats coverage” might only refer to threats known at the time the policy was issued, leaving new threat types that arrive during the coverage term uninsured.
“Problematically, terminology used in insurance policies — such as threats — are often not defined, leaving the insured enterprise to anticipate that their own interpretation of the term is what is meant,” Polsky explains. “Unfortunately, the presence or absence of a comma, or a definition, is the stuff of litigation.”
3. Overlooking hidden caps on specific loss types
You may believe your policy will cover all cyberattack losses, yet a look at the fine print may revealed that it’s riddled with exclusions and warranties that can’t be realistically met, particularly in areas such as social engineering, ransomware, and business interruption.
A policy with hidden caps creates a false sense of security, says Max Coupland, CEO of Insuranceopedia, a service that enables users to compare insurance quotes. You budget for full cyber coverage, then a claim is denied or dramatically reduced because the loss fell into a sub-limit — a limitation placed on a policy that reduces the amount of coverage available for a specific type of loss, he explains.
To prevent hidden caps, Coupland advises running a table-top exercise with both your broker and security team. “For each scenario ask, ‘Do we have coverage?’ At what limit? Are there any exclusions that could be triggered?’” Then convert the final document into a one-page coverage checklist before committing to the policy.
4. Not aligning your security strategy with the policy’s fine print
If your security isn’t up to the policy’s standards — and that includes things like multi-factor authentication, regular backups, and endpoint detection — your claim can be denied outright, warns Matt Mayo, president and CEO of managed service provider Diamond IT.
Many enterprises believe they’re fully secure, yet when they file a claim the insurer points to the fine print about security measures you didn’t know were required, Mayo says. “Now you’re stuck with cleanup costs, legal fees, and potential lawsuits — all without support from your insurance provider.”
The best way to avoid this trap is to align your cybersecurity posture precisely with the requirements spelled out in the policy. “This means reviewing your coverage before an incident happens,” Mayo says. Also consider using a knowledgeable consultant who can help implement and document the required controls.
5. Falling into the retroactive date trap
The retroactive date clause can be the biggest cyber insurance trap, warns Paul Pioselli, founder and CEO of cybersecurity services firm Solace. “This clause voids coverage for any incident that began before the policy’s start date, even if it’s discovered months later. Given that hackers can remain undetected in a network for over 200 days on average, this loophole can, in some cases, render a brand-new policy worthless,” he says.
Pioselli says that whenever possible, demand full prior acts coverage. “This removes the retroactive date entirely,” he states. “If the insurer refuses, negotiate to push the date back as far as possible — ideally to your company’s founding date.”
Whenever possible, Pioselli advises conducting a comprehensive cybersecurity risk assessment before shopping for a policy. “You must understand your specific vulnerabilities and potential financial impact first, then buy a policy with limits and coverages that match that reality.”
6. Misunderstanding first-party versus third-party coverage
Perhaps the biggest mistake an insurance seeker can make is failing to understand the difference between first-party coverage and third-party coverage, and therefore failing to acquire a policy that includes both, says Dylan Tate, a representative of insurance marketing firm Smart Financial.
First-party cyber insurance refers to coverage for the business’s direct losses and expenses after a cyberattack, such as lost revenue, public relations support, and costs related to the recovery of lost data. Meanwhile, third-party cyber insurance is liability coverage that can step in to prevent a lawsuit or handle the costs associated if a business is sued by customers affected by a data breach. It may also cover upfront payments to consumers, settlements or fines, and damages ordered by a judge.
If an enterprise’s cyber insurance policy doesn’t include both first- and third-party coverage, your organization may be underinsured, potentially resulting in significant — and unnecessary — out-of-pocket costs, depending on the types of losses they experience in the event of a cybercrime, Tate explains.
Many cyber insurance policies automatically include both first-party and third-party coverage, but some insurance companies only offer them separately, Tate warns. “The Hartford, for example, sells multiple cyber insurance products, some of which bundle both coverage types together and some of which include only one or the other, which may be confusing for enterprise insurance shoppers.”
Asking questions is the best way to ensure a cyber insurance policy meets all of your coverage needs before purchasing it, Tate advises. Going over known cybersecurity risks and potential claim scenarios can help an enterprise gain a fuller picture of how a given cyber insurance company can support them if they suffer a cyberattack. “Although potentially tedious, it can be helpful to engage in exhaustive conversations up front to avoid unexpected out-of-pocket costs later on in the event of a claim,” he says.
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