You Probably Aren’t Covered for the Next Cyber Incident. Here’s Why

Assuming cyber policies will respond to any loss related to the use of a computer could leave companies in a bind.
By: | November 5, 2018 • 5 min read

“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.

Adam Cottini, managing director, Cyber Liability Practice, Gallagher

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.

Graeme Newman, chief innovation officer, CFC Underwriting

“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. &

Katie Dwyer is an associate editor at Risk & Insurance®. She 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.


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.


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]