by Geoff Stanton | Oct 30, 2024

What Does Cyber Insurance Not Cover: 3 Shocking Exclusions

What does cyber insurance not cover? This is a question often asked by small and midsize business (SMB) owners as they navigate the challenges of safeguarding their operations against cyber threats. While cyber insurance is a vital tool in managing the financial fallout from cyberattacks and data breaches, it doesn’t cover everything. Key exclusions typically include:

Potential future lost profits: Income beyond the attack period is generally not covered.
Loss of value through intellectual property theft: Devaluation due to IP theft remains a business risk.
Technological improvements and upgrades: Costs for upgrades post-incident do not fall under most policies.
Losses incurred during the time deductible: Damage before the end of the deductible period might not be compensated.

In today’s digital landscape, SMBs represent 43% of cyberattack targets, emphasizing the importance of understanding these policy limitations for effective risk management.

I’m Geoff Stanton. With a deep background in commercial property and liability insurance, I specialize in guiding SMBs through the complexities of cyber insurance, helping them understand what does cyber insurance not cover and ensuring they aren’t caught off guard by unexpected exclusions. Let’s explore how to best protect your business amidst the increasing cyber threats.

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What Does Cyber Insurance Cover?

When it comes to cyber insurance, the coverage can be divided into two main categories: first-party expenses and third-party expenses. Let’s break these down into simple terms.

First-Party Expenses

First-party coverage deals with the direct costs your business might face after a cyberattack. Here are some key areas it covers:

Cyber Crime Costs: If your business falls victim to cybercrime, such as ransomware or data theft, your policy can cover the costs of dealing with these incidents.
Incident Response: This includes hiring experts to respond to the breach. Quick action can help minimize damage and prevent further attacks.
Digital Forensics: After an attack, you’ll need to figure out how it happened. Digital forensics experts dig into your systems to understand the breach and help prevent future attacks.
Public Relations (PR) Services: A cyberattack can damage your reputation. PR services can help manage the fallout and rebuild trust with your customers.
Legal Fees: Legal battles can be costly. Cyber insurance often covers the cost of legal advice and representation if you’re sued because of a data breach.
Regulatory Fines: If you fail to comply with data protection laws, you might face fines. Cyber insurance can help cover these costs.

Third-Party Expenses

Third-party coverage focuses on costs related to lawsuits or claims from others affected by the cyberattack. This might include:

Defending Lawsuits: If someone sues your business because their data was compromised, your insurance can cover the costs of defense.
Settling Claims: Sometimes, it’s cheaper to settle a lawsuit than to fight it. Cyber insurance can help with these settlement costs.
Penalties from Regulatory Agencies: If a regulatory body fines you for not protecting customer data, this coverage can help pay those fines.

In summary, while cyber insurance offers a safety net against many cyber risks, it’s important to understand its scope. Coverage can vary significantly between policies, so it’s crucial to know what your specific policy includes. Always read the fine print and consult with an expert to ensure your business is adequately protected.

While cyber insurance provides valuable protection, there are notable areas it does not cover. Understanding these exclusions is key to managing your risks.

Potential Future Lost Profits

Cyber insurance typically covers the immediate aftermath of an attack, such as business interruption during the event. However, it won’t cover future revenue losses that occur after the incident is resolved. For example, if your business loses customers due to a tarnished reputation, resulting in decreased market share, these losses are not covered. This also includes the devaluation of data—if a breach reduces the perceived value of your data assets, insurance won’t compensate for this loss.

Loss of Value Through Intellectual Property (IP) Theft

Another significant exclusion is the loss of value through intellectual property (IP) theft. Cyber policies often don’t cover the long-term financial impact of stolen IP. If a competitor uses your stolen IP to create a similar product, leading to a valuation decrease of your own offerings, this is typically not covered. Many businesses fail to recognize these IP risks until it’s too late.

Technological Improvements and Upgrades

In the wake of a cyberattack, you might need to improve your systems to prevent future breaches. However, cyber insurance doesn’t cover costs related to system upgrades, software updates, or server changes. Even necessary cyber security improvements are usually excluded. As one expert noted, “Insurance is meant to get you back to where you used to be, not to a better place.”

Losses Incurred During the Time Deductible

Cyber insurance policies often include a time deductible, which is a waiting period before coverage kicks in. According to the OECD, this period typically lasts between eight and 12 hours. If your business manages to restore its systems within this timeframe, the insurance won’t cover the losses incurred during this period. It’s essential to understand these coverage limitations to ensure your business is prepared for the immediate impacts of a cyberattack.

By knowing what cyber insurance does not cover, businesses can better prepare and invest in other protective measures to safeguard against these potential risks.

Common Exclusions in Cyber Insurance Policies

When considering cyber insurance, it’s crucial to understand what isn’t covered. These exclusions can significantly affect your risk management strategy.

Human Error or Negligence

One of the most common exclusions in cyber insurance policies is losses resulting from human error or negligence. If a breach occurs because of poor security processes or inadequate configuration management, the insurance may not cover the resulting damages. For instance, if an employee accidentally opens a phishing email that leads to a data breach, this preventable issue might not be covered. Companies need to ensure their staff is well-trained in cybersecurity protocols to minimize these risks.

Acts of War and Terrorism

Cyber insurance policies often exclude damages caused by acts of war and terrorism. This includes cyber terrorism, where attacks are politically motivated. The Terrorism Risk Insurance Program (TRIP) is sometimes referenced in policies to define these exclusions. If your business suffers a cyberattack during a declared state of war, the insurance might not cover the costs. It’s essential to evaluate whether additional coverage is needed to protect against these rare but potentially devastating events.

Physical Damage

Physical damage is another area typically not covered by cyber insurance. This includes damage to property or damaged computers resulting from non-digital perils, like natural disasters or vandalism. For example, if a hacker physically damages your servers, the insurance might not cover the repair or replacement costs. Businesses should consider additional property insurance to cover these types of losses.

Understanding these exclusions helps businesses prepare for potential gaps in coverage and highlights the importance of comprehensive risk management strategies.

Frequently Asked Questions about What Cyber Insurance Does Not Cover

What is excluded from cyber insurance?

Cyber insurance is a great tool for protecting your business against digital threats, but it doesn’t cover everything. Here are some key exclusions:

Failure to Maintain Standards: If your business doesn’t follow industry best practices for cybersecurity, any resulting losses might not be covered. For example, if you neglect regular software updates, your insurer might not pay out if a breach occurs due to outdated systems.
PCI Fines: If your business handles credit card transactions, you must comply with the Payment Card Industry Data Security Standard (PCI DSS). Cyber insurance often excludes fines and penalties for failing to meet these standards.
Prior Acts: Incidents that occurred before your policy started are usually not covered. If you had a breach last year and didn’t have cyber insurance, you can’t claim for it now.
Acts of War: Many policies exclude coverage for damages caused by acts of war, including cyber warfare. If a nation-state attack impacts your business, your policy might not cover it.

Which of the following is typically excluded from cyber insurance coverage?

Poor Security Processes: If your business has weak security measures, like using weak passwords or not training staff on cybersecurity, any resulting breaches might not be covered.
Prior Breaches: If your business was already compromised before you got insurance, those incidents are typically not covered.
Human Error: Mistakes by employees, such as clicking on phishing links or losing a laptop with sensitive data, often aren’t covered. It’s crucial to have strong training and security protocols in place.

What does comprehensive cyber insurance not protect you from?

Even with comprehensive cyber insurance, there are still gaps:

Loss of Future Revenue: Cyber insurance usually doesn’t cover future lost profits. If a breach leads to a long-term loss of customers, your policy likely won’t compensate for that.
Lost Business Opportunities: If a cyber incident causes you to miss a major business deal or partnership, those lost opportunities are typically not covered.

Understanding these exclusions is essential for businesses to prepare and fill coverage gaps with other risk management strategies.

Conclusion

At Stanton Insurance Agency, we are dedicated to providing trusted protection for your valuable assets. Our comprehensive risk management approach ensures that you are well-prepared for the unexpected, even in the digital world.

Cyber insurance is a vital part of a robust risk management strategy, but it’s important to understand its limits. While it offers significant protection against many cyber threats, it doesn’t cover everything. This is where our expertise comes in. We help you navigate these complexities and tailor solutions that fit your unique needs.

As a local business, we are committed to exceeding customer expectations by offering personalized service and expert advice. Our goal is to make the process of finding and maintaining cyber insurance as straightforward as possible.

For more information on how we can help protect your business, visit our Business Insurance page. Let’s work together to secure your future and safeguard your valuable assets.