Sponsored: XL Catlin

These Five Emerging Cyber Threats May Be Creating Gaps in Your Coverage

As cyber risks intertwine with property, fidelity, professional liability and reputation exposures, comprehensive insurance coverage and services become paramount.
By: | July 30, 2018 • 7 min read

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:

1. Infiltration of Industrial Systems Leads to Property Damage

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.

2. IoT and Bitcoin Amplify Ransom Risk

Elissa Doroff, Vice President, Underwriting and Product Manager, XL Catlin.

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.

3. Social Engineering Expands Definition of Theft

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.

4. Data Breaches Threaten Company Reputations

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.

5. Storage of Sensitive Data Increases Professional Liability Risk

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.

Staying Ahead of the Coverage Curve

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.”

To learn more, visit https://xlcatlin.com/insurance/insurance-coverage/professional-insurance/cyber-and-technology.


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.


AXA XL, the property & casualty and specialty risk division of AXA, provides insurance and risk management products and services for mid-sized companies through to large multinationals, and reinsurance solutions to insurance companies globally. We partner with those who move the world forward. To learn more, visit www.axaxl.com.

More from Risk & Insurance

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Risk Scenario

A Recall Nightmare: Food Product Contamination Kills Three Unborn Children

A failure to purchase product contamination insurance results in a crushing blow, not just in dollars but in lives.
By: | October 15, 2018 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.


Reilly Sheehan, the Bethlehem, Pa., plant manager for Shamrock Foods, looks up in annoyance when he hears a tap on his office window.

Reilly has nothing against him, but seeing the face of his assistant plant operator Peter Soto right then is just a case of bad timing.

Sheehan, whose company manufactures ice cream treats for convenience stores and ice cream trucks, just got through digesting an email from his CFO, pushing for more cost cutting, when Soto knocked.

Sheehan gestures impatiently, and Soto steps in with a degree of caution.

“What?” Sheehan says.

“I’m not sure how much of an issue this will be, but I just got some safety reports back and we got a positive swipe for Listeria in one of the Market Streetside refrigeration units.”



Sheehan gestures again, and Soto shuts the office door.

“How much of a positive?” Sheehan says more quietly.

Soto shrugs.

“I mean it’s not a big hit and that’s the only place we saw it, so, hard to know what to make of it.”

Sheehan looks out to the production floor, more as a way to focus his thoughts than for any other reason.

Sheehan is jammed. It’s April, the time of year when Shamrock begins to ramp up production for the summer season. Shamrock, which operates three plants in the Middle Atlantic, is holding its own at around $240 million in annual sales.

But the pressure is building on Sheehan. In previous cost-cutting measures, Shamrock cut risk management and safety staff.

Now there is this email from the CFO and a possible safety issue. Not much time to think; too much going on.

Sheehan takes just another moment to deliberate: It’s not a heavy hit, and Shamrock hasn’t had a product recall in more than 15 years.

“Okay, thanks for letting me know,” Sheehan says to Soto.

“Do another swipe next week and tell me what you pick up. I bet you twenty bucks there’s nothing in the product. That swipe was nowhere near the production line.”

Soto departs, closing the office door gingerly.

Then Sheehan lingers over his keyboard. He waits. So much pressure; what to do?

“Very well then,” he says to himself, and gets to work crafting an email.

His subject line to the chief risk officer and the company vice president: “Possible safety issue: Positive test for Listeria in one of the refrigeration units.”

That night, Sheehan can’t sleep. Part of Shamrock’s cost-cutting meant that Sheehan has responsibility for environmental, health and safety in addition to his operations responsibilities.

Every possible thing that could bring harmful bacteria into the plant runs through his mind.

Trucks carrying raw eggs, milk and sugar into the plant. The hoses used to shoot the main ingredients into Shamrock’s metal storage vats. On and on it goes…

In his mind’s eye, Sheehan can picture the inside of a refrigeration unit. Ice cream is chilled, never really frozen. He can almost feel the dank chill. Salmonella and Listeria love that kind of environment.

Sheehan tosses and turns. Then another thought occurs to him. He recalls a conversation, just one question at a meeting really, when one of the departed risk management staff brought up the issue of contaminated product insurance.

Sheehan’s memory is hazy, stress shortened, but he can’t remember it being mentioned again. He pushes his memory again, but nothing.

“I don’t need this,” he says to himself through clenched teeth. He punches up his pillow in an effort to find a path to sleep.


“Toot toot, tuuuuurrrrreeeeeeeeettt!”

The whistles of the three lifeguards at the Bradford Community Pool in Allentown, Pa., go off in unison, two staccato notes, then a dip in pitch, then ratcheting back up together.

For Cheryl Brick, 34, the mother of two and six-months pregnant with a third, that signal for the kids to clear the pool for the adult swim is just part of a typical summer day. Right on cue, her son Henry, 8, and his sister Siobhan, 5, come running back to where she’s set up the family pool camp.

Henry, wet and shivering and reaching for a towel, eyes that big bag.

“Mom, can I?”

And Cheryl knows exactly where he’s going.

“Yes. But this time, can you please bring your mother a mint-chip ice cream bar along with whatever you get for you and Siobhan?”

Henry grabs the money, drops his towel and tears off; Siobhan drops hers just as quickly, not wanting to be left behind.


“Wait for me!” Siobhan yells as Henry sprints for the ice cream truck parked just outside of the pool entrance.

It’s the dead of night, 3 am, two weeks later when Cheryl, slumbering deeply beside her husband Danny, is pulled from her rest by the sound of Siobhan crying in their bedroom doorway.

“Mom, dad!” says Henry, who is standing, pale and stricken, in the hallway behind Siobhan.

“What?” says Danny, sitting up in bed, but Cheryl’s pregnancy sharpened sense of smell knows the answer.

Siobhan, wailing and shivering, has soiled her pajamas, the victim of a severe case of diarrhea.

“I just barfed is what,” says Henry, who has to turn and run right back to the bathroom.

Cheryl steps out of bed to help Siobhan, but the room spins as she does so.

“Oh God,” she says, feeling the impact of her own attack of nausea.

A quick, grim cleanup and the entire family is off to a walk-up urgent care center.

A bolt of fear runs through Cheryl as the nurse gives her the horrible news.

“Listeriosis,” says the nurse. Sickening for children and adults but potentially fatal for the weak, especially the unborn.

And very sadly, Cheryl loses her third child. Two other mothers in the Middle Atlantic suffer the same fate and dozens more are sickened.

Product recall notices from state regulators and the FDA go out immediately.

Ice cream bars and sandwiches disappear from store coolers and vending machines on corporate campuses. The tinkly sound of “Pop Goes the Weasel” emanating from mobile ice cream vendor trucks falls silent.

Notices of intent to sue hit every link in the supply chain, from dairy cooperatives in New York State to the corporate offices of grocery store chains in Atlanta, Philadelphia and Baltimore.

The three major contract manufacturers that make ice cream bars distributed in the eight states where residents were sickened are shut down, pending a further investigation.

FDA inspectors eventually tie the outbreak to Shamrock.

Evidence exists that a good faith effort was underway internally to determine if any of Shamrock’s products were contaminated. Shamrock had still not produced a positive hit on any of its products when the summer tragedy struck. They just weren’t looking in the right place.


Banking on rock-solid relationships with its carrier and brokers, Shamrock, through its attorneys, is able to salvage indemnification on its general liability policy that affords it $20 million to defray the business losses of its retail customers.


But that one comment from a risk manager that went unheeded many months ago comes back to haunt the company.

All three of Shamrock’s plants were shuttered from August 2017 until March 2018, until the source of the contamination could be run down and the federal and state inspectors were assured the company put into place the necessary protocols to avoid a repeat of the disaster that killed 3 unborn children and sickened dozens more.

Shamrock carried no contaminated product coverage, which is known as product recall coverage outside of the food business. The production shutdown of all three of its plants cost Shamrock $120 million. As a result of the shutdown, Shamrock also lost customers.

The $20 million payout from Shamrock’s general liability policy is welcome and was well-earned by a good history with its carrier and brokers. Without the backstop of contaminated products insurance, though, Shamrock blew a hole in its bottom line that forces the company to change, perhaps forever, the way it does business.

Management has a gun to its head. Two of Shamrock’s plants, including Bethlehem, are permanently shuttered, as the company shrinks in an effort to stave off bankruptcy.

Reilly Sheehan is among those terminated. In the end, he was the wrong person in the wrong place at the wrong time.

Burdened by the guilt, rational or not, over the fatalities and the horrendous damage to Shamrock’s business. Reilly Sheehan is a broken man. Leaning on the compassion of a cousin, he takes a job as a maintenance worker at the Bethlehem sewage treatment plant.

“Maybe I can keep this place clean,” he mutters to himself one night, as he swabs a sewage overflow with a mop in the early morning hours of a dark, cold February.


Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are their recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

Shamrock Food’s story is not an isolated incident. Contaminations happen, and when they do they can cause a domino effect of loss and disruption for vendors and suppliers. Without Product Recall Insurance, Shamrock sustained large monetary losses, lost customers and ultimately two of their facilities. While the company’s liability coverage helped with the business losses of their retail customers, the lack of Product Recall and Contamination Insurance left them exposed to a litany of risks.

Risk Managers in the Food & Beverage industry should consider Product Recall Insurance because it can protect your company from:

  • Accidental contamination
  • Malicious product tampering
  • Government recall
  • Product extortion
  • Adverse publicity
  • Intentionally impaired ingredients
  • Product refusal
  • First and third party recall costs

Ultimately, choosing the right partner is key. Finding an insurer who offers comprehensive coverage and claims support will be of the utmost importance should disaster strike. Not only is cover needed to provide balance sheet protection for lost revenues, extra expense, cleaning, disposal, storage and replacing the contaminated products, but coverage should go even further in providing the following additional services:

  • Pre-incident risk mitigation advocacy
  • Incident investigation
  • Brand rehabilitation
  • Third party advisory services

A strong contamination insurance program can fill gaps between other P&C lines, but more importantly it can provide needed risk management resources when companies need them most: during a crisis.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at dreynolds@lrp.com.