Why Most Cyber Insurance Claims Fail: A Guide for Business Leaders
In today’s digital age, cyber insurance has become an essential tool for businesses to mitigate the financial risks associated with cyberattacks. However, despite its importance, a significant number of cyber insurance claims are rejected. This article aims to explain the reasons behind these rejections in a way that is accessible to business leaders without a technical background.
Introduction to Cyber Insurance
Cyber insurance is designed to provide financial protection against cyber-related losses, including data breaches, ransomware attacks, and other forms of cybercrime. It typically covers costs such as data recovery, legal fees, and business interruption expenses. However, the complexity of these policies and the evolving nature of cyber threats often lead to misunderstandings and misalignments between what businesses expect and what insurers cover.
Reasons for Claim Rejection
Understanding why cyber insurance claims are rejected is crucial for businesses to avoid financial and reputational damage. Here are some of the primary reasons:
1. Inadequate Security Measures
One of the most common reasons for claim rejection is the failure to implement adequate security measures. Insurers often require policyholders to maintain specific security standards, such as regular software updates, firewall usage, and multi-factor authentication. If a breach occurs due to non-compliance with these standards, the insurer may deny the claim.
Example: A company fails to update its software regularly, leading to a vulnerability that is exploited by hackers. If the insurer finds that this lack of maintenance contributed to the breach, they may reject the claim.
2. Misrepresentation of Risk
During the application process, businesses must accurately disclose their cybersecurity practices and risk exposures. Misrepresentation or failure to disclose key information can lead to denied claims. For instance, if a company underreports the amount of sensitive data it holds or overstates its security measures, an insurer may use this discrepancy as grounds for rejection.
Example: A business claims to encrypt all sensitive data but fails to do so, leading to a breach. If the insurer discovers this discrepancy, they may deny the claim.
3. Claims for Excluded Incidents
Cyber insurance policies typically include exclusions, meaning not all cyber incidents are covered. Common exclusions include acts of war, infrastructure failures, and specific types of cyberattacks like state-sponsored attacks or those involving negligent insider actions. Businesses must thoroughly understand these exclusions to avoid surprises when filing a claim.
Example: A company experiences a data breach due to a negligent employee, which is excluded from their policy. In this case, the claim would likely be rejected.
4. Violations of Policy Terms
Claims can be denied if the insured violates the terms and conditions of the policy. This includes failing to notify the insurer in a timely manner after a breach or not following prescribed procedures during incident response. Delayed notifications can hinder the insurer’s ability to mitigate damages, leading to claim denial.
Example: A business delays reporting a breach to the insurer, resulting in increased damages. The insurer may reject the claim due to this delay.
5. Insufficient Documentation
Insufficient documentation of the cybersecurity incident and its impacts can also lead to claim rejections. Insurers require detailed records of the attack’s nature, response actions taken, and damages incurred to process a claim. Inadequate documentation often results in disputes over claim validity and value.
Example: A company fails to keep detailed records of a cyberattack, making it difficult for the insurer to assess the claim. This lack of documentation may lead to a rejected claim.
6. Prior Knowledge
If a business was aware of vulnerabilities or previous breaches before obtaining a policy and did not take adequate measures to address them, any claim arising from these known issues could be denied. This is often stipulated as the “prior knowledge” exclusion.
Example: A company knows about a vulnerability in their system but fails to fix it before purchasing a policy. If a breach occurs due to this known vulnerability, the claim may be rejected.
7. Direct vs. Indirect Losses
Some policies differentiate between direct losses (e.g., money stolen due to a breach) and indirect losses (e.g., business interruption). If a claim is filed for a loss not explicitly covered under the policy’s terms, it will likely be rejected.
Example: A business experiences significant business interruption costs following a cyberattack but only has coverage for direct losses. The claim for indirect losses would be rejected.
Case Study: Legacy System Let down
A notable case study involves a small company that suffered a ransomware attack, which encrypted all the data on their computers. The company had to pay a ransom to regain access to their systems, but the attack severely impacted their operations, as they had to manually re-enter data due to inadequate backup systems.
This case highlights several key points:
- Legacy Systems: The use of outdated systems can significantly increase the risk of a cyber loss. Modern systems are generally more secure and less prone to severe dysfunction following an attack.
- Data Re-creation Costs: Many cyber policies only cover data recovery from backups, not the costs associated with re-creating lost data. Businesses should ensure they have adequate coverage for data re-creation.
- Cyber Exposure: Even traditional businesses have cyber exposure, as shown by the impact of the ransomware attack on the electrical firm’s office operations.
Impact of Claim Rejection
The rejection of a cyber insurance claim can have severe consequences for a business:
- Financial Loss: Without insurance coverage, businesses must bear the full financial burden of the incident, including costs related to data breaches, legal expenses, system repairs, and regulatory fines.
- Reputational Damage: Cyber-attacks can damage a business’s reputation, and a rejected claim can exacerbate this by making the business appear unreliable and insecure.
- Operational Disruption: A rejected claim can lead to operational disruptions, impacting customer service, productivity, and business continuity.
- Legal Consequences: Rejected claims can lead to legal disputes between the business and the insurer, which can be costly and time-consuming.
- Future Coverage Issues: A rejected claim can make it more difficult for a business to obtain favourable cyber insurance coverage in the future, potentially resulting in restricted coverage terms and higher premiums.
How to Minimise the Risk of Claim Rejection
To avoid claim rejection, businesses should take the following steps:
- Maintain Good Cybersecurity Practices: Regularly update software, use firewalls, implement multi-factor authentication, and train staff to spot social engineering attacks.
- Understand Policy Exclusions: Carefully review policy documents to ensure they cover the main threats and risks to your company.
- Complete Applications Accurately: Ensure that all information provided during the application process is accurate and complete.
- Keep Detailed Documentation: Maintain thorough records of cybersecurity incidents and response actions.
By understanding the reasons for claim rejection and taking proactive steps to mitigate these risks, businesses can better protect themselves against cyber threats and ensure that their cyber insurance policies provide the intended financial protection.
Conclusion
Cyber insurance is a vital tool for businesses in the digital age, but its effectiveness is often compromised by misunderstandings and misalignments between policyholders and insurers. By recognising the common pitfalls that lead to claim rejection and taking steps to address them, businesses can strengthen their cybersecurity posture and ensure that their insurance coverage provides the necessary protection in the event of a cyberattack. In a rapidly evolving cyber landscape, vigilance and proactive management are key to navigating the complexities of cyber insurance successfully.
By engaging with Somniac Security, our experienced team can help you build and maintain the appropriate strategies and processes for your organisation which enable you to effectively manage your cybersecurity risks. Contact us at info@somniacsecurity.com today to help safeguard your business against tomorrow’s challenges!
