You Probably Aren’t Covered for the Next Cyber Incident. Here’s Why
“Cyber” is really not the right word to describe both the vast umbrella of threats we call cyber risks, and the insurance policies meant to cover them.
Merriam and Webster define cyber as anything “relating to or involving computers or computer networks.” By that description, a cyber insurance policy could be expected to cover any losses resulting from a network malfunction, a breach, or a transaction conducted over the web.
By now we know that’s not the case.
That disconnect between terminology and reality is one reason why insureds increasingly find themselves lacking coverage for a variety of tangible losses resulting from cyber events. Increasing reliance on technology, automation and constant connectivity have amplified the risk of falling into a coverage gap where digital and physical worlds collide.
“Clients think that their cyber policy will cover any and all events related to a computer. It’s a fair misunderstanding. But it’s becoming more commonplace to see a cyber event that results in bodily injury or property damage, and it’s less well-understood how traditional cyber policies respond to those losses,” said Adam Cottini, managing director of the Cyber Liability Practice at Gallagher.
“Cyber insurance as a product is designed for a specific purpose — to protect data and information,” said Graeme Newman, CFC Underwriting’s chief innovation officer. “We use the word ‘cyber’ as if everyone knows what it means. The reason there is so much confusion around this risk is because there are two distinct interpretations: cyber as any risk associated with using technology; and cyber insurance as a product line.”
“It’s becoming more commonplace to see a cyber event that results in bodily injury or property damage, and it’s less well-understood how traditional cyber policies respond to those losses.” – Adam Cottini, managing director, Cyber Liability Practice, Gallagher
Conflating the two could result in some unpleasant claim denials for companies counting on their cyber policies to respond to certain physical or financial losses stemming from any computer-related error.
Physical Losses from Cyber Events
Cyber policies typically do not cover physical property damage or bodily injury arising from a network failure. Though this risk predominantly affects businesses reliant on industrial control systems, like manufacturers and energy companies, the proliferation of IoT devices across industries has expanded the potential for a network error to cause tangible damage.
An all-risk property policy should pick up those damages, but some carriers are beginning to exclude cyber-related events as the likelihood of a loss increases. According to a January 2018 Lloyd’s Market Association report, “the majority of classes of business currently utilize some form of cyber exclusion.”
“On the cyber side, bodily injury and property damage are the biggest issues we get pushed on,” said Elissa Doroff, product manager, cyber and technology, AXA XL. “Our perspective is that those coverages should live in a commercial general liability or property policy, but given the soft market, carriers are more frequently pressed to create coverages to specifically address gaps related to cyber.”
Social Engineering Fraud and the Definition of Crime
Theft of funds through social engineering scams presents another grey area. Since these schemes don’t involve a breach of a corporate network, cyber policies typically don’t respond. Because funds or private data are often willingly transferred to fraudulent accounts in these schemes, crime and fidelity policies likewise may not respond.
Crime policies may expressly exclude coverage for “voluntarily parting” with funds even if the employee was tricked into doing so. Coverage for computer fraud or funds-transfer fraud may also be invalidated if there was no unauthorized entry to the insured’s network, and if funds were sent with the organization’s knowledge and consent.
According to an October 2017 Breach Insights report by Beazley, social engineering attacks increased nine-fold in 2017. As the risk increases, so does demand for coverage, and carrier response varies.
“With cyber crime faced by banks, there is a very fine line between what should be covered under a traditional crime policy and what should be covered under a cyber policy. It’s a crime, but it’s also a cyber attack, so which policy should respond?” CFC Underwriting’s Newman said.
Newman described cyber insurance as “the modern-day crime policy.”
Crime coverages are already built into about six or seven other types of policies, Newman said, including property, professional liability, K&R, standalone crime, fidelity and employee theft, and now cyber. Especially for smaller and mid-sized businesses, a cyber policy is likely to cover most crimes they would experience, which are likely to be committed electronically.
“Extortion is a crime, theft is a crime, sabotage is a crime, and these are all being perpetrated online today. We’re seeing a lot of innovation in the cyber market, which is expanding to cover these exposures while the crime market is eroding,” he said. “I’ve seen crime forms that haven’t changed in 10 years.”
Many carriers do now offer a social engineering endorsement, but some attach it to crime and fidelity coverages while others write it into cyber policies. Insureds should check both for exclusionary language and decide where the risk should live.
Business Interruption Impact
“Last year’s NotPetya attack demonstrated the financial impact of downtime created by cyber events. The focus is shifting from PII toward the financial impact of business interruption,” said Christian Hoffman, president, U.S. Cyber Solutions, Aon.
Both cyber and property policies will cover business interruption, though the waiting periods vary. In instances where two policies come into play, “you have to determine the best structure to place that risk,” said Jason Hogg, CEO, Cyber Solutions, Aon. “The retentions, specific features and language of the policies should be compared closely.”
“Last year’s NotPetya attack demonstrated the financial impact of downtime created by cyber events. The focus is shifting from PII toward the financial impact of business interruption.” – Christian Hoffman, president, U.S. Cyber Solutions, Aon
“That can also be addressed through a separate endorsement outlining which policy pays first,” Doroff said. “Figuring that out proactively means if you have a loss, you can hit the ground running on response and recovery and don’t have to sort out carrier disputes.”
“The nexus of the problem is that one event can have multiple outcomes,” Cottini said. “Then the question is, how would you like your outcomes to be covered?”
“There’s potential aggregation between property and casualty where there’s resulting property damage and bodily injury due to a cyber event with both first-party and liability loss. There is a lot of thought being given to how coverages come together to address cyber events, in terms of providing affirmative coverage and eliminating silent coverage,” said Sandy Codding, global head of cyber and technology, Swiss Re Corporate Solutions.
It is likely that cyber insurers will be the ones tailoring coverages more than other lines. Specialty carriers and new capital are the most likely sources, Newman said. &