6 Risks for Global High Tech Manufacturers
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Cyber risk continues to be the amorphous and seemingly indefensible threat facing businesses of all types and sizes, and insurers are continually tailoring their policies to respond to the changing environment. Making the challenge more difficult is the fact that cyber no longer is constrained to breaches of network security that imperil private information.
Cyber threats now intermingle with other types of exposure, like employee theft and professional liability, and can cause a broader spectrum of loss including property and reputation damage.
“We’re seeing a change now where the malicious actors aren’t just hacking networks to steal information; they’re reaching out from the digital world to cause different types of damage,” said Elissa Doroff, vice president, underwriting and product manager, XL Catlin.
As cyber becomes the root case of various types of tangible damage, it raises questions around what policies will be triggered by an event involving both digital and physical damage, and raises the potential for both gaps and overlaps in coverage.
Here are the top five ways cyber risk is evolving to create gray areas in existing insurance coverages:
Hackers’ ability to breach a corporate network through various channels is nothing new. But when the intent is to cause physical harm rather than steal data, they can find their way into the industrial controls that operate a facility and wreak havoc.
In 2014, cyber criminals sent a German steel mill up in flames by speeding up the machinery until it became too hot and eventually exploded. The following year, bad actors brought down the Ukrainian power grid through similar methods.
A property policy responds to the resulting physical damages from such an incident, regardless of the cause. But the physical damages are just one piece of the attack.
The targeted organization will also have to investigate how the hackers gained access to their systems and whether they stole or altered any data in the process. The costs of a forensic investigation, restoration of data, notification and any other third-party liability exposures would not be covered under a property policy.
“A cyber policy would respond to network issues like theft of PII or use of transient malware that causes damage to a third party,” Doroff said. “And it would include the first-party coverages to remediate the network breach itself.”
Without a cyber policy, any incident of physical property damage caused by a cyber event would only be partially covered.
When ransomware attacks first emerged, they weren’t significant enough to warrant large-limit cyber liability policies.
“On average, the claims didn’t exceed $50,000. You paid the ransom if you needed to. More sophisticated organizations with good backups knew that they would be safe without paying, so they could just wait for the hacker to go away,” Doroff said.
But the problem is no longer that easy to solve. The explosion of devices connected via the Internet of Things has created more access points to corporate networks.
“When workers connect with their phones outside of a VPN, it may not be bifurcated from the corporate network that has a higher level of security,” she said. “It opens the door for new strains of malware.”
The rise of bitcoin also drives up the ransom amounts sought by hackers. More thieves are asking for their payment in cryptocurrency, which continues to rise in value. This is why having a cyber insurance policy with access to the right breach response vendors is critical.
Since bitcoin is not readily ascertainable on the open market, insureds need access to forensics vendors that maintain a bitcoin wallet. When a ransom is demanded in bitcoin, the vendor can quickly respond to facilitate the transaction and the insured back to business as soon as possible.
“Cyber extortion claims are not $50,000 anymore. With the increase in bitcoin’s ubiquity and value, the cost of a ransomware attacks today can double or triple that amount,” Doroff said.
Where coverage for cyber extortion was once considered a throw-on to a cyber policy, it’s now a critical must-have. Cyber liability insurance without coverage for extortion could leave targets with insurmountable losses after an attack.
Hackers have become adept at mimicking professional emails to request fraudulent transfers of funds, posing as a client or vendor, or sometimes as a senior manager making a request of a subordinate. Often, the employee tricked into sending the cash doesn’t realize the mistake until it’s too late, and both the thief and the money are long gone.
“That type of theft has created a gap in the insurance market when it comes to treatment of financial fraud,” Doroff said.
A fidelity and crime policy typically would not cover a loss stemming from a social engineering scheme because the funds ultimately were willingly transferred away, even if the employee that did so was deceived. Crime policies may only extend coverage to outright theft of money or securities.
“There has been a push in the marketplace to offer coverage for social engineering fraud within cyber policies, but most of the coverage that exists now is offered on a sub-limited basis,” Doroff said.
As cyber thieves find new ways to bilk businesses, a cyber policy with coverage for social engineering fraud in combination with a crime and fidelity policy closes the coverage gap for emerging types of theft.
Plenty of high-profile breaches demonstrate how a cyber attack can cause the public to lose faith in an organization they trusted with their personal information. Target, Equifax, Yahoo and Uber are just a few examples.
“Adverse publicity will cause a loss of brand trust that negatively impacts sales, but measuring that impact is the difficult part of designing coverage,” Doroff said. Quantifying exposure is the barrier to developing coverages that adequately address the reputation risk of cyber breaches — but a few methods are emerging.
“We’ll look at a company’s sales over a six-month period after an incident and compare that to the previous year, which provides a snapshot of how much revenue they’ve lost that’s likely attributable to the cyber event,” Doroff said.
But, she added, quantifying the loss is not an exact science. Along with a comparison of sales and revenue, a more thorough financial audit conducted by forensic accountants may be needed. Each carrier will have their own preferred method for measuring reputation exposure.
Because most cyber policies on the market today don’t address this exposure at all, it’s best to work directly with underwriters up front to determine whether there is coverage for financial losses from reputation damage, and how those losses will be accounted for.
While theft of PII has always posed a significant threat to financial institutions, hospitals, and other organizations that house large amounts of customers’ private data, some firms previously less concerned with cyber risk are finding that they may have targets on their backs as well.
“This comes up often with professional services firms like attorneys’ offices or financial consultants,” Doroff said. “They have a duty to keep clients’ sensitive information secure. If there’s some third-party incident whereby their clients’ information gets out, they could face costly lawsuits.”
While a professional liability policy likely covers those legal expenses, it won’t cover the first-party losses related to the breach itself, including the investigation, notification and remediation expenses. For more and more firms, “It’s not sufficient to rely on your E&O coverage,” Doroff said.
As cyber risks and responding coverages continue to evolve, companies are best served by working with a carrier at the forefront of cyber underwriting. XL Catlin’s cyber and technology liability policy addresses the varying ways in which malicious hackers can infiltrate systems or otherwise cause harm.
“We built this policy based on all the endorsement requests we received from brokers, which meant changing some definitions, removing certain exclusions or broadening some insuring agreements,” Doroff said. “The result is a policy with very broad terms and conditions that is a market leader in terms of what brokers and insureds are looking for.”
Along with the policy, companies gain access to XL Catlin’s breach preparedness services and vendor response panel.
“Our services include everything from training articles and videos to tabletop exercises, testing of employees’ response to phishing emails, and an 800-number manned by our claims team,” Doroff said. “Our broad vendor panel also offers several options for law, public relations and forensic firms, to help insureds recover quickly from a cyber incident — whatever shape it takes.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.
A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.
With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.
The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.
The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”
Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.
Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.
The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney
However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.
Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.
Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.
Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.
“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”
Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.
Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.
The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”
“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust
It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.
Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.
So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.
The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.
These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.
Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.
That could destabilize social safety nets as well as shrink available workers’ comp premiums.
Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.
Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage. Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.
The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.
What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.
There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.
Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.
Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”
A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.
The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &