Cyber Risks: Creating A Comprehensive Cyber Insurance Program

by Sherman & Howard L.L.C.
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Insurance is one important line of defense companies can use to protect against the potentially devastating costs of responding to cyber breaches.  The following list gives examples of insurance coverage to consider when creating a comprehensive cyber insurance program.  As always, your company's individual needs, industry-specific risks, and tolerance for absorbing costs internally will greatly impact the types of coverage and policy limits you will need.  The following suggestions are a guide for consideration.  However, it is important that you and an insurance coverage lawyer, a qualified broker, or other insurance professional review and understand the policy's actual terms and conditions in evaluating whether the insurance is appropriate to cover the risks you seek to cover.

What Should My Policies Cover?

First-Party Coverage
First-party coverage insures against damage to and costs incurred directly by your company in responding to cyber breaches and cyber attacks. 

The following are examples of types of risks which you should consider insuring.

  1. Notification Costs.  The costs to notify customers, clients, or other victims affected by a security or privacy breach.  The response costs incurred in complying with state and federal laws that require notification of clients or customers affected by a breach are often the single biggest expense stemming from a cyber breach. Thus, this is a critical component of any cyber insurance program.
  2. Computer, Data, and Information Loss and Restoration Costs.  The cost of retrieving and restoring data, hardware, software, and information that was lost, damaged, or destroyed due to a cyber breach or attack.
  3. Public Relations and Crisis Management Costs.  The costs of public relations and crisis management companies to assist the insured in its response to cyber breaches. 
  4. Forensic Investigation.  The cost to hire a security breach response professional to locate, evaluate, and stop the breach.  It can take months to investigate and stop a sophisticated cyber breach.
  5. Fines and Penalties.  The costs of any regulatory inquiry, investigation, proceedings, fines, and penalties associated with a cyber breach.  Failure to timely comply with applicable regulations may subject you to costly fines and penalties.
  6. Business Interruption.  Business interruption, including lost revenue resulting from a cyber attack or breach. 
  7. Computer Fraud.  The insured's money or property stolen by or as a result of fraudulent or criminal cyber activity.
  8. Funds Transfer Fraud.  Reimbursement for the insured's money that was fraudulently transferred from the insured's account.
  9. Extortion.  The costs of investigating the extortion and reimbursement of monies paid to the extortionist who has threatened to obtain and disclose sensitive cyber information.
  10. Credit Monitoring.  The costs of credit monitoring for the individuals whose information was breached.

Third-Party Liability Coverage
Third-party coverage insures against liability, damages, attorneys' fees, costs, and expenses incurred in responding to allegations against your company made by third parties arising from cyber attacks and cyber breaches.  The following are some of the costs your company may incur in responding to cyber liability claims which might be asserted against your company by third parties:

  1. Network and Information Security.  Damages and defense costs for defending your company, officers, and employees against lawsuits arising out of covered cyber events in which sensitive information is obtained.
  2. Regulatory Defense Expenses.  The costs of responding to actions asserted against your company by regulatory authorities, such as Attorneys General.
  3. Media Liability.  Claims against, and damages to, your company arising from certain personal injury torts, dissemination of information through a website, and certain types of intellectual property infringement.

Remember, cyber breaches and attacks can originate both internally (e.g., by employees) and externally (e.g., by hackers), and can be both intentional (e.g., disgruntled employee stealing trade secrets) and inadvertent (e.g., employee opens email containing a virus).  Beware of exclusions that eliminate coverage for cyber breaches involving directors and officers of your company.  Make sure you understand the risks and talk with your broker or insurer about whether and how to cover all potential losses.

If you plan ahead, insurance can be a valuable source of funding to respond to cyber breaches. However, cyber insurance policies are relatively new products and vary widely in the scope of available coverage and the limits of insurance that are offered.  These policies are not one-size fits all and are largely untested in courts.  In fact, many policies are "manuscript policies", written on a case-by-case basis.  If you have a particular concern, ask your insurance company or broker.  Do not hesitate to ask questions - up front - concerning the scope of coverage. Together, your broker and insurer may be able to craft a coverage provision or provisions to fit your needs.  Keep in mind, however, you may need more than one policy to cover all the risks your company may face in the event of a cyber breach.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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