For small businesses operating in an increasingly digital landscape, cyber threats are no longer hypothetical—they’re a constant concern. From phishing scams and ransomware attacks to accidental data breaches, the potential for financial loss and reputational harm is significant. As a result, more companies are turning to cyber insurance as a safeguard against these growing risks.
Cyber insurance policies can vary widely, and not all offer the same level of protection. Many business owners assume they’re fully covered—only to discover critical gaps when it’s too late. In this blog post, we’ll explain what cyber insurance typically covers, what it often doesn’t, and how to choose a policy that truly meets your business’s needs.
Why Is Cyber Insurance More Crucial Than Ever?
You don’t have to be a large corporation to catch the attention of hackers—in fact, small businesses are becoming increasingly frequent targets. According to the 2023 IBM Cost of a Data Breach Report, 43% of all cyberattacks now target small to mid-sized businesses. The financial impact of a cyber breach can be overwhelming, with smaller businesses facing average costs of up to $2.98 million. For a growing company, that kind of loss can be devastating.
In today’s environment, customers expect companies to safeguard their personal data, and regulators are enforcing data privacy laws more strictly than ever. A strong cyber insurance policy not only helps cover the financial impact of a breach but also supports compliance with regulations like GDPR, CCPA, and HIPAA—making it an essential layer of protection.
What Cyber Insurance Typically Covers
Having a comprehensive cyber insurance policy is key to shielding your business from the financial consequences of a cyber incident. These policies generally include two core components: first-party coverage and third-party liability coverage. Each serves a different purpose, offering protection tailored to your business’s specific risks and the nature of the cyber event. Here’s a closer look at what each type typically covers.
First-Party Coverage
First-party coverage is intended to protect your business directly in the event of a cyberattack or data breach. It helps cover the immediate financial losses and recovery expenses your company may face as a result of the incident.
Breach Response Costs
One of the primary aspects of first-party coverage is handling the costs associated with managing a breach. Following a cyberattack, your business will likely need to:
- Investigate how the breach happened and what was affected
- Get legal advice to stay compliant with laws and reporting rules
- Inform any customers whose data was exposed
- Offer credit monitoring if personal details were stolen
Business Interruption
Cyberattacks that lead to network outages or operational disruptions can cause substantial revenue loss. Business interruption coverage helps offset this impact by reimbursing lost income during the downtime, allowing you to concentrate on recovery without the added stress of maintaining daily cash flow.
Cyber Extortion and Ransomware
Ransomware attacks are becoming increasingly common and can cripple your business by encrypting critical data. Cyber extortion coverage is specifically designed to support businesses in these scenarios by covering:
- The cost of paying a ransom to cyber attackers.
- Hiring of professionals to negotiate with hackers to lower the ransom and recover data.
- The costs to restore access to files that were encrypted in the attack.
Data Restoration
A significant cyber incident can lead to the loss or corruption of vital business data. Data restoration coverage guarantees that your business can recover this data—either through backup systems or professional data recovery services—helping to reduce downtime and maintain smooth operations.
Reputation Management
After a cyberattack, restoring the trust of customers, partners, and investors is essential. Many cyber insurance policies now offer reputation management coverage, which typically includes:
- Hiring Public Relations (PR firms) to manage crisis communication, create statements, and mitigate any potential damage to your business’s reputation.
- Guidance on how to communicate with affected customers and stakeholders to maintain transparency.
Third-Party Liability Coverage
Third-party liability coverage safeguards your business against claims from external parties—like customers, vendors, or partners—affected by a cyber incident. When a breach or attack impacts others outside your organization, this coverage provides financial and legal protection.
Privacy Liability
This coverage protects your business in the event that sensitive customer data is lost, stolen, or exposed during a breach. It usually includes:
- Coverage for legal costs if you’re sued for mishandling personal data.
- It may also cover costs if a third party suffers losses due to your data breach.
Regulatory Defense
Cyber incidents frequently attract the attention of regulatory agencies like the Federal Trade Commission (FTC) or other industry-specific authorities. If your business faces investigations or fines for data protection violations, regulatory defense coverage can assist with:
- Coverage may help pay for fines or penalties imposed by a regulator for non-compliance.
- Mitigating the costs of defending your business against regulatory actions, which can be considerable.
Media Liability
If your business experiences a cyberattack that leads to online defamation, copyright violations, or the disclosure of sensitive information (like trade secrets), media liability coverage provides protection. This coverage includes:
- Defamation Claims – If a data breach leads to defamatory statements or online reputational damage, this policy helps cover the legal costs of defending the claims.
- Infringement Cases – If a cyberattack leads to intellectual property violations, media liability coverage provides the financial resources to address infringement claims.
Defense and Settlement Costs
If your company faces a lawsuit after a data breach or cyberattack, third-party liability coverage can assist with covering legal defense expenses. This may include:
- Paying for attorney fees in a data breach lawsuit.
- Covering settlement or judgment costs if your company is found liable.
Optional Riders and Custom Coverage
Many cyber insurance policies offer businesses the option to add extra coverage tailored to their specific risks or needs. These optional riders provide customized protection for the unique threats your business may encounter.
Social Engineering Fraud
Social engineering fraud is one of the most prevalent types of cybercrime today, involving phishing scams and other deceptive methods that manipulate employees into disclosing sensitive information, transferring money, or granting access to internal systems. Coverage for social engineering fraud helps safeguard your business against:
- Financial losses if an employee is tricked by a phishing scam.
- Financial losses through fraudulent transfers by attackers.
Hardware “Bricking”
Certain cyberattacks can cause physical harm to business devices, making them completely inoperable—a situation known as “bricking.” This rider covers the expenses related to repairing or replacing devices that have been irreparably damaged by a cyberattack.
Technology Errors and Omissions (E&O)
This coverage is particularly vital for technology service providers like IT companies or software developers. Technology E\&O safeguards businesses against claims arising from mistakes or malfunctions in the technology they deliver.
What Cyber Insurance Often Doesn’t Cover
Knowing what a cyber insurance policy excludes is just as crucial as understanding what it covers. Below are common gaps that many small business owners overlook, which can leave them vulnerable to specific risks.
Negligence and Poor Cyber Hygiene
Many insurance policies include strict requirements about your business’s cybersecurity measures. If your company doesn’t follow essential practices—like using firewalls, enabling Multi-Factor Authentication (MFA), or regularly updating software—your claim may be denied.
Pro Tip: Insurers are increasingly demanding evidence of strong cyber hygiene before approving a policy. Make sure you’re ready to demonstrate that you’ve conducted employee training, vulnerability assessments, and other proactive security steps.
Known or Ongoing Incidents
Cyber insurance won’t cover incidents that were already underway before your policy took effect. For instance, if a data breach or attack started prior to your coverage, the insurer won’t cover damages from those events. Similarly, if you were aware of a vulnerability but didn’t address it, your claim could be denied.
Pro Tip: Before buying insurance, make sure your systems are secure and promptly fix any known vulnerabilities.
Acts of War or State-Sponsored Attacks
Following high-profile cyberattacks like the NotPetya ransomware incident, many insurers have added a “war exclusion” clause. This means that if a cyberattack is linked to nation-state or government-backed actors, your policy may not cover the resulting damage. These types of attacks are often classified as acts of war and fall outside the coverage of standard commercial cyber insurance.
Pro Tip: Stay aware of these clauses and carefully review the terms of your policy.
Insider Threats
Cyber insurance usually excludes coverage for malicious acts committed by your own employees or contractors unless your policy explicitly includes “insider threat” protection. This can be a major vulnerability since internal actors often cause significant harm.
Pro Tip: If insider threats worry you, talk to your broker about adding specific coverage to protect against intentional harm caused by employees or contractors.
Reputational Harm or Future Lost Business
Although many cyber insurance policies include PR crisis management services, they typically don’t cover the long-term reputational harm or future financial losses that may follow a cyberattack. Consequences like lost customers or decreased sales due to damaged trust are usually not covered.
Pro Tip: If protecting your brand’s reputation is a top priority, consider adding extra coverage or crisis management services. Reputational damage can have lasting effects that go far beyond the immediate financial impact of a cyberattack.
How to Choose the Right Cyber Insurance Policy
Assess Your Business Risk
Start by evaluating your exposure:
- What types of data do you store? Customer, financial, and health data, all require different levels of protection.
- How reliant are you on digital tools or cloud platforms? If your business is heavily dependent on technology, you may need more extensive coverage for system failures or data breaches.
- Do third-party vendors have access to your systems? Vendors can be a potential weak point. Ensure they’re covered under your policy as well.
Your responses will help identify the areas that require the greatest protection. Reputational Harm or Future Lost Business
Ask the Right Questions
Before signing a policy, ask:
- Does this cover ransomware and social engineering fraud? These are growing threats that many businesses face, so it’s crucial to have specific coverage for these attacks.
- Are legal fees and regulatory penalties included? If your business faces a legal battle or must pay fines for a breach, you’ll want coverage for these costly expenses.
- What’s excluded and when? Understand the fine print to avoid surprises if you file a claim.
Get a Second Opinion
Don’t try to handle it by yourself. Collaborate with a cybersecurity expert or broker who knows both the technical and legal sides of cyber risk. They can guide you through the complexities of policy language and spot any coverage gaps. Having a professional in your corner ensures you’re properly protected and helps you make the best choice for your business.
Consider the Coverage Limits and Deductibles
Cyber insurance policies include specific coverage limits and deductibles. Make sure the coverage limit matches your business’s potential exposure—for instance, if a data breach could cost millions, your policy should reflect that amount. Also, review the deductible, which is the amount you’ll need to pay out of pocket before the insurance takes effect. Choose a deductible that your business can comfortably manage if an incident occurs.
Review Policy Renewal Terms and Adjustments
Cyber risks are always changing, and a policy that protects you now might not cover new threats in the future. Review your policy’s renewal terms and whether your insurer offers regular assessments to keep your coverage up to date. Make sure you have the flexibility to adjust your coverage limits and terms as your business grows and as cyber threats evolve. It’s essential that your policy evolves alongside your business needs.
Cyber insurance is a wise investment for any small business—but only if you truly understand what the policy covers. Being clear on what’s included and excluded can make all the difference between a quick recovery and a complete shutdown.
Make sure to evaluate your risks carefully, review the details thoroughly, and ask the important questions. Pair your insurance coverage with robust cybersecurity measures, and you’ll be prepared to face whatever challenges the digital world presents.
Article used with permission from The Technology Press.