Cyber Coverage

Navigating the Minefield

From gaps in coverage to confusing terminology and hidden exclusions, choosing the right stand-alone cyber policy is a complex and challenging process.
By: | February 20, 2017 • 7 min read

Over the past two decades, traditional lines, from GL to crime to property, have increasingly included some form of cyber cover as standard, while cyber underwriters have done their best to sculpt stand-alone policies that react to the evolving nature of both the risk and client demands. But for those seeking to buy their first stand-alone cyber policies, the landscape can be daunting.

Cyber specialist Lynda Bennett, chair of the insurance practice for law firm Lowenstein Sandler, described the increasingly crowded stand-alone cyber market as a “minefield” in which terminology, exclusions, terms and conditions can “vary wildly” from form to form.

Lynda Bennett, insurance practice chair, Lowenstein Sandler

“We are asked to review cyber policies because they can be unbelievably complex. While the appetite and demand is there for coverage, the nature of the risk is in flux and insurers are having as much trouble pinning down what risk they are willing to insure as risk managers are trying to work out what risks they need insurance for,” she said.

“Each year the traditional industry tweaks its exclusions to push buyers into a dedicated cyber policy. Then they are left in the Wild West having to negotiate a new policy,” said Bennett.

Marsh’s cyber product leader Bob Parisi believes that consistency of approach is appearing in tranches of the industry — such as underwriters who wish to write primary versus those who write excess, those who favor large companies over SMEs, and those who focus on privacy/liability versus those who underwrite direct first-party losses.

According to Jason Glasgow, vice president and practice lead for technology, privacy and network security professional liability with Allied World U.S., it is mainly terminology, not coverage, which sets most of today’s cyber policies apart. But there is no doubt first-time buyers can easily find themselves inadequately covered if they’re not careful.

Mind the Gap

Once predominantly serving to protect customer-facing sectors against data privacy breaches, the scope of cyber cover has expanded into many new areas including property damage, business interruption (BI) and bodily harm. Cobbling together adequate cyber coverage between traditional property, GL and crime policies is increasingly challenging.

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However, buying stand-alone cyber cover is not a magic bullet; sources all agree that gaps in coverage may still remain — particularly as far as property and BI are concerned.

Many underwriters are cautious, treating every applicant as “the virtual equivalent of a stilt house on the Gulf Coast.” — Bob Parisi, managing director, Marsh FINPRO

“BI cover in the cyber space is growing but is still limited,” said Parisi. “A risk manager who knows what their property policy would pay out on a loss due to fire would find the BI cover in a cyber policy looks like property language but doesn’t truly mirror the way a property policy deals with a loss.

“Cyber focuses mainly on the IT side, nonphysical perils, and is missing around two-thirds of what a traditional property policy would cover for physical peril,” he said.

“The challenge facing cyber underwriters is how to bridge the gap between where traditional P&C forms leave off and the current cyber wordings begin. Clients don’t care what ‘silo’ the insurance market decides to place the risk in, just that it is covered.”

Bob Parisi, managing director, Marsh FINPRO

A lack of loss history, fears over risk aggregation and uncertainty over how companies will react to cyber-triggered BI events mean many underwriters are cautious, treating every applicant as “the virtual equivalent of a stilt house on the Gulf Coast,” Parisi added.

Waiting periods are one area of concern in cyber BI policies. According to Kevin Harding, partner at RGL Forensics, typical cyber insurance policies include a waiting period of four to 12 hours before BI cover begins to apply. Depending on the nature of the cyber event or the business, this means anything from none to most of the sales loss could fall within the waiting period and therefore not be covered.

“To avoid this situation, and give more certainty to both the insurer and policyholder, we feel either a fixed monetary deductible or possibly a franchise deductible could be adopted,” he said.

“Once the losses are in excess of the defined monetary amount, both parties know what will be paid and no hourly calculation is required.”

However, Harding noted, insurers would need a lot more information about the value of the potential exposures at the time of underwriting the policy to determine the deductible values.

Terrorism is another “area of discomfort” for policyholders and insurers, with Bennett arguing that the definition of what constitutes a terrorism trigger is even vaguer under a cyber policy than other policy forms. “Several recent losses are speculated to be politically motivated, but many cyber policies exclude terrorism whether it is declared or undeclared as a terrorist act, leaving insureds on uncertain ground and heading towards coverage disputes with their insurers.”

Collaborative Approach

Buying stand-alone cyber property or BI cover needs to be carefully woven into a company’s overall program. Certain serious property damage coverages may be best off under a property policy that is likely to have greater limits and a different pricing scheme than a cyber policy, Glasgow said.

“Clients may not want their cyber policy to erode limits in their crime, E&O, D&O or property policies — they have those limits in place for a reason and need to maintain separate limits to ensure proper coverage,” he said.

Further, when two or more policies provide overlapping first-party property coverage it can create an uncertain outcome if a loss occurs, as each insurance policy will likely contain ‘other Insurance’ provisions that make each of them excess to the other.

“Each year the traditional industry tweaks its exclusions to push buyers into a dedicated cyber policy. Then they are left in the Wild West having to negotiate a new policy.” — Lynda Bennett, insurance practice chair, Lowenstein Sandler

“This has the potential to lead to uncertainty at the worst possible time — after the loss has happened,” said Grace Ries, head of cyber risk insurance products at FM Global, whose new product, “Cyber Optimal Recovery,” allows clients to position their property policies to maximize recovery alongside cyber or designate property as primary in order to preserve the cyber policy’s non-property limit.

Steve Anderson, cyber liability product executive at QBE, said some of the next steps in cyber product development are likely to include micro insurance, artificial intelligence and Internet of Things liability coverages, as well as cyber “all risk” policies — though only if the industry can come to grips with potential risk aggregation.

Beazley has taken a step in that direction, partnering with Munich Re to offer what it terms “holistic” cyber cover — catastrophic limits (up to $100 million at present) and broad coverage against virtually any type of cyber loss.

This type of cover can be bought either as primary to any other type of cover, or to dovetail around existing policies — the latter approach requiring a collaborative approach. According to Paul Bantick, Beazley’s leader for technology, media and business, the specialty insurer is seeing huge demand for the product and is already working with about 50 large corporate clients to design holistic programs.

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But, noted Jill Salmon, head of cyber/tech/MPL at Berkshire Hathaway Specialty Insurance: “If we are going to start writing holistic programs, broadening cover to include social engineering, crime coverages and property damage, or expanding cover to nonsecurity breach triggers such as system failure, this is not necessarily what cyber underwriters have grown up understanding, so broadening expertise in cyber is critical, as is working collaboratively with experts in other lines of insurance.”

For this reason, Salmon and others believe cyber still has a future within traditional lines such as property and crime, as well as other lines of coverage. “Cyber is a cross-line coverage. As other lines recognize cyber events as a cause of loss, they will have to integrate the cyber discipline,” she said.

With cyber products and inclusions only set to proliferate further, employing a specialist cyber broker is essential.

A good broker will not only help the client better understand what the most appropriate coverages are for their exposures, but can also negotiate better terms from carriers and in the case of bigger players may have already negotiated a degree of cross-carrier standardization of wordings through its work with other clients.

Holistic coverages may go some way toward simplifying the process for large firms, but for the majority, the future may hold an even wider choice of options as cyber grows both stand-alone and as a component of a wider array of covers.

Getting expert advice is an essential tool to help navigate the market. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]