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.

So, as Wendi Rafferty, vice president of services at CrowdStrike, put it to CSO in an earlier 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.

Also different industries have different kinds of risks – health care is not the same as retail, which is not the same as education.

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:

• Breaches of protected information in paper files.
• 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.
• Vicarious liability, for data entrusted to a third-party vendor, when the breach occurs on the vendor’s system.
• Unencrypted data.

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.

Yet another “increasingly common” exclusion, Rafferty said, is expenses for first-party notification, which result from, “disclosure of personally identifiable, confidential corporate, or personal health information.”

The reason, she said, is because those costs, especially in the retail sector (illustrated by breaches of major retailers like Target and Home Depot), have skyrocketed.

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.”

Rafferty said it is crucial to have any proposed insurance policy, “thoroughly reviewed by someone with extensive experience investigating cyber breaches,” to make sure it meets the specific needs of the organization.

Some damages, of course, cannot be measured exactly. “Damage to reputation cannot be mitigated by insurance policies,” said Lucas Zaichkowsky, enterprise defense architect at AccessData. Nor can, “forecasted revenue that drops both short and long term as loyal customers change allegiances.”

But there are ways to close coverage gaps. One of the most obvious is to practice good security “hygiene,” including end-to-end encryption of data and keeping software up to date with all recent patches.

Kaplan said the obvious way to avoid the “vicarious liability” exclusion is to, “work only with third-party vendors who have insurance; that way, in a worst-case scenario, you have an avenue for seeking compensation.”

And he added, as many experts have, that one of the best ways to avoid the headaches and costs of a major data breach is for organizations to make themselves a more difficult target.

“It’s incredibly important to train your employees in data security best practices,” he said, noting that according to 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.

Many of the policies, with premiums ranging from $6,000 to $37,000, limit coverage to just $1 million, which in today’s world rarely comes close to covering the total expenses.

And those limits may decline. “As technology risks continue to evolve, many carriers are starting to pull back on the types of industries and risks they will cover,” Marciano said.

In short, cyber insurance can ease the pain, but it won’t eliminate it. “Most policies are nowhere near inclusive of all cost associated with breaches,” Rafferty said, “but they can certainly offset the cost of the response and first-party monetary loss for breach victims.”