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Cyber Risk Is Evolving. How Will Coverage Keep Pace?

As the cyber risk evolution continues, coverage gaps will only grow without innovative solutions.
By: | May 2, 2018 • 6 min read

Cyber risk is never the same two days in a row.

Interconnected technology, sophisticated hackers and the speed of new attacks make cyber security an ongoing and exhausting challenge. The various types of breaches — denial of service, ransomware, social engineering and outright theft of private data, among others — infiltrate systems in different ways and make it difficult for risk managers to determine whether or where they have coverage.

Traditional cyber policies primarily cover network security and privacy breaches. After a handful of high-profile security incidences, many companies have grown familiar with the consequences of such a breach, including notification, forensic investigation, credit monitoring and system security enhancement expenses.

“Cyber risk is evolving so quickly that it’s difficult to adjust and build new solutions to keep pace,” said Tim Nunziata, director and division head of Commercial E&O/Cyber, Management Liability and Specialty at Nationwide. “We are often still resolving issues from a previous attack, implementing security patches and shoring up vulnerabilities, while bad actors are already on to something new. As cyber threats take on new forms, companies may find themselves bearing related expenses not covered under any of their insurance policies.”

Addressing coverage gaps will take a concerted effort to improve network defenses, broaden cyber policies and better align them with other products.

“We are now seeing a more organized approach to cyber risk to address all potential causes of system failure,” Nunziata said.

Evolving Risks Create Coverage Gaps

Tim Nunziata, Director and Division Head of Commercial E&O/Cyber, Management Liability and Specialty

Exposures now include other forms of technology failure that could incur business interruption and property losses not typically covered by stand-alone cyber policies. Overlap with other policies or the presence of “silent” cyber coverage (non-traditional sources of cyber exposure coverage found in property and liability insurance policies by virtue of policy wording not implicitly including or excluding cyber risks) may yield some indemnification, but gaps and gray areas abound.

System failure can come in many forms and result in varied consequences depending on the type of business. Global attacks like WannaCry and NotPetya may grab headlines, but a far more common — and commonly overlooked — cyber threat is accidental system failure triggered by a negligent employee.

“I’m talking about the worker who trips over a cord in the hallway, accidentally unplugs something, or pushes the wrong button and inadvertently shuts the whole network down,” Nunziata said. “If the problem is not identified and resolved quickly, there will be a business interruption impact and it could affect the business of third parties as well.”

A typical cyber policy may respond if the incident potentially exposes confidential information, but it may not pick up extra expenses associated with business interruption. An E&O policy, however, could potentially respond if it includes coverage for employee negligence.

Similar overlaps occur between cyber and crime policies in the case of social engineering scams, which involve no network breach but amount to a theft via network channels.

“If there has been no unauthorized access to your system and an employee is tricked into willingly transferring funds, that may not be a cyber claim,” Nunziata said. “But a crime or a professional liability policy could come into play.”

Interplay between cyber and physical property exposures presents similar challenges.

“If a refrigerated truck is carrying a load of produce and someone hacks into the main system and raises the temperature in the truck by five degrees, causing everything to spoil, is that a property claim or a cyber claim?” Nunziata said. “There are many areas where overlap with other exposures creates risks that are not covered by a standard cyber policy.”

As the risk continues to evolve, coverage gaps will only grow without innovative solutions. Two coverage strategies are emerging as options to bridge those gaps.

Extending Coverage Up and Out to Fill the Gaps

Broadening language in existing cyber policies can bring business interruption and other expenses related to system failure — regardless of the cause — under the umbrella of affirmative cyber insurance. In other words, the focus is on building up the cyber vertical, rather than spreading it outward.

“Existing cyber products can be extended or amended to include those E&O exposures, broader system failure, business interruption, contingent business interruption,” Nunziata said. “These will become standard extensions on many network security and privacy policies over the next few years.”

But as cyber risk seeps into every facet of a business’s operations and overlaps with more traditional property/casualty exposures, the most robust defense may be tacking affirmative cyber coverage onto those traditional policies.

“Cyber coverage is its own vertical, but the market is starting to realize that coverage can also potentially run horizontally throughout,” Nunziata said. “In the past we were trying to find answers within the cyber policy, but I think the answer is going to be pushing cyber extensions into other property/casualty coverages. That presents the best way to underwrite specifically to the wide varying types of cyber risks, charge appropriate premium and clarify language, so there are better opportunities to seal gaps and eliminate overlaps.”

Cyber endorsements and insuring agreements could introduce affirmative cyber coverage to professional liability, property, crime and even personal lines policies. This would go a long way towards reducing the guesswork around the root cause of a system failure and how to classify the resulting losses for coverage purposes.

Those other products, however, have the benefit of multi-decade claims histories and court precedents that have helped to standardize language, or at least create precedent regarding, contract interpretation.

This is where the enforcement of new data protection and network security standards may help.

New rules, including Europe’s General Data Protection Regulation (“GDPR”) and the New York Department of Financial Services’ cybersecurity regulations, represent a first step toward a more holistic approach to combatting cyber risk, as they will aid organizations and insurers in gathering information around cyber incidents consistently and on a broader scale. They will also raise risk management standards and hold companies accountable for protecting their networks and data.

“These regulations will require clients to be prepared, and the first step of preparation is gathering information. The more information we can collect, the better products we can build,” Nunziata said.

A Long-Term Approach Built to Evolve with the Risk

No matter how ironclad a company’s network defenses may be and no matter how well-versed they are in breach response, the ever-evolving nature of the risk means a debilitating cyber incident is not a question of if, but when. Even the best risk management cannot supply clear, comprehensive coverage.

“Despite this fact, overcoming a cyber breach is possible,” said Nunziata. “There are solutions, and we work with clients to craft what they need.”

“Our cyber underwriters are partnering with other divisions within Nationwide to push affirmative coverage out to more traditional commercial policies, leveraging our multiline expertise across products. We’re looking to build out existing products through innovative structures, endorsements and new insuring agreements.”

A strategy of gradual and consistent growth within the cyber market has enabled the carrier to closely track and respond to evolving exposure thoughtfully, without rapidly raising rates or tightening terms and conditions.

“We’re going to dictate our strategy around the problem. We’ve seen markets come and go over the last five or six years, but our approach has not changed. It’s expanded and grown, but it’s been consistent,” Nunziata said.

To learn about Nationwide’s Cyber and Professional Liability services visit https://mls.nationwideexcessandsurplus.com/fs/products/cyber-and-professional-liability/ or contact Tim Nunziata, director, at 212-329-6915 or [email protected].

Speak with your agent about specific policy details and coverages. Consult your policy’s terms and conditions for specific coverage information.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Nationwide. The editorial staff of Risk & Insurance had no role in its preparation.




Nationwide, a Fortune 100 company, is one of the largest and strongest diversified insurance and financial services organizations in the U.S. and is rated A+ by both A.M. Best and Standard & Poor’s.

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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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.

A Legislative Movement

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.

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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.

A New Classification

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.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

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.

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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. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]