Cyber insurance exclusions: what you should know

As a business leader, you need to ensure your cybersecurity protection covers your entire business. However, unexpected incidents like data breaches and cyber-attacks cannot always be planned for. It’s critical to protect your business from potential financial losses and reputational damage following an incident, which is where cyber insurance comes in. 

Business leaders must understand cyber insurance policies come with certain exclusions that could limit the coverage provided. In this article, we’ll explore some common cyber insurance exclusions you should be aware of to ensure your organization is adequately protected.

What is cyber insurance?

Cyber insurance is a specialized insurance product designed to protect businesses from losses resulting from cyber incidents. These incidents may include data breaches, ransomware attacks, network disruptions, and other cyber-related events. 

Cyber insurance typically covers expenses such as legal fees, forensic investigations, customer notifications, credit monitoring services, and even extortion payments in some cases.

Common cyber insurance exclusions

Prior knowledge

One of the exclusions commonly found in cyber insurance policies is the prior knowledge exclusion. This exclusion states the insurance coverage does not apply if the insured party had prior knowledge of an event or circumstance which could reasonably be expected to give rise to a claim. 

In simpler terms, if you were aware of a potential cyber vulnerability within your organization but failed to address it before obtaining the insurance, your claim may be denied.

War and terrorism

Another important exclusion to be aware of is the war and terrorism exclusion. Most cyber insurance policies explicitly exclude coverage for losses caused by any of these acts. 

While cyber-attacks by state-sponsored actors or terrorist groups are relatively rare, they can have devastating consequences. Therefore, it’s crucial to understand whether your policy includes this exclusion and, if so, consider additional coverage to protect against these risks.

Contractual liability

Many cyber insurance policies also contain a contractual liability exclusion. This exclusion states the insurance coverage does not extend to any liability assumed by the insured under a contract or agreement. This means if your organization agrees to assume liability for certain cybersecurity breaches in a contract, your cyber insurance policy may not cover those losses.

It is essential to carefully review your contracts and negotiate liability provisions to ensure you are adequately protected.

Vicarious liability

Vicarious liability is an exclusion that may catch some business leaders off guard. This exclusion typically states the policy will not cover losses resulting from the acts or omissions of third-party service providers, even if they are acting on behalf of the insured organization. In fact, one of the most frequently seen reasons for coverage not being triggered is the use of unapproved vendors.

If you outsource certain cybersecurity functions or work with third-party vendors who handle sensitive data, it’s essential to understand the potential gaps in coverage and assess the level of risk involved.

Lost portable devices

The loss or theft of portable devices, such as laptops or mobile phones, can pose a significant risk to the security of sensitive data. However, some cyber insurance policies may exclude coverage for losses resulting from the loss or theft of these devices. 

To mitigate this risk, it’s important to implement encryption and device tracking measures, as well as establish protocols for reporting lost or stolen devices promptly.

Intellectual property infringement

If your organization is involved in disputes or legal actions concerning intellectual property rights, such as patent, copyright, or trademark infringement, the policy may exclude coverage for associated legal expenses and damages. It’s important to understand cyber insurance primarily focuses on data breaches and security incidents, rather than intellectual property matters.

Intentional acts

Some cyber insurance policies may exclude coverage for losses resulting from intentional acts by the insured party. This exclusion is designed to prevent individuals or organizations from intentionally causing or participating in cyber incidents to obtain insurance payouts. 

If it is determined the insured deliberately caused the cyber incident, the policy may deny coverage for resulting damages. This exclusion underscores the importance of maintaining ethical and responsible conduct in cybersecurity practices.

Unapproved system modifications

If your organization deviates from approved system configurations or neglects to apply necessary patches or updates, the policy may not cover losses stemming from cyber incidents that exploit those vulnerabilities. Regularly updating and securing systems in accordance with industry best practices is crucial to minimizing risk and maintaining coverage.

Employee actions

Cyber insurance policies may exclude coverage for losses caused by the intentional or malicious acts of employees. This exclusion acknowledges the potential risk posed by insiders, such as employees who intentionally cause a data breach, steal sensitive information, or sabotage systems. 

Insurers may expect organizations to implement robust internal controls, employee training programs, and monitoring mechanisms to mitigate these risks. By promoting a culture of cybersecurity awareness and implementing appropriate safeguards, businesses can reduce the likelihood of insider threats and enhance their coverage eligibility.

Implement a strong cybersecurity framework to cover your cyber needs

Cyber insurance can be an essential tool in safeguarding your business against the financial and reputational consequences of a cyber incident. However, a strong cybersecurity posture is crucial when it comes to obtaining good cyber insurance coverage.

The cybersecurity specialists at BCS365 can assess your business’s infrastructure, recommend security solutions to heighten your security posture, and manage your IT environment to ensure your security needs are covered.