How to Buy Cyberinsurance
Exposure to network and data security breaches has grown exponentially in recent years, and the market for insurance to cover this risk has grown just as fast. With policies sold under names like “cyberinsurance,” “privacy breach insurance” and “network security insurance,” the market for this coverage often seems chaotic, with premiums and terms varying dramatically from one insurer to the next. So before buying or renewing a cyberinsurance policy, it is crucial to understand what you are being offered and how to bargain for what you need.
Given the bewildering variety and lack of standardization in cyberinsurance, buying an off-the-shelf policy can result in disaster. Instead, partner with experienced professionals to help you place and negotiate tailored coverage.
At the very least, cyberinsurance policies should cover both third-party claims and first-party losses. Most policies will also cover the costs of defending claims that result from data security breaches, regulatory investigations, judgments and settlements. Some policies may cover a hodge podge of other items, such as the costs of notifying those affected by a data breach, credit monitoring, retaining public relations, forensic investigators, restoring lost or stolen data, and pursuing indemnity rights when someone else has caused a breach. Some policies may also cover business interruption losses following a breach, costs of responding to “e-extortion” and “e-ransom” demands, and even media liability claims.
Few policies contain all of these coverages, however, and every policy’s coverage is different. So before you buy or renew a cyberinsurance policy, be sure to understand these 10 guidelines.
1. Buy What You Need
With all the bells and whistles now offered by some insurers, it is important to stick to basics. Consider whether you really need the coverages being offered, and just say “no” if you don’t. Business interruption coverage, for example, is usually subject to a lengthy waiting period before it attaches. Some companies conclude that this coverage is not worth the extra premium because they expect network disruptions to be quickly fixed.
The cyberinsurance market is highly competitive, with many insurers currently focused on building market share, so one might be willing to give you coverage or terms that another won’t.
Conversely, if an insurer is unwilling to remove an objectionable exclusion or limitation from its policy, then ask your broker to get bids from other insurers. The cyberinsurance market is highly competitive, with many insurers currently focused on building market share, so one might be willing to give you coverage or terms that another won’t.
2. Limits of Liability
One of the most important issues in negotiating cyberinsurance is determining the appropriate limits of liability. The costs of responding to a data breach can be substantial. Estimates vary, but one study found that, in 2011, the average organizational cost of a data breach involving the loss or theft of personal data was $5.5 million, or $194 per electronic record. To put that number in context, a data breach involving just 25,000 records—a below-average total—would nearly exhaust a $5 million policy. And if a plaintiff class actually obtained a judgment under a state statute that imposes $1,000 in damages for each claimant, the judgment alone could consume $25 million of insurance policy limits. Because cyberinsurance is not particularly expensive, you should choose limits of liability in line with your total potential liability exposure in the event of a breach.
Most cyberinsurance policies impose sub-limits on some coverages, such as for crisis management expenses, notification costs or regulatory investigations. These sub-limits are not always obvious and they are often inadequate. They should be scrutinized carefully and set realistically.
3. Get Retroactive Coverage
Most cyberinsurance policies limit coverage to breaches that occur after a specified “retroactive date.” In some, this date is the same as the policy’s inception date. This means there may be no coverage provided for claims made due to breaches that occurred before the policy period, even if the insured did not know about the breach when it bought the policy.
Because breaches may go undiscovered for some time before claims are made, insureds should always ask for a retroactive date that is earlier than the inception date. This will ensure the coverage includes unknown breaches that occurred before the policy incepted but first give rise to a claim after it did. Insurers do not always offer retroactive coverage unless asked, but it is commonly available for periods of one, two, five or ten years. Some carriers even offer unlimited retroactive coverage.
4. Beware of Broadly Worded Exclusions
It is not uncommon to find cyberinsurance provisions that contradict the insured’s basic purpose in buying the coverage. Sometimes these provisions have been cut from other insurance policy forms and pasted into cyberinsurance forms where they do not belong. Some policies broadly exclude coverage for any liability arising from a breach of contract, for example. The problem is that many insureds collect and store confidential information from customers, patients or business partners pursuant to contracts that require them to maintain the confidentiality of the information. They buy cyberinsurance precisely to protect them in case a privacy breach gives rise to damages claims under such confidentiality agreements.
Many insurers, if asked, are willing to modify their exclusions to make it clear that they will not bar coverage for these claims. This is just one of many examples of broadly worded exclusions that need to be reviewed carefully and narrowed to make sure that they will not defeat the reasonable expectations of the insured in buying cyberinsurance.
5. Beware of Panel and Consent Provisions
Many cyberinsurance policies require that any investigators, consultants or attorneys used by the insured to respond to a claim or potential claim be drawn from a list of professionals that have been preapproved by the insurer. If the insured has consultants or attorneys that it wants to involve in the event of a loss because they already know its business operations, it is a good idea to ask to add these professionals to the insurer’s preapproved list during underwriting. It may be easier to add professionals to the pre-approved list before you pay the policy’s premium than it is after the insurance company has your money.
Cyberinsurance policies also often contain consent provisions stating that the insured must obtain the insurer’s consent before incurring any expenses to notify customers or patients of a data breach, conduct forensic investigations or defend against third-party claims. Such prior consent provisions are sometimes invoked by insurers to deny coverage when emergency costs have been incurred without the insurer’s consent, even if the costs are completely reasonable and necessary. If prior consent provisions are included in the policy and cannot simply be removed, you should, at a minimum, change them to provide that the insurer’s consent “shall not be unreasonably withheld.”
Some policies broadly exclude coverage for any liability arising from a breach of contract. The problem is that many insureds … buy cyberinsurance precisely to protect them in case a privacy breach gives rise to damages.
It is also a good idea to keep your insurer on speed dial when a breach happens so that it cannot assert that it has been kept in the dark about any emergency-response costs you incurred.
6. Allocation of Defense Costs
Where both covered and non-covered claims are asserted in the same lawsuit against the insured, an issue often arises regarding the proper allocation of defense costs: what portion of the insured’s defense costs must the insurer pay? There are a number of ways that insurance policies can respond in this situation, with some policy provisions being more advantageous to the insured than others.
For example, some policies provide that the insurer will pay 100% of defense costs if the lawsuit alleges any claim that is potentially covered. Others say that the insurer will only pay the portion of defense costs it unilaterally believes to be covered until a different allocation is negotiated, arbitrated or judicially determined.
These issues are less likely to arise in a “duty to defend” policy (where the insurer must take over the insured’s defense of any third-party claims), which typically covers 100% of defense costs so long as any of the claims against the insured is potentially “covered.” However, under a “duty to pay” policy (where the insurer agrees to reimburse the insured for its defense costs or pay them on its behalf), allocation is more likely to be disputed. It is important to understand the allocation method contained in the policy and try to negotiate one up front that is favorable to you.
7. Obtain Coverage for Vendor Acts and Omissions
Chances are that at least a portion of your organization’s data processing and storage is outsourced to a third-party vendor. Therefore, it is important that your cyberinsurance policy cover claims against you that result from breaches caused by your data management vendors.
Most cyberinsurance policies do provide coverage for such vicarious liability, but not all do. It is widely understood in the insurance industry that policyholders expect coverage for claims that arise out of the acts and omissions of their vendors, consultants and subcontractors. If such coverage is not initially offered—or is at all ambiguous—you should demand that it is clearly included in the policy.
8. Dovetail Cyberinsurance with Indemnity Agreements
You should also make sure that your cyberinsurance and vendor indemnity agreements complement each other so you can maximize your recovery from both sources. Some cyberinsurance policies state, for example, that the policy’s deductible or self-insured retention “shall be borne by the insured [and remain] uninsured at its own risk.” Some insurers may interpret this language as requiring the insured to pay the retention out of its own pocket, and take the position that if the insured gets reimbursed for this amount from the vendor that caused the breach then it has failed to satisfy this precondition to coverage.
This kind of clause can therefore present the insured with a so-called Hobson’s Choice: either pursue indemnity from your vendor and give up your insurance, or collect from your insurance company and let the responsible vendor off the hook. This unfair outcome is not in the interest of either insurer or insured.
As a result, insurers are often willing to modify these provisions to clarify that the insured can collect its self-insured retention from a third party without compromising its insurance coverage.
9. Align Cyberinsurance with Other Insurance
Some cyberinsurance policies also cover data management vendors. There may be business reasons for wanting vendors to be insured under your policy in a particular case. But it is generally better to contractually require your vendors to buy their own cyberinsurance to act as the primary coverage and name you as an insured. Then, arrange for your policy to state that it will only apply to third parties in excess of that vendor’s insurance. This structure can reduce the odds that your insurance policy limits will be depleted by claims for which your vendors are primarily responsible.
10. Get a Partial Subrogation Waiver
If your insurer pays a loss, it may become “subrogated” to your claims against any third parties that were responsible for causing the breach. This means that the insurer can try to recoup its payment by pursuing your claims against the responsible parties. Many cyberinsurance policies contain a provision stating that you cannot take any action to impair the insurer’s subrogation rights.
One problem with such provisions in the cyberinsurance context is that contracts with data management vendors commonly contain limitation of liability provisions. These provisions can give rise to disputes about whether the insured has breached its contract with its insurer by impairing or limiting its recourse against the vendor.
A possible fix is to insist that a partial “waiver of subrogation” provision be added to your cyberinsurance policy. Such provisions, which are quite common in other lines of coverage, simply provide that the insurer will not assert that its subrogation rights have been impaired by any contract into which you entered before a loss occurs. Some insurers are willing to agree to such provisions in the cyber context, but others may not be. If your insurer is not willing to give a partial subrogation waiver, you should consider shopping elsewhere.