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Exclusions in Cyber Liability Insurance: Closing Security Gaps

With the increasing prevalence of cyber attacks and data breaches, businesses are recognizing the need for cyber liability insurance to protect themselves from the financial and reputational damages that can result from such incidents. Cyber liability insurance provides coverage for a range of risks, including data breaches, network security failures, and cyber extortion. However, it is important for businesses to understand that not all cyber liability insurance policies are created equal. Many policies contain exclusions that can leave significant security gaps, potentially leaving businesses vulnerable to financial loss. In this article, we will explore some common exclusions in cyber liability insurance and discuss strategies for closing these security gaps.

1. Exclusion of Known Vulnerabilities

One common exclusion in cyber liability insurance policies is the exclusion of known vulnerabilities. Known vulnerabilities refer to weaknesses or flaws in a company’s computer systems or software that have been identified by the company or by external sources, such as security researchers or software vendors. These vulnerabilities can be exploited by cyber criminals to gain unauthorized access to a company’s systems or to steal sensitive data.

While it is important for businesses to promptly address known vulnerabilities and implement appropriate security measures, the exclusion of known vulnerabilities in cyber liability insurance policies can leave businesses exposed to financial loss if a cyber attack occurs as a result of an unpatched vulnerability. For example, if a company fails to install a critical security patch for a known vulnerability and subsequently suffers a data breach, their cyber liability insurance policy may not cover the resulting damages.

To close this security gap, businesses should carefully review the exclusions in their cyber liability insurance policies and consider negotiating the removal or modification of the known vulnerabilities exclusion. Alternatively, businesses can take proactive measures to minimize the risk of known vulnerabilities by implementing a robust patch management process and regularly updating their systems and software.

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2. Exclusion of Social Engineering Attacks

Social engineering attacks, such as phishing and impersonation scams, are a common tactic used by cyber criminals to trick individuals into revealing sensitive information or performing actions that can compromise the security of a company’s systems. These attacks often exploit human vulnerabilities, such as trust and curiosity, rather than technical vulnerabilities.

Unfortunately, many cyber liability insurance policies exclude coverage for losses resulting from social engineering attacks. This exclusion can leave businesses vulnerable to financial loss if an employee falls victim to a phishing email or a fraudulent request for sensitive information.

To address this security gap, businesses should consider purchasing a separate social engineering insurance policy or adding a social engineering endorsement to their existing cyber liability insurance policy. These policies provide coverage for losses resulting from social engineering attacks, including financial losses due to fraudulent wire transfers or unauthorized disclosure of sensitive information.

3. Exclusion of Acts of War or Terrorism

Acts of war or terrorism can have devastating consequences for businesses, including cyber attacks that target critical infrastructure or disrupt essential services. However, many cyber liability insurance policies contain exclusions for losses resulting from acts of war or terrorism.

This exclusion can leave businesses exposed to financial loss if they suffer a cyber attack that is deemed to be an act of war or terrorism. For example, if a company’s systems are compromised by a state-sponsored cyber attack, their cyber liability insurance policy may not cover the resulting damages.

To mitigate this risk, businesses should carefully review the exclusions in their cyber liability insurance policies and consider negotiating the removal or modification of the acts of war or terrorism exclusion. Alternatively, businesses can explore the option of purchasing standalone cyber war insurance, which provides coverage for losses resulting from cyber attacks that are considered acts of war or terrorism.

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4. Exclusion of Intentional Acts

Another common exclusion in cyber liability insurance policies is the exclusion of intentional acts. This exclusion typically applies to losses that result from intentional acts or omissions by the insured or their employees. For example, if an employee intentionally discloses sensitive customer information, the resulting damages may not be covered by the cyber liability insurance policy.

While this exclusion is intended to prevent fraudulent or malicious activities from being covered by the insurance policy, it can leave businesses vulnerable to financial loss if an employee intentionally causes a data breach or engages in other harmful activities.

To address this security gap, businesses should consider negotiating the removal or modification of the intentional acts exclusion in their cyber liability insurance policies. Alternatively, businesses can implement strict security protocols and employee training programs to minimize the risk of intentional acts that could lead to a cyber incident.

5. Exclusion of Third-Party Vendors

Many businesses rely on third-party vendors to provide essential services or to store and process sensitive data. However, the actions or omissions of these vendors can pose significant risks to the security of a company’s systems and data. Unfortunately, many cyber liability insurance policies exclude coverage for losses resulting from the actions or omissions of third-party vendors.

This exclusion can leave businesses exposed to financial loss if a data breach or other cyber incident occurs as a result of a vendor’s negligence or security failure. For example, if a company’s customer data is compromised due to a security vulnerability in a vendor’s system, their cyber liability insurance policy may not cover the resulting damages.

To address this security gap, businesses should carefully review the exclusions in their cyber liability insurance policies and consider negotiating the removal or modification of the third-party vendor exclusion. Alternatively, businesses can implement a robust vendor management program to ensure that their vendors have appropriate security measures in place and to minimize the risk of a cyber incident caused by a vendor’s actions or omissions.

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Summary

Cyber liability insurance is an important tool for businesses to protect themselves from the financial and reputational damages that can result from cyber attacks and data breaches. However, it is crucial for businesses to carefully review the exclusions in their cyber liability insurance policies to ensure that they are adequately covered. By addressing common exclusions, such as known vulnerabilities, social engineering attacks, acts of war or terrorism, intentional acts, and third-party vendors, businesses can close security gaps and minimize their exposure to financial loss. Additionally, businesses should consider implementing robust security measures, such as patch management processes, employee training programs, and vendor management programs, to further enhance their cyber resilience.

In conclusion, cyber liability insurance is an essential component of a comprehensive cybersecurity strategy. However, businesses must be aware of the exclusions in their policies and take proactive steps to close security gaps. By understanding the potential risks and vulnerabilities, businesses can make informed decisions about their cyber liability insurance coverage and implement effective risk mitigation strategies.

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