[authors: Rene L. Siemens, David L. Beck]

The market is rapidly growing for insurance that is specifically meant to cover losses arising out of cyber attacks and other privacy and data security breaches. These insurance policies are marketed under names like "cyber-liability insurance," "privacy breach insurance" and "network security insurance." Many companies and other institutions that handle legally protected information now view this kind of insurance as an essential part of their coverage programs. There is no standardization of cyber insurance policies. The terms and exclusions can vary dramatically from one insurer to the next. Broadly speaking, however, cyber insurance policies can provide coverage for third-party liability, first-party losses or both. A policy typically includes some or all of the following types of coverage.

For third-party liabilities, a cyber insurance policy may cover costs of mitigating the insured's potential liability from an actual or suspected data security or privacy breach, including:

Crisis Management Expenses

• Costs of notifying affected parties

• Costs of providing credit monitoring to affected parties

• Costs of public relations consultants

• Forensic investigation costs incurred to determine the existence or cause of a breach

• Regulatory compliance costs

• Costs to pursue indemnity rights

• Costs to analyze the insured's legal response obligations
   

Claim Expenses

• Costs of defending lawsuits

• Judgments and settlements

• Regulatory response costs

• Costs of responding to regulatory investigations

• Costs of settling regulatory claims
   

Many policies also provide coverage for a variety of torts, including libel, invasion of privacy or copyright infringement. First-party coverages may include lost revenue due to interruption of data systems resulting from a cyber or denial of service attack and other costs associated with the loss of data collected by the insured, such as:

Revenue lost due to interruption of your operations due to, e.g.,

• Hacking

• Virus transmission

• Other security failures

Costs of restoring, recreating or recollecting:

• Lost data

• Stolen data

• Damaged data

Some policy forms even include coverage for costs of responding to demands for "ransom" or "E-extortion" threats to prevent a threatened cyber attack.

Market Conditions
The market for cyber insurance in the U.S. grew from less than $100 million in premiums underwritten during 2002 to approximately $800 million in annual premiums by 2011. Many insurers have recently jumped into this market and are competing to establish market-share. As a result, the cyber insurance market is "soft": The coverage has actually become less expensive as insurers compete for business. This decrease in price contrasts with the ever-increasing risk for significant cyber-liability exposures. The cyber insurance market may not remain soft for long, but in the meantime policyholders may benefit from a competitive market.

The cost of cyber insurance will vary depending on a variety of factors, including the size and risk factors of the insured organization, the amount and kinds of coverages purchased, and the size of the retentions or deductibles. Average premiums for primary coverage may range from $15,000 to $35,000 per $1 million of limits.

Given the lack of standardization and competitive market, the terms of cyber insurance coverage tend to be highly negotiable. Terms that are initially offered in the form of an apparently "off the shelf" policy by an insurer may often be customized, through negotiation, in order to respond to a prospective policyholder's unique circumstances. A prospective policyholder may also negotiate changes to policy language that ultimately yield an insurance policy with broader grants of coverage, and narrower (or at least clearer) exclusions and limitations, than those initially offered by an insurer, with no additional premium charge. The result is better coverage, usually for no increased cost.

Insureds that are considering cyber coverage, or are approaching renewal time, should therefore have an experienced insurance coverage attorney review the terms of the policy forms they are being offered, with a view to recommending enhancements that should be requested from the insurer. In short, companies should approach the purchase of a cyber insurance policy the same way they approach the negotiation of any other substantial business contract: They should review the proposed contract carefully and negotiate better terms where possible. Soliciting competitive bids from several insurers may increase one's negotiating power.

Common Coverage Provisions
Cyber insurance policies, like other kinds of insurance policies, usually contain several insuring clauses that cover different types of loss within a single policy.

For third-party liability, most cyber insurance forms apply to claims that are brought against the insured by those whose private data has been breached. Costs that are payable typically include the amount of any settlement or judgment, as well as the insured's defense costs. Other covered costs may include expenses incurred to comply with consumer notification provisions contained in privacy laws and regulations, or to provide credit monitoring services for those parties whose information has been compromised, investigatory expenses incurred to determine the cause and scope of the data breach, and the cost of retaining a public relations firm to handle the public disclosure of the breach.

For first-party losses, coverage may include lost revenues and continuing operating expenses incurred due to a denial of service or other impairment resulting from a cyber attack. Some policies also provide coverage for the cost of restoring or re-creating lost or stolen data.

As with any insurance, these coverages are subject to a number of limitations and exclusions that must be reviewed carefully —and renegotiated where appropriate—in order to ensure that important coverages are not omitted and the insured's intent in purchasing the coverage is not obscured or frustrated. Clients frequently ask us to review cyber insurance policies before the underwriting process and advise them on terms, conditions and exclusions that should be renegotiated.

Conclusion
Cyber insurance can be a valuable tool for mitigating losses from data security breaches. However, as with any insurance policy, cyber insurance policies contain many limitations and exclusions. It is important that these exclusions be read carefully during the initial underwriting process, as many of the limitations of this kind of insurance can be overcome through negotiation before the policy is bound.