Cyber Risk Insurance: What Is It and When Is Coverage Necessary?
There’s an old saying that an ounce of prevention is worth a pound of cure; however, when it comes to cyber security, you will want to ensure you’re practicing both. After all, the average data breach costs $3.8 million.
But how do you protect yourself from these costly incidents? It’s not enough to just put in some standard security measures—you need additional protection from cyber risk insurance. But what exactly is this special insurance coverage? And why does it matter?
What is cyber risk insurance, and why is it important?
Unfortunately, the internet is a dangerous place. Experts say you should assume that any online database (including yours) will be hacked. As a result, many entrepreneurs are now seeking cyber risk insurance.
Cyber risk insurance protects against financial losses due to a security breach or system failure on your end. For example, suppose you store customer credit card information unsafely or fail to encrypt sensitive data on your servers.In that case, cyber risk insurance can cover costs associated with fraud claims and penalties from regulatory agencies such as state attorneys general or state consumer protection agencies.
Are there different cyber risk insurance coverage types?
A cyber risk insurance policy can be broken down into three types of coverage: General, First Party, and Liability Coverage. In addition, businesses can choose from various coverages to suit their needs. Below are the key types that are available for individuals and businesses.
General Cyber Risk Insurance
Cyber insurance is liability coverage that protects an organization from certain types of losses caused by cyber-incidents. For example, a cyber attack, a computer crime, or a hacking incident can result in identity theft or unauthorized access to digital systems.
Typical consequences of cyber-incidents include data breaches, extortion attempts, and insider threats such as employees taking confidential information out of a company. These incidents have become more common over time as computers have become more advanced, allowing hackers to access the information they might not otherwise be able to obtain. Typically, general cyber risk insurance covers a range of options, including:
- • Structured and Planned Security Audits: One of the best ways to protect your company from cyber attacks is to conduct a security audit. An audit allows you to identify potential risks in your computer systems and create strategies for addressing them. For example, an audit may reveal that a company has weak password protection or is not backing up its data regularly. The goal of an audit is to improve security and reduce risk so that if a cyber attack does occur, your business can respond quickly and minimize any damage done.
- • Post-Incident Management: If a cyber attack does occur, your business will need to take action. For example, you may need to notify customers that their information has been compromised or hire a forensic team to investigate how an attack occurred. Additionally, suppose your company is liable for damages in a lawsuit related to a cyber attack. In that case, you’ll want coverage to pay any financial penalties without going out of business.
- • Public Relations Initiatives: Public relations is another important aspect of cyber risk insurance. A security breach can go viral in minutes in today’s digital world. So if your company has suffered a data breach or cyber-attack, you’ll want to be prepared to respond quickly with an official statement about what happened and how you plan to deal with it.
- • Major Investigations and Reports: If your company is involved in a major investigation or report, you’ll want cyber risk insurance. For example, if you are found liable for a data breach that has affected millions of customers, your business could face significant financial penalties. These penalties could put your company out of business if you don’t have coverage.
First-Party Cyber Risk Insurance
The first party at risk of cyber-attacks includes those directly involved in the incident. Therefore, educating these people on online threats is important. This can be done through training sessions or appropriate cyber insurance. Typically, it covers a range of options, including:
- • Data Destruction: The first-party insurer is responsible for compensating all parties involved in a cyber attack. However, they are only liable if they prove they have been negligent in their duty of care toward their customers. For example, if an organization’s security measures were not up to scratch, then it would be possible for them to lose their customer’s data. Likewise, if a customer had stored personal information on a company server, it would be essential for that company to ensure that its servers were secure.
- • Extortion: If a cyber-attack occurs, then extortionists can gain access to sensitive information. They can then use that information to blackmail an organization into paying them money. This is not only illegal, but it can also be extremely damaging to an organization’s reputation. If a company could prove that it had been extorted, it would be eligible for compensation from its first-party insurer.
- • Online Theft: Information theft is one of the most common types of cyber attack. This can damage an organization, leading to data breaches, identity theft, money laundering, and fraud. Cyber risk insurance will typically cover a range of options, including data destruction: If a company has been a victim of a cyber-attack, then sensitive information can be stolen. If extortionists can access that information, they could blackmail an organization into paying them.
Liability Coverage Cyber Risk Insurance
Liability coverage also offers protection for claims that may be brought against you. So it helps to ensure that your company is protected in the event of a lawsuit. Typically, it covers a range of options, including:
- • Errors of Commission: If a hacker manages to get past your security measures, there’s a chance that they could cause damage to your clients’ computers. Depending on how you handle it, you may be liable for that damage. For example, if you are working with sensitive information and a hacker takes it from one of your clients, you may be held responsible for not adequately protecting that data. In these situations, insurance errors and omissions can help provide financial protection for you and your client.
- • Defamation and Related Negative Publicity: This coverage is for when you are accused of a crime, whether or not you’re guilty. This includes lawsuits from defamation, libel, slander, invasion of privacy, and false arrest. In addition, if someone posts something about your business on social media that causes a negative reaction from other people, it could also end up hurting your business. But, again, cyber risk insurance can help cover some of these expenses if they arise.
What Do Cyber Risk Insurers Require from Their Customers to Be Covered or Maintain Coverage?
The rationale behind these requirements is pretty clear: Insurers want their customers to be as prepared as possible for a cyber attack so they’re not hit with astronomical bills that could put them out of business.
- • These requirements include not sharing or storing critical data on systems that a third party owns.
- • Insurers also want a solid plan for how a business will recover in case of an attack, including alternative locations where staff can work if their offices have been hit by malware.
- • Cyber-risk insurance providers may require evidence of cyber insurance for subcontractors or periodic reports about your company’s IT security measures to maintain coverage.
- • This can be done by sharing a written document such as an internal policy statement or through monthly reporting via email. In addition, certain services can help small businesses prepare documents for their insurer’s review.
- • Finally, they want companies to perform penetration testing, just hiring hackers to try and breach your security systems so you can find weaknesses before anyone else.
How Can an IT Provider Help You Maintain Cyber Risk Insurance Coverage?
When it comes to cyber risk insurance—it’s not just about purchasing a policy; it’s about protecting your bottom line.Cyber insurance isn’t something you should do without, especially as a business owner. If your business faces even a small risk of being hacked, cyber insurance can help pay for costs associated with an attack.
- • A strong partnership between your IT provider and insurer will help protect against such risks while keeping costs low. As such, it’s wise to have an IT provider on hand who can work with insurers to keep coverage up-to-date and affordable.
- • A professional IT provider might be able to offer you a more affordable option by bundling services like maintenance, backup support, and disaster recovery into one package. This way, you get all these services at once instead of having to buy them separately—and it will likely save you money over time too.
- • Plus, when you choose a service provider with experience dealing with cyber risk insurance, they can help answer any questions about obtaining coverage. They also might be able to assist with filing claims or provide other resources that could make life easier during a crisis.
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