Worldwide: Cyber-Insurance For Banks: Why They Need It; What To Do About It

Insurance coverage for cyber attacks and privacy breaches is not a novelty anymore; it is a necessity.  Increasingly, having cyber-insurance in place is becoming a regulatory requirement for financial institutions.  But how to evaluate the coverage required ...

State and federal banking regulators' recent focus on cyber security and cyber insurance underscores the importance of procuring cyber insurance, both as a risk management tool and for purposes of demonstrating regulatory compliance. As such, it is imperative that financial institutions review their cyber security insurance policies carefully to ensure that the scope, limits, and sublimits of the coverage are appropriate. Consistent with other areas of risk mitigation, the amounts of such cyber security insurance coverage should be commensurate with the level of risk involved with the bank's operations and the type of activities to be provided. (For additional discussions about cyber-insurance, see the posts here, here here, and here.)  Banks should also understand that not all cyber-insurance products are the same – the scope of coverage can vary drastically among products offered by insurance carriers.

On December 3, 2014, in prepared remarks, Sarah Raskin, Deputy Secretary of the Department of Treasury, highlighted the developing focus of cyber security insurance, stating, "I have been asking our insurance and cyber experts at Treasury to think about how to encourage an environment where market forces create insurance products that enhance cybersecurity for businesses. Ideally, we can imagine the growth of the cyber insurance market as a mechanism that bolsters cyber hygiene for banks across the board."

Most recently, on December 10, 2014, the New York Department of Financial Services (the "NYDFS") issued a guidance letter to all NYDFS-regulated banks outlining the issues and factors on which banks will be evaluated during new targeted, cyber security preparedness assessments. The guidance letter specifically stated that the NYDFS will focus on "[c]yber security insurance coverage and other third-party protections."

Other bank regulators over the last year have issued similar pronouncements. In addition to the extrinsic motivation of the evolving regulatory landscape, banks should also be motivated by the financial and reputational risks of privacy breaches.  The 2014 Poneman Study indicates that the cost of data breaches is increasing. The companies involved in the study reported an average of $201 per record breached, and an average of 29,087 records per breach – that's an average cost of $5,846,487 per breach for the companies studied. For the financial industry (globally), the average costs per breach are higher, at $206 per record, according to the Study.

Cyber-insurance is a concept, not a product, so it is unclear what criteria regulators will use to evaluate banks' cyber-insurance, particularly in light of the rapidly changing cyber-insurance market. At a minimum, banks should be aware that their traditional insurance (e.g., commercial general liability and D&O) likely will exclude coverage for privacy breaches in the near future. Some coverage may be found in a bank's financial institution bond or E&O policies. In addition, most banks have by now purchased some form of stand-alone specialty cyber product, and regulators likely will deem that a necessity. However, there currently is no such thing as a "standard" specialty cyber policy, so it is unclear whether regulators will deem the mere purchase of a cyber policy as sufficient to meet their standards. Therefore, banks should consider evaluating at least three variables that impact the amount of cyber-insurance they carry: the risks insured; the losses insured; and limits/sublimits.

Risks Insured

Data security experts will use technical terms like "DDOS," "mobile malware," "spear-phishing," and others, but the risks basically break down into the following four categories that should guide banks' cyber-insurance evaluations: 

  • The "Oops" – negligent breaches, caused by you, an agent, or a vendor, inadvertently causing a breach.
  • The "Hacker" – intentional attacks/breaches, with the goal of making money, or a statement, by causing or threatening to cause your organization or its customers harm.
  • The "Blogger" – intentional or unintentional, where a blogger or webmaster uses trademarked or copyrighted material, or invades the privacy of a third party without permission. This is traditionally the realm of "media liability" and sometimes "advertising injury" insurance.
  • The "Ghost in the Machine" – some sort of inherent flaw or hole in your hardware or software causes data loss or a security breach.

It is also important to remember that for many banks, data breach risks are present and losses can occur under much more mundane and low-tech circumstances than a "DDOS" attack. For example, a loan officer leaving documents containing a customer's confidential information out in the open where other customers can see them or a customer service representative inadvertently sending one customer an email that was intended for another can constitute data breaches that lead to liability. It is also important to evaluate how much a bank's cyber-insurance covers acts/omissions/networks of its third party vendors. Many products offered by major carriers do not cover, or provide only limited coverage for, third party acts/omissions/networks.

Losses Covered

Losses arising from cyber risks tend to fall into one of two general categories – "first-party" losses (the bank's direct costs) and "third-party" losses (liability losses). First-party losses consist of costs directly incurred by the bank as a result of the breach, such as costs incurred in connection with privacy notifications, public relations efforts, forensic investigations, restoration of data, and business interruption, and, in some instances, ransom payments. Third-party losses are liability losses, and include defense costs and indemnity payments in connection with customers' claims for damages and regulatory investigations. While other types of insurance policies may or may not cover regulatory penalties, banks' cyber-insurance should cover all of these potential losses but the policy language should be reviewed carefully to determine the types of losses that are covered and those that are excluded. Also, beware of policy language that purports to provide the carrier the unilateral right to determine whether certain costs will be deemed necessary and thus covered. Some policies, for example, state that they cover first party costs that are necessary "in the sole discretion of the insurer." Banks may be able to negotiate language that permits more flexibility and even-handedness should a cyber event occur.

Limits

As with other insurance products, aggregate limits for specialty cyber-insurance will be a function of insurance carrier capacity/risk tolerance, and the premiums that insureds are willing to pay. Excess insurance, attaching at higher losses at a reduced ratio of premiums/limits, may be available to some institutions. However, the most important factor banks should consider is whether their cyber-insurance products provide sufficient limits for the various losses they might incur. For example, many bank policies have drastically lower sub-limits than their aggregate policy limits for certain first first-party losses, when it is the first-party losses that can often be greater than the third-party liability.

Bottom line: cyber risks and costs are increasing for the financial industry (as well as most, if not all, other industries), and cyber risks are evolving more quickly than the cyber-insurance products available on the market. Banks need to work with their brokers, coverage attorneys, and IT professionals to analyze their risks and whether they have sufficient insurance to cover them, so that when the regulator shows up for the examination, they are ready.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Smith Gambrell & Russell LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Smith Gambrell & Russell LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions