Analyzing Cyber Risk Coverage by Steve Raptis
Unlike other types of insurance, there is no standard form on which the insurance industry as a whole underwrites cyber coverage.
By: Steve Raptis | March 13, 2015
Many companies are now taking a close look at the protections provided by cyber risk insurance policies — some for the first time — as data breach incidents and related cyber risks continue to increase and gain publicity, and as government agencies become more actively involved in policing the corporate response.
Although cyber coverage is a relatively new product in the insurance marketplace, there are now roughly 50 insurance carriers that offer it (although the amounts of coverage available often are limited).
These policies are sold under a number of different names, including “cyber risk,” “information security,” “privacy,” and “media liability” coverage. Unlike other types of insurance, there is no standard form on which the insurance industry as a whole underwrites cyber coverage.
These policies are sold under a number of different names, including “cyber risk,” “information security,” “privacy,” and “media liability” coverage.
While this provides some challenges to buying coverage, especially for the uninitiated, it often provides more room for negotiation of the terms of cyber policies than many other types of coverage.
Most cyber policies currently in the marketplace offer some combination of traditional liability coverage protecting against claims by third parties, and first-party coverage protecting against losses suffered by the insured.
There also are important terms and conditions of cyber policies that can have a significant impact on available coverage. While no company can reasonably expect to secure every available component of coverage, awareness of differences among the policies being offered is critical to maximizing premium dollars spent.
While not exhaustive, some of the important features to be mindful of when shopping for cyber coverage include:
1.Third-Party (Liability) Coverages
Privacy liability coverage. This includes liability to the insured’s customers, clients and employees for breaches of their private information which can be a major component of liability in the case of a data breach.
Seeking trigger language that focuses on the insured’s failure to protect confidential information, regardless of the cause (e.g., “any failure to protect”), rather than language requiring an intentional breach, is advisable.
Also, some (but not all) cyber policies also provide coverage for the insured’s failure to disclose a breach in accordance with privacy laws.
Policies that include defence from the earliest stages of an investigation, typically including a civil investigative demand or similar request for information, are preferable.
Regulatory actions. There is substantial variance among cyber policies regarding whether and to what extent they provide coverage for regulatory and other governmental actions. Even where covered, some policies require that the action be initiated by a formal “suit” in order to trigger the defense obligation.
This limitation typically would preclude defense of the investigative stage of government actions — which often is the most expensive stage for the entity being investigated.
Policies that include defense from the earliest stages of an investigation, typically including a civil investigative demand or similar request for information, are preferable.
It also bears noting that civil fines and penalties are covered under many cyber policies, and companies should be mindful of this if an insurer seeks to exclude such coverage.
Notification costs. This coverage includes the costs of notifying third parties potentially affected by a data breach. There is an ever-increasing and constantly evolving landscape of breach notification laws on a state-by-state basis.
This coverage is included in most cyber policies. However, many policies, often by endorsement, limit the number of individuals that must be notified and the method(s) of notification. Some policies also may vest some control over the notification process (which is often sensitive to the insured) with the insurer.
These limitations could leave a company absorbing at least some of the notification costs if a breach occurs, and may require it to relinquish some control over the notification process.
Crisis management. This coverage includes the costs of managing the public relations outfall from most data breach scenarios. Most, but not all, cyber policies contain some form of this coverage.
The insured sometimes is required to choose from a pre-determined list of vendors. In most cases, if the insured chooses another vendor, the insurer is not required to pay for the services. However, this restriction may be negotiable.
Call centers. This coverage may be included within the notification and crisis management coverages, may be a stand-alone coverage, or may not be provided at all.
Because this tends to be one of the higher costs associated with data breaches, it is important to identify whether this coverage is expressly provided and any applicable limitations (including the number of affected persons who are eligible to receive call center services, the hours and locations of the call center, and the specific services the call center staff will provide).
Credit/identity monitoring. This coverage is included in most cyber policies, but again, may be limited for the number of affected individuals that can receive the services and the prescribed vendors that are available.
Transmission of viruses/malicious code. As its name suggests, this coverage protects against liability claims alleging damages from transmission of viruses and other malicious code or data. Not all cyber policies have this coverage.
However, before making it a priority, a company should consider the extent to which its operating systems realistically have the potential to be a source of this type of liability.
2. First-Party Coverages
Theft and fraud coverage. Covers certain of the costs of theft or destruction of the insured’s data and theft of the insured’s funds.
Forensic investigation. Covers the costs of determining the cause of a loss of data.
Network/business interruption. Covers the costs of business lost and additional expense due to an interruption of the insured’s computer systems. Some cyber policies require that the interruption be caused by an intentional cyber attack and some do not.
There typically are limitations to this coverage, including a requirement that the interruption last a minimal length of time before coverage incepts, and the total length of an interruption that will be covered. This coverage may also include contingent business expenses.
Extortion. Covers the costs of “ransom” if a third party demands payment to refrain from publicly disclosing or causing damage to the insured’s confidential electronic data.
Data loss and restoration. This component — included in some but not all cyber policies — covers the costs of restoring data if it is lost, and in some cases, diagnosing and repairing the cause of the loss. It typically is subject to a substantial retention, and may be limited in terms of the cause of the data loss at issue.
The claims-made type polices typically are more restrictive in terms of the events that can trigger coverage, and the timing of resulting claims in relation to the loss may limit or preclude available coverage.
3. Other Key Provisions
Trigger — loss or claim. Cyber policies typically are triggered either by an event that results in the loss of data, or a “claim” arising from the event that is made against the insured (or made against the insured and reported to the insurer) during the policy period.
The claims-made type polices typically are more restrictive in terms of the events that can trigger coverage, and the timing of resulting claims in relation to the loss may limit or preclude available coverage. Thus, the loss type policy is preferable, even though this coverage may be more expensive.
Trigger — defense. In some cyber policies, the defense obligation is triggered by a “suit,” which requires a lawsuit or written demand against the insured. This definition may preclude defense of a claim that has yet to ripen into a lawsuit or written demand (where much of the defense costs on a particular matter may be spent).
If available, less restrictive defense language is preferable. As noted above, in some cyber policies, the “suit” limitation does not apply to governmental actions (such as investigations), which make this language somewhat more acceptable to some companies.
Defense — choice of counsel. In some cyber policies, defense costs are covered only to the extent that the insured chooses from the insurer’s (sometimes short) list of “panel” law firms. If the insured chooses a different firm, its defense costs probably will not be covered.
Given the substantial costs likely to be associated with a significant data breach (which could exceed the limits of the policy), the insured ideally will have substantive input in the choice of counsel.
Accordingly, policies with more balanced choice of counsel language (e.g., the insured and the insurer shall mutually agree on defense counsel and if they cannot agree, the insured shall choose counsel for which the insurer shall pay up to a set hourly rate) are preferable.
Retroactive coverage. Cyber policies often contain a “retroactive date.” Losses arising from events prior to the retroactive date will not be covered. Insurers often fix the retroactive date at the initial date of coverage by the insurer, although the insured may be able to negotiate a retroactive date further back in time.
Acts and omissions of third parties. Acts or omissions of third parties may not be covered expressly, or even may be excluded, under some cyber policies.
By way of example, if a company uses the services of a third-party vendor to maintain its confidential customer or employee information in the “cloud” and the vendor experiences a data breach, the company could be sued by its customers or employees, and may not have any coverage.
Some cyber policies provide coverage for breaches of data maintained by third parties as long as there is a written agreement between the insured and the vendor to provide such services. If a company relies on any third parties to maintain any of its confidential information, it should consider seeking a policy that expressly covers breaches of data maintained by third parties.
Moreover, any self-insured retention language applicable to this coverage should be clear that any payments made by the third party indemnifying the company for loss sustained by the breach count toward satisfaction of the retention.
Coverage for unencrypted devices. Many cyber policies exclude coverage for data lost from unencrypted devices. Cyber coverage without this limitation is preferable.
Coverage for corporations and other entities. Many cyber policies define covered persons, for liability purposes, to include only natural persons. However, entities affected by data breaches may include corporations and other business entities.
Companies should consider seeking coverage that appropriately defines the scope of entities potentially affected by a data breach.
Policy territory – occurrences outside the United States. Even if a purchaser does not operate outside the Unites States, its employees may lose their laptops, PDAs and other electronic devices containing confidential information (or have them stolen) while traveling abroad.
Many cyber policies restrict the applicable coverage territory to the United States and its territories. Companies should ensure that its cyber policy provides coverage even if the loss or theft of confidential information at issue occurs outside the United States.
Breaches not related to electronic records. Some cyber liability policies restrict coverage to loss or theft of electronic data. However, many breaches occur as a result of loss or theft of paper (or other non-electronic) records. Cyber policies covering both are preferable.
Location of security failure. Coverage under some cyber policies is limited to physical theft of data from company premises. This could be problematic in a number of situations, including theft of a laptop, PDA or external drive from an airport or an employee’s home.
Other policies limit coverage for data breaches resulting from password theft to situations where the theft occurs by non-electronic means. Companies purchasing cyber policies should be wary of these types of limitations, which may not seem particularly pernicious on initial review but could be extremely costly.
Exclusions for generalized acts or omissions. Some cyber policies exclude coverage for losses arising from: (i) shortcomings in security of which the insured was aware prior to the inception of coverage; (ii) the insured’s failure to take reasonable steps to design, maintain and upgrade its security; and (iii) certain failures of security software.
Because this type of exclusionary language at least arguably is overly broad, lacking in adequate definition, and potentially subjective in application, it should be limited appropriately by negotiation or avoided altogether.
Exclusions for acts of terrorism or war. This is a common type of exclusion in cyber policies. It is unclear to what extent insurers will rely on these exclusions when data breach result from an organized attack by a foreign nation or hostile organization.
Again, the scope of these exclusions should be negotiated appropriately or, if that is not feasible, the company should consider purchasing alternative coverage.
Steve Raptis is a partner in the Washington, D.C. office of Manatt, Phelps & Phillips LLP. He counsels corporate policyholders nationwide on a broad range of insurance-related issues and represents them in complex insurance disputes. He can be reached at email@example.com or 202.585.6550.