Cyber insurance: Worth it, but beware of the exclusions

It’s what all sensible people do to mitigate the risk of catastrophic financial damage: Buy insurance. There’s not even a choice when it comes to auto and health risks – insurance is a legal mandate. And most people would agree that anyone with a house who does not carry homeowner’s insurance is a fool or fabulously wealthy.

So, why not cyber insurance?

Indeed, the case for it is compelling. The costs of data breaches are in the millions and rising fast. As the Ponemon Institute put it in a synopsis of one of its recent reports on the issue, “data breaches have become as common as a cold, but far more expensive to treat.”

In another report sponsored by HP Enterprise Security, Ponemon found that, “the average annualized cost of cyber crime incurred by a benchmark sample of U.S. organizations was $12.7 million,” up 96% since five years ago. The average cost to resolve a single breach was $1.6 million.
interview, part of any prudent organization’s advance plan to respond to a data breach should include data breach insurance.

The biggest reason is that a general liability policy is no longer enough. It covers, “third-party claims of bodily injury or property damage, but the trend among insurance providers is to exclude electronic records and data,” said Jared Kaplan, executive vice president and CFO of insureon.

First introduced a decade ago, the field has grown rapidly. Christine Marciano, president of Cyber Data Risk Managers, said there are, “close to 50 carriers offering stand-alone cyber insurance policies.”

And Rafferty called it, “a burgeoning industry, with new organizations entering the market nearly every week.”

Getting effective cyber insurance is not simple, however. Data breaches, in addition to being expensive, are notoriously complicated. They require a host of costly responses, including forensic investigation, notification of first and third parties, fulfillment of legal and compliance obligations, possible litigation, working with law enforcement, public relations, credit monitoring fees, crisis management – the list goes on.

That means simply buying a “cookie-cutter, off-the-shelf” policy is asking for trouble since it will likely have exclusions for significant expenses.

According to a recent post in Dark Reading, many such policies exclude coverage for:

[li]Breaches of protected information in paper files.[/li][li]Claims brought by the government or regulators, including the Office of Civil Rights, the Department of Health and Human Services, and the Office of the Attorney General.[/li][li]Vicarious liability, for data entrusted to a third-party vendor, when the breach occurs on the vendor’s system.[/li][li]Unencrypted data.[/li][/ul]
Marciano said another common exclusion is, “based upon negligent computer security. If a data breach happens, coverage will be denied for companies that failed to use their best efforts to install software updates or releases, or failed to apply security patches to their computer systems,” she said.

All of that, experts agree, means that companies need to custom-design their coverage. “No two policies are alike,” Kaplan said. “’Significant’ and ‘reasonable’ depend entirely on the kind of work a business does.”

An example, he said, is companies in the medical field. “They may be more likely than others to be targeted by government or regulatory claims because there are more stringent state and federal-level laws that govern medical data than there are for other kinds of data.”

Verizon Enterprise, 25% of data loss incidents in 2013 happened, “not because of hacking, but because of human error. Another 14% were caused because of theft or loss of devices.”

The other reason to try to avoid the need for an insurance claim is because, even if most exclusions are eliminated, it will not cover every expense. Marciano offers a list of typical annual premiums for organizations of different sizes in different fields, which range from a mere $649 for $500,000 of coverage for a doctor’s office, to $84,000 for $5 million in coverage for a $4 billion pharmacy benefits management company.

breaches,” Rafferty said, “but they can certainly offset the cost of the response and first-party monetary loss for breach victims.”