Data Breach Insurance

Data breach insurance encompasses various policies designed to shield companies from financial losses arising due to a data breach. These policies include cyber liability insurance and technology errors and omissions insurance (tech E&O).

Why is data breach insurance crucial?

With security breaches making headlines, IT consultants are increasingly recognizing the role of small business insurance in managing financial risks associated with cyber threats. The significance of this data breach insurance coverage is underscored by the substantial costs associated with data breaches, reaching an all-time high of $4.35 million in 2022, according to IBM. Given the financial burden, few small business owners can afford to bear such costs independently, prompting IT professionals to seek insurance for mitigating their data breach risks. Cyber liability insurance, often bundled with errors and omissions insurance in the tech industry, proves to be a vital component in addressing the financial implications of a data breach.

Who should contemplate data breach insurance coverage?

Small businesses, lacking robust defenses against cyber threats, emerge as appealing targets for cybercriminals, making them susceptible to data breaches, ransomware, and other cybercrimes. Three specific categories of small businesses stand to gain from data breach insurance:

1. Businesses that store customer data. Any business handling personal identifiable information (PII), including online retailers and accounting firms, is vulnerable to data breaches. PII encompasses credit card details, Social Security numbers, bank account information, or any data that can identify an individual.
2. Enterprises dealing with personal health information. This pertains to businesses within the healthcare sector, including medical offices, chiropractors, and physical therapists. Their sensitive data may encompass details like birth dates, Social Security numbers, email addresses, and medical record numbers.
3. Any IT or technology-related business. This category includes professionals engaged in network cybersecurity, software development, web hosting, or app development. In essence, if you are involved in technology-related services, data breach insurance is likely a necessity.

What kinds of data breaches are included in the coverage?

Data breaches manifest in various forms and scenarios. When the term “data breach” is mentioned, the common association is often with hackers. However, cyber incidents encompass a broad spectrum, including:

1. Malware attacks
2. Malfunctions
3. Insider data breaches
4. Data theft by employees
5. Ransomware attacks
6. Employee mistakes
7. Phishing attacks

Cyber liability insurance provides coverage for both unintentional data breaches and situations where a malicious actor specifically targets your business or a client.

What does first-party cyber liability insurance entail?

First-party cyber liability insurance is designed to cover a variety of expenses that may arise in the event of a breach on your network. In instances where your own data is compromised, this policy provides financial assistance for:

1. Customer notification
2. Hiring security experts to investigate the breach
3. Establishing call centers to manage customer inquiries
4. Engaging crisis management teams
5. Implementing anti-fraud protection for individuals affected by the data compromise

Businesses that store significant amounts of data or handle sensitive information, particularly retailers, derive substantial benefits from first-party coverage. Moreover, if your business involves storing customer data on your network, such as providing data mining or business intelligence services, carrying first-party data breach insurance is advantageous. This coverage becomes crucial in mitigating the substantial costs associated with notifying clients, covering expenses for credit monitoring services, and addressing potential state fines resulting from a network breach.

What does third-party cyber liability insurance entail?

Third-party cyber liability insurance is designed to cover the expenses associated with a lawsuit if a client’s data is compromised, and they allege that a professional oversight or error on your part led to the breach.

This form of insurance is particularly popular among IT companies, primarily concerned with securing their clients’ data, often stored on clients’ servers or in the cloud. For instance, IT consultants typically have minimal data on their own network that requires protection, making third-party cyber liability insurance the logical choice. Many IT businesses include third-party coverage in an errors and omissions insurance policy (tech E&O), where a data breach lawsuit is treated similarly to any other E&O lawsuit.

Consider the following example to illustrate how third-party cyber liability insurance aids IT consultants in managing the risk of client lawsuits:

Suppose you assist a client in transitioning to a new ERP platform, and the software experiences a security breach. The client files a lawsuit, asserting that you failed to configure it properly and recommended insecure software.

In any lawsuit, expenses can be substantial, but in a data breach lawsuit, you may be responsible for:

1. Attorney’s fees
2. Court costs
3. Settlement
4. Judgment (if you lose in court)

Third-party cyber liability insurance steps in to cover these costs, shielding your business from the potential financial impact of a successful data breach lawsuit on your overall financial health.

Data Breach Insurance: Cost

The cost of data breach insurance varies depending on the specifics of each business, but it is generally affordable when compared to the potential expenses associated with a data breach. There are three main ways to integrate data breach insurance into your risk management strategy:

1. Adding a data breach rider to your general liability policy: This is the most economical option, typically adding a modest amount to your general liability insurance premium, which averages around $42 per month.
2. Purchasing a standalone cyber liability insurance policy: This option, on average, costs around $145 per month.
3. Bundling cyber coverage with E&O insurance: This combines coverage and averages to approximately $61 per month.

Alongside the type of coverage you choose, several factors impact your premium, such as policy limits, the volume of sensitive data your company handles, business size and revenue, as well as your claims history.

What is a data breach insurance rider to a general liability policy or BOP?

A data breach insurance rider can be added to your general liability insurance or business owner’s policy (BOP). This option is suitable for businesses with lower cyber risks and limited storage of sensitive information. However, it’s important to note that data breach riders usually come with smaller coverage limits compared to standalone policies.

If Uninsured, How much would a Data Breach Cost?

In the absence of appropriate insurance and risk mitigation measures, a data breach has the potential to inflict significant financial harm on your business and tarnish its reputation. According to an IBM study, the average cost of a data breach is around $242 per stolen record. Depending on the volume of customer information stored by your company, these costs can escalate rapidly. A data breach insurance policy is designed to address these expenses, facilitating a return to normal business operations.

The cost will vary based on multiple factors, including:

1. The number of people impacted.
2. Expenses related to identifying and resolving the breach’s cause.
3. Cyber extortion demands, if any.
4. Duration of business interruption.
5. Loss of business resulting from damage to reputation.
6. Regulatory fines and penalties.

What is typically excluded from data breach insurance coverage?

In most instances, data breach insurance does not extend to cover third-party data theft. This means that if your business inadvertently causes a breach in someone else’s data, it won’t be covered. The insurance primarily addresses the financial losses incurred by your business in the aftermath of a cyberattack.

Additional exclusions from data breach coverage include:

1. Data loss resulting from accidental damage: A data breach policy does not provide coverage for data loss resulting from physical damage to a network or storage device. To address this, an electronic data liability policy can be considered to broaden property damage coverage, encompassing data loss due to accidental damage.
2. Data loss caused by natural occurrences: In cases where sensitive data is lost due to a natural disaster, electronic data processing (EDP) insurance is required. EDP insurance offers protection for data loss attributable to your equipment, such as computers and backup systems.

It is advisable to thoroughly review your insurance policy and scrutinize the details to gain a comprehensive understanding of what is covered and excluded by your data breach insurance policy.

How much coverage does cyber liability insurance provide in the event of a data breach?

Cyber liability insurance serves as a protective measure for companies facing cyberattacks and data breaches. It aids in covering the expenses related to responding to, investigating, and mitigating the damage caused by such incidents.

Many small tech companies opt for a cyber liability insurance policy with specific coverage details, such as a $1 million per occurrence limit, a $1 million aggregate limit, and a $2,500 deductible. This structure is designed to provide ample protection, particularly if a data breach results in an approximate cost of $250 per client or customer record. For businesses managing a few thousand records, the chosen coverage limits should be sufficient.

Cyber liability insurance policies generally come with two limits, typically ranging from $1 million to $5 million:

1. Per-occurrence limit: This represents the maximum amount the insurer will pay for a single claim while the policy is in effect.
2. Aggregate limit: Throughout the policy’s duration, usually one year, this is the maximum amount the insurer will pay to cover all claims.

What is technology errors and omissions insurance?

Technology errors and omissions insurance, commonly known as Tech E&O insurance, is a comprehensive policy chosen by many IT businesses. This insurance option merges third-party cyber liability coverage with errors and omissions insurance, often at a discounted rate.

Tech E&O insurance is designed to shield businesses from lawsuits pertaining to the quality and delivery of their services. The coverage extends to various liability scenarios, including:

1. Client data breaches and cyberattacks
2. Errors and oversights in work
3. Undelivered services
4. Missed deadlines
5. Accusations of professional negligence

By combining these aspects into a single policy, Tech E&O insurance provides a robust defense against a range of potential liabilities that IT businesses may encounter in the course of their operations.

Additional Coverages to Consider:

Business Owners Insurance (BOP)

Providing comprehensive coverage, BOP is designed to safeguard your business against various risks, including property damage, liability, and business interruption. It offers a holistic approach to business protection.

General Liability Insurance

Essential for trucking operations, general liability insurance covers bodily injury, property damage, and related liabilities. It shields your business from legal and financial risks associated with accidents or incidents involving your vehicles.

Commercial Umbrella Insurance

Offering an additional layer of liability protection beyond primary coverage limits, commercial umbrella insurance acts as a supplementary safeguard against catastrophic losses. It provides heightened security for unforeseen events.

Workers Compensation Insurance

Addressing the well-being of your workforce, workers compensation insurance ensures coverage for medical expenses and lost wages in the event of work-related injuries or illnesses. It is a crucial component for businesses with employees.

Errors & Omissions Insurance

Specifically tailored for professional services and advice, errors and omissions insurance shields your business from legal claims related to professional negligence or mistakes. It is vital for businesses offering specialized services.

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