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Cyber Liability - Watch those Indemnity Periods!

Cyber Liability Insurance remains a relatively new insurance product and as with all new insurance products it is when claims start to appear that the cover variations can be evaluated.  

Written on 25th October 2018

Cyber Liability Insurance remains a relatively new insurance product and as with all new insurance products it is when claims start to appear that the cover variations can be evaluated.  

Whilst traditional Business Interruption policies connected to property damage typically offer a 12, 24 or 36 months Indemnity Period as standard, many Cyber Liability Insurance extensions to Commercial Combined policies offer only three or six months.

There seems to be a perception that a system outage caused by a cyber event will be shorter lived than the effects of a major property damage loss. However, it is becoming increasingly clear that the operational impact of a cyber event can be felt for much longer than a six month period. In addition, any cyber-attack that impairs a business’s ability to perform a service to their clients over the longer term can result in customer dissatisfaction and ultimately significant financial loss.

Leading Cyber Liability underwriter CFC Underwriting references a recent claim to demonstrate this fact.  The company concerned was the victim of an increasingly common ransomware attack that disabled their server and a number of computer workstations. Unfortunately, their data back-ups were also kept on this server, meaning that these were also impacted by the ransomware and therefore rendered inaccessible.  Whilst their IT service provider fixed the problem and wiped the ransomware from the server, allowing the organisation to regain access within a couple of weeks, they faced a number of complications.

Their main software programme used for producing their customers’ financial reports had been in use since the business was founded over two decades ago and included bespoke features that had been designed at the outset to help deal with each customer’s data and reporting requirements. The software was so archaic that it wasn’t possible to restore it to its original functionality and it was no longer capable of producing the financial reports in an effective manner.

It took over four months to get the new software system ready, during which time monthly financial reports had to be manually prepared for their clients.  This was a time-consuming process that resulted in delays to the service and  the reports that were produced were of a lower quality than their customers had come to expect. The sub-standard reports led to dissatisfaction with the service and as a direct result of the cyber-attack, seven customers chose to cancel their annual contracts with the insured and take their business elsewhere. In addition, a further four customers requested rebates from the insured for those months in which only lower quality reports had been produced.

This incident demonstrates the value of longer indemnity periods. The full reputational impact of this cyber event was not felt until after the six month indemnity period – which is typical of what the team at Franklands finds on many cyber insurance policies. Businesses that receive their income on a contractual basis could be more exposed to business interruption losses, as the cancellation of monthly, or annual contracts could very quickly result in sizeable financial losses being incurred. Accordingly, businesses that receive their revenue in this way should consider factoring this in when selecting an appropriate indemnity period for their policy.

Many businesses seem to rely on an extension of another type of insurance policy for cyber liability protection.  However, as the market matures it is vindicating our preferred approach at Frankland’s which recognises the benefits of a stand-alone cyber liability insurance policy with valuable cover extensions.  For more information please speak to your usual Franklands adviser.   

Source: CFC Underwriting (compatible with Internet Explorer only)

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