How Can That Not Be Covered? I Have Cyber Insurance!

Editor’s Note: The author of this post practices D&O and Management Liability Insurance law at Holland & Knight in Washington, D.C.

By Thomas H. Bentz, Jr., Holland & Knight, Partner

Many companies purchase cyber liability insurance to help cover their risk of computer fraud or attack. However, if not properly negotiated, some cyber insurance policies may not fully protect against all risks.

A common and potentially costly issue in many insurance policies is a lack of coverage for “voluntary transfers” (i.e., where the insured is tricked into voluntarily transferring money to a third party). Coverage for this type of fraud is generally available but insureds need to ask for it.

In the past few years, many companies have purchased cyber liability insurance to help cover their risk of computer fraud or attack. However, if not properly negotiated, some cyber insurance policies may not fully protect against all risks.

One of the more common and potentially costly coverage issues is the lack of coverage for “voluntary transfers.” There are many variations on this scam, but typically the chief financial officer (CFO) receives what appears to be a real email from a client or vendor asking the CFO to wire money to an account. The email often looks completely legitimate, but instead is the result of a hacker breaking into the client’s or vendor’s system, allowing the hacker to send messages from the client’s or vendor’s actual email address.

Only after wiring the money (often multiple transfers and increasingly larger sums) does the CFO learn that he or she has become a victim of fraud.

We have seen this scam hit companies large and small – and across several industries, including banks, manufacturers, retailers, airlines and even several law firms. Nearly without fail, the companies are surprised to learn that they are not insured against this type of loss because both their cyber and crime policies contain an exclusion that states that there is no coverage for a “voluntary parting” (i.e., where the insured voluntarily transfers money to a third party). Insurers argue that this exclusion applies even though the CFO was tricked into wiring the money.1

One of the most frustrating and unfortunate things about this situation is that coverage for this type of social engineering fraud is generally available upon request by endorsement. Moreover, the coverage generally is available for a nominal, additional premium. Unfortunately, most companies do not have this coverage because they simply do not know to ask for it.

What You Can Do Now to Protect Your Company

1. Determine whether you are covered for social engineering fraud today and, if not, buy the coverage.

As noted above, social engineering fraud coverage is generally available upon request and without a significant additional premium. This type of fraud is not going away, and even the strongest cyber-controls can be breached. If you cannot stop the fraud, at least you can minimize its effect. Determine whether your cyber liability or crime policies provide coverage that will protect you against social engineering fraud and, if not, determine whether the coverage is available and appropriate to protect the company.

• 2. Review other potential gaps in your cyber liability insurance program.

Because there is no standard cyber liability insurance form, coverage offered by one insurer may (and often does) differ dramatically from that offered by another insurer. There is little agreement between insurers on what should be covered, when the coverage should be triggered or even how basic terms should be defined. These differences make understanding what is and is not covered very difficult. It also makes it nearly impossible (or at least foolish) to purchase coverage based on price alone.

Companies are well advised to work with experienced and knowledgeable insurance counsel who understands what coverages are available in the marketplace and the types of claims being made on the policies.

• 3. Understand how your cyber insurance coverage works with your other insurance policies.

Cyber liability policies are not the only place where an insured might find coverage for a cyber event. Depending on the losses and/or allegations, several other types of insurance policies may also respond to a cyber-related claim.

Understanding where there may be coverage for a claim as well as how the various lines of coverage will work together in the event of a claim is imperative to a strong insurance program. Coordinating limits, retentions/deductibles and other coverage requirements may be difficult. In addition, because multiple types of policies may apply, there may be problems coordinating defense counsel, such as different insurers not approving of a firm required by another insurer or a disagreement between insurers about reasonable hourly rates). The claims made requirement of many policies may also present problems for insureds in the event of a claim. Insureds are well advised to coordinate their coverage in advance so they are not attempting to resolve these issues for the first time after a cyber event has occurred.

Considerations and Next Steps for Insureds

Cyber insurance is still evolving. Insureds must take the time to learn what coverage they need and what coverage they have to ensure they are adequately protected. In addition, insureds should have a plan in place to deal with the complexity of having multiple lines of coverage that may apply to a single cyber event. A little preparation can avoid significant problems with coverage in the event of a claim.