When It Comes to Cyberinsurance, Buyer Beware: 10 tips for upping recovery odds from cyber and D&O policies

[Audrey McNeil <audrey () riskbasedsecurity com>]

http://www.metrocorpcounsel.com/articles/32594/when-it-comes-cyberinsurance-buyer-beware-10-tips-upping-recovery-odds-cyber-and-do-p

While the risks posed by data breaches are by now widely recognized,
effective management of the risk is lagging. Statistics indicate that
concern about data breaches is up, yet half of all businesses have no plans
to dedicate more resources to avert these perils.

The purchase of dedicated cyberinsurance products appears to be on the
rise, but many in the insurance brokerage community indicate that the
marketplace is not yet as robust as one would expect given the staggering
scope of recent data breaches and the ensuing headlines.

Figuring out what kind of insurance is needed to respond effectively to
cyberclaims is challenging. Recent history teaches that the losses
occasioned by cybersecurity breaches are not always predictable. The Sony
Pictures breach is a prime example, as it imperiled or implicated in one
fell swoop proprietary and intellectual property, employee personal
information, sensitive management communications, reputation/goodwill,
extortion, threats of bodily injury and business income. Now that hackers
are extending the playing field of targeted data beyond the familiar
categories of customer credit card numbers, addresses and health-related
data, risk managers need to re-prioritize certain protections (including
insurance protection) that used to be lower down on the shopping list.

Further widening the scope of cyberclaims, D&O insurance came into the
picture last year after data breaches spurred derivative lawsuits against
company officers and directors. While cyberinsurance products are finally
registering on the radar of senior corporate executives, D&O insurance
policies remain nearest and dearest to directors' and officers' hearts. It
is therefore essential that D&O insurance respond to suits targeting
company managers and directors that have their genesis in data breaches.

Purchasing adequate insurance coverage for technology-related insurance
claims is challenging, as products lack uniformity and the claims history
is thin. Following the tips below will improve the chances of recovery from
stand-alone cyber and D&O insurance policies.

1. Pursue Clarity: Buy an insurance policy that you can actually
understand. Unfortunately, many stand-alone cyberinsurance policies are
virtually incomprehensible. Since there is not a lot of uniformity of
product right now in the marketplace, many policies are confusing and
densely written, making it hard to determine the scope of actual protection
provided. Comparison shop with a good insurance broker at your side to help
you find the best forms. Once you have a good, comprehensible form to work
with, the insurance company will often endorse it to provide protection
that is better tailored to your needs if you know what to ask for.

2. Cover the Evolving Risk: Continuously monitor trends in computer hacks
and data breaches. Remember that data breaches can still occur the
old-fashioned way, through theft of sensitive hard-copy documents, as well
as in cutting-edge ways not currently imagined. Your insurance policy needs
to match the underlying exposure.

3. Cover Time-Element Losses: Business income coverage and reputational
damage coverage take on added importance in the wake of recent hacking
events. While a slew of insurance companies have offered cybercoverage for
business income losses and reputational damage for several years, that
coverage was not nearly as coveted as class action privacy litigation
coverage, breach notification costs or regulatory proceedings coverage.
Now, the reality that a breach can imperil the very core of the
policyholder’s ability to continue business operations takes on much
greater import for risk management objectives. As such, consider insurance
coverage that pays time-element claims resulting from reputational damage
and business interruptions, including ones that partially interfere with
business income.

4. Seek Retroactive Dates: Push for retroactive coverage whenever possible.
Many insurance companies want to provide insurance protection only from the
date that the first policy they sold you incepts. The problem is that some
cyberthreats occur well before the policyholder actually learns of them.
Computer forensic specialists will tell you that computer hackers can
intrude into a computer system weeks, months and even years before the
policyholder becomes aware of the threat.

If you purchase insurance coverage with a retroactive date that pre-dates
the policy period, your cyberinsurance company may ask you to provide a
warranty letter. If you provide one, make sure it is carefully written and
ensure that you do your due diligence in reaching out to other departments
and employees within the company to ensure that your representations are
fair.

5. Avoid Breach of Contract and Warranty Exclusions: Resist efforts to
include breach of contract exclusions in your coverage. These provisions
should be obsolete in an era in which so many policyholders do business
pursuant to a contract (whether with customers, credit card companies,
financial institutions, etc.). These exclusions are used all the time by
some insurance companies to challenge insurance claims. While some recent
court decisions have curtailed this use, it is best not to have the fight
in the first place.

6. Avoid Cybersecurity Reasonableness Clauses: Resist insurance company
efforts to include exclusions, warranties, representations or “conditions”
in insurance policies concerning the soundness or reasonableness of the
policyholder’s data security efforts/protocol. These clauses are a recipe
for disputes on potentially every security incident. Given the pace of
technological innovation, almost every security step can be second-guessed
with the benefit of 20-20 hindsight. Is it safe to log onto a secure
network from your luxury hotel room using the hotel’s wifi? The answer
depends upon many factors that are difficult to pinpoint, including the
exact point in time in which attitudes collectively begin to change. Such a
question is bound to end in dispute if the cyberclaim is big enough.

7. Preserve D&O Insurance Coverage for Cyberclaims: Keep your directors and
officers (D&O) insurance program (primary, excess, Side A, etc.) clean from
any cyber-related exclusions or sublimits. Management will be highly
concerned with any argued “gap” in coverage should a cyberevent ensue and
D&O coverage be contested on the basis of an exclusion or limitation for
suits where cyber may be the underlying cause or context of the claim.

8. Be Thorough When Filling Out Cyberinsurance Policy and D&O Policy
Applications: Complete insurance applications carefully and gather
information from other business units where necessary when answering
questions. Even if an insurance company must pay a claim under the plain
terms of the insurance policy, coverage may still be contested, under
certain circumstances, on grounds that application questions were not
correctly answered. Do not give the insurance company this opportunity.

9. Remember That Cyberbreaches Happen Off-line Too: Make sure your
cyber-specific coverage protects losses involving mobile devices, home
offices, data that is off-line at the time security is breached and devices
that may not be owned by the policyholder. A lost flash drive containing
gigabytes of information can lead to a breach and possibly an expensive
one. Make sure your insurance coverage is available for such a scenario –
even where the device is not actively connected to a network when the data
breach occurs.

10. Cover Cloud and Third-Party Vendors: Make sure that your cyber-specific
coverage protects against losses where others manage, transmit or host data
for your company. Insurance coverage is available for cloud computing and
instances where data is handled, managed or outsourced to a third party.
Going back to point number one above, however, not all insurance policies
are created equal, and there are cyberinsurance forms that on their face
appear not to provide express protection for cloud-like scenarios. Most of
these policies can be modified to extend such protection –if requested.

A static assessment of data security risk management will not work in most
instances, given the rapid pace of change in this area. Be vigilant and
adaptable in managing the security risk. Work with your colleagues in other
departments to reduce risk where you can – and secure the best insurance
your company can afford to protect against losses stemming from
cyber-related perils.

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