Cyber insurance has become an increasingly popular way for businesses to protect themselves against data breaches, hacking, malware, and other digital threats. But while these policies can provide important protection, it's also critical to understand their limitations. There are key losses and liabilities that even the most comprehensive cyber insurance will not cover.
Common Exclusions in Cyber Insurance Policies
Cyber insurance policies contain exclusions that eliminate coverage for certain incidents and damages. Reviewing these exclusions closely is crucial when evaluating policies. Here are some of the most common exclusions to be aware of:
Prior Knowledge Exclusion
If your business was aware of a vulnerability or threat prior to taking out a cyber insurance policy, claims related to that threat will not be covered. Insurers will investigate when you first knew about a problem, so it's important to be upfront about any known issues when applying for coverage.
War and Terrorism Exclusion
Damages and disruptions caused by acts of war or terrorism will not be covered. Separate terrorism insurance may be needed if these risks are a major concern.
Contractual Liability Exclusion
Any liability that your business assumes through contracts or agreements will likely be excluded. Be sure to review any cybersecurity or privacy-related clauses carefully before signing contracts.
Vicarious Liability Exclusion
Claims brought by third-party vendors, contractors, or other related entities may be excluded. Make sure these relationships are covered through general liability insurance.
Key Financial Losses Not Covered
While cyber insurance policies cover some direct costs related to cyber incidents, there are significant financial losses typically excluded from coverage:
Loss of Company Value
Your policy will not cover decreases in your company's overall value due to loss of consumer trust or damage to your reputation and brand identity. These indirect impacts can be severe following major breaches.
Intellectual Property Losses
The theft or corruption of intellectual property such as proprietary data, trade secrets, and patented designs is generally excluded. Separate intellectual property insurance may be required.
Business Interruption Losses
Policies usually limit the coverage window for business interruption. Ensure you have coverage extensions for longer disruptions caused by cyber incidents.
Legal and Regulatory Exclusions
Cyber insurance is not a shield against fines, penalties, and related legal actions:
Fines and Penalties
Any civil, regulatory, or criminal fines and penalties imposed on your business will not be covered by a cyber policy. Avoid assuming insurance protection from legal punishments.
Claims from Related Entities
Lawsuits filed by current or former employees, contractors, or shareholders over cyber incidents may be excluded. Ensure other liability policies offer protection.
Bodily Injury and Property Damage
Direct physical harm, injuries, and property destruction are not covered by cyber insurance. General liability coverage is required for these risks.
Key Operational and Physical Damage Exclusions
Cyber insurance does not replace more traditional policies needed to cover physical assets and operations:
Loss of Portable Devices
The loss or theft of laptops, smartphones, and tablets containing sensitive data will not be covered. Make sure these devices are insured against loss.
Cyber Warfare and Infrastructure Failure
Major disruptions caused by cyber terrorism or failures of critical infrastructure systems will be excluded by most policies. Additional coverage may be required for businesses in high-risk industries.
Failure to Maintain Security
Claims may be denied if you fail to implement adequate cybersecurity controls and measures. Stay up to date on best practices and address vulnerabilities.
Customizing Your Cyber Insurance Policy
While cyber insurance can provide invaluable protection, it's important to thoroughly review policies and understand where you may need additional coverage. Work closely with your broker to customize a policy meeting your specific business risks and needs. Conduct regular reviews to ensure your coverage evolves along with the threat landscape. Though not a one-size-fits-all solution, thoughtfully designed cyber insurance can significantly strengthen your organization's resilience.
Frequently Asked Questions About Cyber Insurance Exclusions
What are some common exclusions in cyber insurance policies?
Most policies contain exclusions for prior knowledge of vulnerabilities, war and terrorism, contractual liabilities, claims from third parties, loss of intellectual property, business interruptions, fines and penalties, bodily injury, property damage, and more. It's critical to review all exclusions before purchasing a policy.
Why doesn't cyber insurance cover loss of company value or reputation?
Cyber policies are designed to cover direct costs from cyber incidents, not indirect impacts like loss of trust or brand value. These are considered consequential damages that are difficult to quantify. Separate insurance may be needed if reputation damage is a major concern.
Does cyber insurance protect against lawsuits from employees or shareholders?
Lawsuits from internal stakeholders over cyber incidents are usually excluded. Employment practices liability and directors and officers (D&O) policies offer protection against employee lawsuits and shareholder claims.
What physical risks aren't covered by cyber insurance?
Damages like bodily injuries, property destruction, and theft/loss of devices are not covered by cyber policies. General liability, property, and commercial crime insurance provide protection for physical assets and spaces.
How can my business customize our cyber policy to fit our needs?
Work closely with your broker to tailor coverage based on your operations, assets, relationships, and cybersecurity posture. Negotiate terms to reduce gaps, extend coverage windows, increase limits, and address excluded areas with supplemental policies.
Why is it important to review cyber policies regularly?
Cyber risks evolve rapidly, so policies should be reviewed at least annually. Adjust coverage as your business changes, address new exposures, update liability limits, reduce overlaps with other policies, and take advantage of lower premiums.
The key is thoroughly understanding your cyber policy exclusions, limitations, and gaps in order to make smart decisions when customizing coverage. Partner with experienced brokers and insurers to construct a policy aligned with your specific cyber risks and business needs. Ongoing reviews and updates ensure your protection keeps pace with the ever-changing threat landscape.
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