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Cyber Coverage

Plugging the Cyber Gap

Marrying property and cyber coverage seamlessly is an area of increased focus for risk managers and underwriters.
By: | April 9, 2018 • 6 min read

Manufacturing and logistics companies are living in constant fear of the next big cyber event. Advancements in smart technology and interconnectivity in the manufacturing and supply chain process only heighten cyber risk.

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This has had the unintended consequence of leaving companies more vulnerable to cyber attacks than ever, as evidenced by the recent spate of NotPetya and WannaCry attacks that devastated many businesses last year.

Once hackers get hold of the relevant codes, they can shut down entire manufacturing processes and supply chains, causing untold damage and costing companies billions in lost revenue.

As a result, demand for cyber coverage has spiked over the last year. However, given the relatively new nature of cyber as a risk, there’s less historical data available, making coverage harder to find.

Added to that, as an admitted risk, property coverage is regulated on a state-by-state basis. But because cyber risk is non-admitted, bolting it on to an existing property program, particularly for a company operating in multiple states, can be problematic because of the different way the two types of cover are regulated.

Graeme Newman, chief innovation officer, CFC Underwriting

An even deeper-lying issue: Many companies don’t understand what coverage they have and whether they will be covered for a cyber event that causes property damage or business interruption.

This was tested by last year’s NotPetya cyber attack on Merck & Co, which disrupted production of its medicines and vaccines on a mass scale. The company has yet to quantify its total losses.

“We have seen a definite increase in the inclusion of non-physical business interruption coverage within manufacturers’ property policies,” said Tracie Grella, global head of cyber insurance, AIG.

“Since property policies provide coverage for business interruption caused by physical loss, it is only logical to want to extend coverage within the property policy to include business interruption caused by a cyber attack, rather than by having a standalone cyber product.”

System Failure

Emy Donovan, global head of cyber and tech PI, Allianz Global Corporate & Specialty, said cyber threat increased as a result of manufacturing companies connecting more of their processes to the internet. Added to that, there has been a move toward smarter processes, which, when they go wrong, can leave the company exposed to even wider business interruption (BI) problems, she said.

“Now companies have got the internet of things devices within their production facilities and rely on connected functionalities for critical operations,” she said. “Additionally, we all used to have manual work-arounds for processes that were somewhat connected.

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“But now we have all dismantled those work-arounds in favor of ‘smart’ processes. That means that if something ‘smart’ breaks, there’s no other way to complete the task, so the BI loss gets worse.”

The problem has been exacerbated because companies rely so heavily on these interconnected systems to run their day-to-day business, leaving them susceptible to malware and ransomware attacks, said Graeme Newman, chief innovation officer, CFC Underwriting. But this has at least caused risk managers and companies to sit up and take notice of the problem.

“Following the surge in ransomware and destructive malware that we witnessed in 2017, the awareness of cyber risk among more traditional industries has risen,” he said.

“For them, the exposure is more akin to the risks covered under their property policies, hence why they have turned to these to look for cover.”

Coverage Headache

Many companies have a standard property program and are only now waking up to the cyber threat following recent attacks. As a result, Marcin Weryk, underwriting manager, cyber and technology, XL Catlin, said there has been an increase in clients looking for more inclusive property policies with cyber bolted on.

But because of the mismatch between property being an admitted risk and cyber being non-admitted, it’s often tricky to add on cyber, he said. Companies are seeking guidance on whether their property program will cover them for a cyber event, he added.

“We have seen a definite increase in the inclusion of non-physical business interruption coverage within manufacturers’ property policies.” — Tracie Grella, global head of cyber insurance, AIG

To overcome the problem, Stephanie Snyder, national cyber sales leader, Aon Risk Solutions, said that companies need to consider using the same carrier to provide their property and cyber coverage to ensure the two are streamlined. The need to work with specialist property and cyber brokers is also paramount.

“Many carriers are now making sure that any type of cyber risk that’s bolted on to their property policy is underwritten by a cyber underwriter,” she said.

“It helps to give them a better understanding of the potential aggregation of risk and eliminate any gray areas or overlaps in coverage.”

A greater problem, said Newman, is carriers’ understanding and appetite to insure these risks. Given the limited knowledge of cyber risk and a fear of aggregation, he said, often the only alternative has been for companies to turn to the excess and surplus market.

“The very real fear that one piece of malware could result in simultaneous limit losses across a huge property portfolio is what is preventing more insurers from entering this market,” he said.

“Had NotPetya been targeted at the U.S. rather than Ukraine, then we could have witnessed an economic impact well in excess of $50 billion, much of which would have fallen on the property market had they provided affirmative cover for cyber risk.”

Streamlined Solutions

Despite this, great strides have been made in aligning property and cyber coverage, said Tom Reagan, managing director and cyber practice leader, Marsh. But there’s still a long way to go.

Grace Reis, VP, cyber risk insurance products, FM Global

“Brokers and carriers have done a great deal of work over the last few years to try to align the two coverages. In general, the property market has continued to be responsive to physical events arising from cyberattacks, but on the other hand, the property market has been moving towards excluding non-physical cyber events,” he said.

Companies also need to work with their brokers and carriers to identify any gaps in their programs, said Weryk. At the end of day, he said, risk managers must decide between an overarching policy covering all cyber and property risks or having separate ones.

“They have to make a clear decision as to whether they go for numerous separate policies or explicit coverage using one program,” he said. “Both have merits and drawbacks, but it’s up to them what suits their business.”

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Education is another key area to help companies, said Grace Reis, VP, cyber risk insurance products, FM Global. She said clients and brokers need to understand how their policy will respond to an event.

“You need to put in the groundwork before an event happens,” she said.

“The last thing you want is to get a nasty shock at 2 a.m. Companies need to treat cyber as an enterprise risk that affects all operations rather than just an IT issue. In a business sense, cyber and property may live in two different segmentations, but companies need to ensure they are plugging that gap.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

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]