UK: Cyber Attacks And Insurance: Prevention Better Than The Cure?

Last Updated: 16 June 2016
Article by James Cooper, Helen Bourne and Rebecca Lowe

Most Read Contributor in UK, September 2017

Cyber insurance is a booming business, with global premiums increasing by USD 500m, to USD 2.5bn. It is estimated that the market will continue to grow, with premiums reaching USD 7.5bn by 2020.

However, cyber attacks are also on the increase: PwC estimates that 1 in 4 UK companies were attacked by cyber criminals in the past two years. Such attacks cause significant financial, business and reputational damage costing businesses USD 400bn annually.

There have been many high profile examples of the consequences of cyber attacks. The 2014 cyber attack on Sony by the "Guardians of Peace", filled column inches for several months, assisted by the stolen data containing unreleased films and film stars' salaries.

In the UK, telecoms company TalkTalk was infamously hacked in 2014 and again in October 2015. In the 2015 attack more than 150,000 customers' personal details were accessed and over 20,000 bank account numbers and sort codes were stolen. According to TalkTalk's recent financial results, that attack cost the company GBP 60m and the loss of 95,000 customers.

In addition to high profile hackings, a typical business could be the victim of a cyber attack via one or more of the following methods:

  1. A corrupt current or former employee, service-provider or consultant accessing a company's systems to steal confidential information or to deploy hostile software, known as malware
  2. "Phishing" or fraud using electronic communications such as emails, letters or instant messages. The communications appear to be an authentic communication from a trusted source but will typically invite the recipient to disclose confidential information, transfer funds or visit websites hosting malicious content or
  3. "Vishing" or scams which take place over the telephone or via text message. Vishing might involve the fraudster impersonating the victim's bank or solicitor and deceiving the recipient to disclose information or transfer funds

What happens following a cyber attack?

If the cyber attack involved the theft of money, then the fraudsters will work quickly to transfer and convert the funds in order to obscure the audit trail. The speed at which fraudsters are able to transfer and convert stolen funds makes it very difficult to trace and recover funds, particularly if the funds are moved across international borders or converted to digital currencies. It is unsurprising that 70% of RBS' customers who were victims of scams did not receive a penny back.

If the attack involved the theft of information, such as bank account or other personal details, then the fraudsters will quickly look for ways to capitalise on that information. This might include selling the information on the "dark web" or using the information to enable further, even more sophisticated cyber attacks.

Impact of cyber attacks

Clearly, cyber attacks can cause significant first and third party loss, including business interruption, reputational damage, a fall in share price and litigation.

In addition, cyber attacks can lead to regulatory fines. Sony was fined GBP 250,000 in the UK for breaches of the Data Protection Act following the 2011 hack of its PlayStation Network. Data protection fines are expected to increase when the General Data Protection Regulation comes into force, currently expected in 2018. This will include penalties of up to 5% of worldwide turnover or €100m, whichever is bigger, for breaches.

In the FI Sector, the FCA provides guidance and enforces ongoing obligations on firms to identify cyber risks, update their fraud prevention systems and scrutinise transactions. It will be interesting to see if the FCA will also exercise its enforcement powers to sanction firms whose systems are found to be inadequate.

D&O policies also might not be immune from the impact of cyber attacks. Following the 2013 cyber attack on US retail giant Target, shareholders sued the directors and officers alleging that the directors knew or ought to have known that a cyber attack would cause substantial financial and reputational damage to the company and that the directors failed to take actions that would have prevented the cyber attack. These proceedings are continuing but we expect that the trend for shareholder claims and consequent claims under D&O policies will follow.


Given the difficulties of tracing stolen funds and presuming that the fraudster cannot be found (or is impecunious) then an option to recover financial losses might be to claim against the bank. Such a claim would be on the basis that the transfer to the fraudster was not authorised, breached the bank's mandate and/ or was negligent.

Since 2009, payments have been regulated by the FCA and the Payment Services Regulations ("PSR"). If the payer did not consent to a payment via the agreed procedure then the transaction is considered to be unauthorised and, under PSR 61, the bank or payment service provider ("PSP") is obliged to refund the full amount to the payer.

That said, if a payment was made in line with the agreed process then it is deemed to have been authorised, even if the payer was tricked into making the payment or disclosing confidential security information.

However, if it appears that the PSR has been negligent or not followed its own fraud prevention or notification processes then a recovery action against a PSP might still succeed.

Prevention and due diligence

The sophistication and ever-changing nature of fraudsters' methods makes preventing cyber attacks a constant challenge for insurers and their insureds.

Insurers can first start to manage that challenge via the policy's proposal form. This should be used to obtain information about an insured's cyber risk-profile, including its use of security systems, cyber attack testing and incident response plans.

Obtaining good due diligence from the proposal form combined with imposing appropriate minimum cyber-security standards puts insureds in a better position to prevent cyber attacks and avoid expensive claims. Given the financial, regulatory and reputational implications of a cyber attack, it is undoubtedly in the interests of all to be vigilant and prioritise investing in preventing cyber attacks.

Guidance for directors of companies fully or partly owned by the public sector

On 10 February 2016, the Cabinet Office published guidance for directors of companies fully or partly owned by the public sector, a summary of which is as follows.

Directors' responsibilities and duties

In addition to responsibilities under the Companies Act 2006 (CA 2006), directors appointed by a public sector body must also continue to act in accordance with other applicable legislation, relevant civil service and public sector guidelines, which include directions on managing public money and standards for conduct in public life.

Potential conflicts of interest

The guidance notes that a conflict of interest might occur where:

  1. There are conflicts between different professional duties, for example, where a director is a member of two boards, or where a director has competing loyalties to their public sector employer and the commercial venture to which they have been appointed director or
  2. There are conflicts between director duties and private interests, such as a financial or family interest

The duties in section 175 CA 2006 apply to all directors and all conflicts must be disclosed to the board and, in the case of directors who are public servants, to line managers. Failure to acknowledge and report the conflict may have significant consequences.

Directors' liability and indemnity protection.

The guidance refers to the chapter in CA 2006 which deals with directors' liabilities and notes that "where there is a publicly owned company, Government will decide on a case by case basis, with regard to the Companies Act 2006 whether it will offer any kind of indemnity to Directors."

The full guidance can be found on the government's website.

Cyber Attacks And Insurance: Prevention Better Than The Cure?

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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