It has been said that there are two types of companies in the world – those that have been hacked, and those that do not yet know they have been hacked. While perhaps an overstatement, it seems that every day, another company (sometimes public, sometimes private) announces that it has been the victim of a data breach. And given the fast-changing nature of cyber threats, even the best information security practices are not foolproof. As a result, sound corporate management means thinking about not just how to prevent a cyber-attack, but how to respond in the event one does occur. Cyber insurance is one tool available to companies to manage and respond to that risk. The cyber insurance market is expanding, and rapidly. According to the Insurance Information Institute, there are now 60 different insurance carriers that offer stand-alone cyber insurance policies, and a leading insurance broker expects the market, estimated to be worth over $2 billion in gross premium in 2014, could increase nearly fourfold by 2020.
Yet with growth has come uncertainty in the marketplace about the coverage itself – about what it does and does not cover, and about whether it is really necessary. Bottom line, any company without cyber insurance needs to start thinking about it; as it becomes more widely adopted, the marketplace, shareholders, regulators and other corporate stakeholders will begin to view it as necessary rather than optional.
What follows are key issues every company should think about when deciding whether cyber insurance is right for them.
Evaluate Your Risk
If your company maintains nonpublic data, you are at risk. Historically, the biggest target for cyber-intruders has been financial information such as credit card data and bank account numbers. Although that information still has value to cyber criminals, these days more sophisticated attacks have targeted other personal information, such as protected health information and other personal information that is not as easily replaceable, including social security numbers and tax identification numbers. 2014 has been called the “Year of the Data Breach,” but 2015 has been called the “Year the Data Breach Got Personal.” Indeed, according to the Identity Theft Resource Center, 2015 saw a large spike in the number of social security numbers exposed, along with a corresponding drop in number of compromised debit and credit card numbers.
In addition to the type of data your company holds, the amount of data is crucial to assessing your risk. The amount of personal information a company holds can vary dramatically. Some companies maintain personal information on a large customer base, whereas others maintain such information only on employees. And companies that store large amounts of protected health information are in many ways at an even higher risk given the regulations that govern such data and the resulting scrutiny that often accompanies health care breaches. Taking stock of what is at stake is the first step in determining the scope and extent of the necessary coverages.
Review Your Existing Coverages
After determining your risk, you should evaluate the insurance you already have to see if you have any coverage for cyber events. Although your existing policies likely will not cover everything that a stand-alone cyber policy would, there may be some existing coverages you should take into account when selecting a cyber policy. For example, an existing directors & officers (D&O) policy, while not covering direct losses for cyber-attacks, may provide some measure of coverage to directors and officers against claims that they failed to take adequate steps to protect against a security breach. Similarly, some errors and omissions (E&O) policies have cyber modules that attach and may provide similar coverage to stand-alone cyber policies. Finally, most cyber losses do not fit neatly within the framework of a general liability policy, and even where they might, it is very common for general liability coverages to exclude cyber-related loss such as losses of data and information. Still, general liability coverages should be reviewed for possible elements of cyber coverage that may be available.
Work with a Broker with Real Cyber Expertise
In the insurance world, cyber coverage is a relatively recent invention. While products such as general liability, E&O and D&O coverage go back decades (or even centuries), cyber insurance only started to mature in earnest in the 2000s, and even then, was only used in any real sense over the past 10 years. As a result, there is little uniformity among the policies and rates can vary markedly. Thus, when shopping for a cyber policy, it is in your best interest to work with an insurance broker with real cyber experience, not just a broker who places a handful of such policies per year. Ask how many the broker has placed recently. Because so much is open to negotiation, working with an experienced broker will put you in the best position to get the most favorable policy language you can.
Use Outside Counsel to Evaluate Your Coverage Options
While an experienced broker is a necessary first step in obtaining good coverage, it often isn’t enough. Because cyber insurance is a relatively new product, the policy language is highly variable and not yet universally understood. Likewise, case law interpreting the policies is still immature, making careful review of the policy language even more important. For this reason it is wise to retain experienced counsel to review the policy in conjunction with your broker.
Not All Policies Are Created Equal
In general, a stand-alone cyber policy covers a variety of losses, from first-party expenses (meaning costs incurred by the insured, such as forensic investigation costs, the cost to repair or replace data and the cost to notify affected individuals, if required by law), to third-party loss (meaning defense costs and amounts paid to others, such as liability incurred in a lawsuit or penalties imposed by government agencies). Policies can and do vary within this framework, though. For example, many policies do not cover physical damage to computer hardware resulting from the breach. Others have broadly worded exclusions for acts of terror, which could operate to disclaim coverage for losses caused by state-sponsored hacking. And some policies have broad exclusions that deny coverage when certain data security practices are not in place.
Another key policy provision is the retroactive date provided for by the policy. A “retroactive date” is, in essence, an exclusion under the policy that disclaims coverage for claims or loss in connection with breaches that occur prior to the policy’s retroactive date. Yet, it is common for companies to not discover a cyber intrusion until long after it occurs. If the retroactive date is relatively recent in time (perhaps even the date of policy inception), there is a risk that you will be without coverage for earlier-occurring breaches. You will want to evaluate retroactive coverage options to make sure you are fully protected for undiscovered breaches occurring earlier in time.
These common exclusions reinforce the importance of working with experienced brokers and counsel to get the policy that is right for your company’s risk profile. Where exclusions cannot be negotiated out, experienced counsel can help manage expectations with senior management as to what a cyber policy will and will not cover in the event of a privacy or security incident.
Consider the Mechanisms of Filing a Claim
Although one hopes never to have to file a claim, it’s never too early to start thinking about ways to protect yourself if you do. Think about the claim retention or deductible level you’re comfortable with. Also think about whether you have preferred outside counsel you want to work with if a privacy or security incident occurs. In the event of a breach or lawsuit, many cyber carriers will require you to use their panel counsel, or offer to pay only a portion of the rates for the law firm you would prefer to use. These negotiations are especially fraught in the context of an active breach situation, when you will be at your most vulnerable and with the least leverage. You may have better luck negotiating for your counsel of choice in the first instance, before you are committed to a carrier.
A Final Note
With the increasing sophistication of cyber-attacks and the frequency with which they occur, it is no longer a badge of shame to fall victim. Many of your company’s counterparties, clients and customers have been victims themselves, and can be sympathetic to a report of a breach. But what your business partners will not take in stride is a poorly-managed response. Although cyber coverage by itself is not enough to ensure a pitch-perfect response, it can provide you with the financial resources that, when coupled with a thoughtful and diligent response plan, can go a long way towards mitigating exposure in the event of a breach.