UK: Cyber Coverage: Mind The Gap

This alert identifies a number of important themes in the growing area of exposure to cyber risks and offers advice on how to negotiate the new array of insurance coverage on the market.

The increasing threat of cyber-attacks

Cyber-attacks are not a new concept – their history dates back almost as long as the internet itself. However, until recently the insurance market has not offered dedicated and comprehensive products to allow insureds to protect themselves effectively against this peril. Rather, cyber cover has often been added as an after-thought to an existing policy. This may well be due to misconceptions on both sides as to what a cyber-attack is and how it might affect a business, but left unchecked, this could leave costly gaps in your insurance coverage. These gaps might appear both in relation to first party losses (those sustained directly by your company) and third party losses (those sustained by others who look to claim against you to recover those losses).

Cyber-attacks are no longer only the concern of U.S. Government agencies. If your business holds personal data, runs on a computer system or operates a website, then it is at risk. In fact, according to a survey this year, 41% of organisations globally have been subjected to a Distributed Denial of Service ("DDoS") attack. However, that same survey reported that only 8% of IT managers felt they had sufficient resources to handle such attacks, making provision of the correct insurance all the more important.

Increases in the frequency and seriousness of cyber-attacks and impending changes in legislation and regulation mean that current practices cannot continue. Due to the increased profile of this type of risk, risk managers will be required to understand its significance to their business and at the same time, as the insurance market responds with more focused products, will also be required to understand the scope of cover available to them. A recent attack led by a Russian crime ring is reported to have caused losses of more than £1.4 billion. The attack led to the crime ring gathering a cache of over 1.2 billion user name and password combinations and more than 500 million email addresses from over 400,000 websites. This followed the much publicised attack on U.S. retail giant Target last Christmas which caused $148 million of losses, and other recent attacks. Not only are these attacks publicly embarrassing and damaging to a company's reputation, they also often cause unappreciated exposure to financial liability.

Cyber exposures: first and third party considerations

Cyber-attacks could affect your business in multiple ways, including:

  • Loss, damage or theft of digital assets, including software
  • Business interruption caused by denial of service attacks
  • Cyber extortion caused by detention of data pending ransom payment
  • Reputational damage caused by the loss of personal data and IP infringement

In addition, an attack could also leave you at risk of claims and costs from third parties:

  • Claims for breach of privacy, including investigation costs, plus liability for fines, damages and compensation
  • Customer notification costs
  • Loss of third party data compensation

Current approaches to insurance protection

Most companies will not have a dedicated cyber policy. Instead they may have an extension to a property damage and business interruption policy to deal with first party risks which may be experienced by the company first hand in the event of an attack, and an extension to a professional indemnity, or other liability and errors and omissions policy to cover third party risks. Even if these endorsements provide cover for all of the direct losses involved in a cyber attack, it is very unlikely that they would cover the anticipated changes in legislation and the costs of investigating and recovering from such an event. To put it in context, Marsh & McLennan Cos. recently estimated that the U.S. cyber insurance market could double this year to $2 billion in gross written premiums from an estimated $1 billion in 2013. Europe is lagging some way behind, with the market estimated at less than $150 million. However, there are now many new products on the London market, with insurers keen to catch up on lost ground and respond to consumer demand.

The EU Data Protection Regulation (the "Regulation")

First published over two years ago, the Regulation is nearing the final stage of drafting. The Regulation aims to put in place a single system for the protection of personal data throughout the EU. At present, some European companies are not subject to the current EU data regime. Data processors, for example, do not currently have to comply, but will be subject to the impending changes. In addition, the Regulation will apply to more non-EU based companies than previously and will now include data controllers outside of the EU, where those controllers process data belonging to EU subjects in relation to the offering of goods and services in the EU.

The main impact of the Regulation will be the increase in fines for breaches of the Regulation. The exact level of the fines is still under discussion, but companies could be on the hook for fines in the region of 2-5% of global turnover. Such draconian fines will only be applied to intentional or negligent breaches, but the message is clear: the penalties for misuse of personal data, whether caused by you or by an unrelated cyber attacker, will be increased. It will be interesting to see the extent of cover offered to insure against these fines. Often in general policies cover for fines and penalties is expressly excluded, particularly if they are incurred due to wilful misconduct or negligence. However, there is no rule of law or public policy reason in this jurisdiction which prevents insurance cover for any type of civil fine or penalty. The market has been offering limited cover for PCI Fines and Penalties of up to £5 million and Regulatory Defence and Penalties of up to £10 million in separate Cyber policies.

Another key development is that the Regulation will allow individuals to claim directly against data processors, in addition to data controllers. Such claims will now extend to non-pecuniary loss, which will add an extra layer of consideration to the assessment of third party liability risk.

Added to these statutory pressures, the Financial Conduct Authority (FCA) included the topic of "Resilience against cyber-attacks" in its 2014 Business Plan and Risk Outlook. This means that all financial institutions will start to come under greater scrutiny in this area, which may well lead to a requirement to review IT systems and capabilities and add cyber-attacks as a specific category in annual risk assessments.

New products on the market

The market is now realising the significance of cyber-attacks and is starting to launch appropriate, targeted and comprehensive products to protect companies who have suffered an attack. Many of these policies offer not only indemnity for first and third party claims, but also provide for dedicated teams to come into your business after an attack and assist the company's recovery. This may include forensic investigation teams which will analyse how the attack happened and what data has been compromised, public relations experts who will assist with media and client enquiries after an attack, and customer support teams who will deal with customer queries and client care. However, these policies are yet to be tested in coverage disputes and so there is little practical guidance from the courts on how coverage will operate.

As the U.S. market for cyber policies is more mature, policy coverage is beginning to be tested and weaknesses found. For example, claims are being denied when the cause of the attack is due to an employee erroneously downloading malware onto the system, or where employees do not put in place the firewalls specified by the policy. As such, it is wise to insist on a tailored policy which includes a broad definition of "claim" (but this will often require broad reporting obligations such a definition will usually entail) and a broad definition of "loss" which should include at least investigatory and response costs, statutory fines and penalties (where insurable) and regulatory defence costs. Exclusions should be narrowly tailored where possible, for example, any conduct exclusions should be limited to the dishonest, fraudulent or criminal acts of senior management only. Your policy may have a coverage structure which adds additional limits of cover through excess layer policies. However, such policy structures can create complications for recovery, as complex questions may arise over the aggregation of limits. This may be an issue with the new policies as it will not always be clear how losses will aggregate where one attack causes multiple losses.

What your risk managers and brokers should be doing now

It is clear that cyber coverage cannot be adequately dealt with using a "one size fits all" policy and a good understanding of your business is required before you can even begin to consider specific policy wordings. The process should start with your risk managers reviewing the type of data controlled and processed by your company. Risk managers should also liaise with IT specialists to ensure that they understand the security systems in place and identify any areas of increased risk. Once this understanding has been gained you should be able to identify the relevant first and third party risks most relevant to your business and ensure that your policy covers those. Brokers can be invaluable in this process once the background facts are known. A clear understanding of your business will also allow you to make the appropriate and necessary declarations prior to taking out a policy.

Finally, whilst it should not be automatically assumed that cover will not be available under existing policies for some losses suffered by a cyber attack, now that new cyber-specific policies are on the market, insurers will likely seek to exclude claims for cyber attack losses under extensions and endorsements of non cyber-specific policies. Risk managers should therefore be taking stock of their suite of cover, analysing the gaps and filling them with tailored cyber policies which will work with the systems and practices they have in place.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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