New York - The recent string of sensational hacker attacks
is driving companies to seek "cyberinsurance" worth hundreds of
millions of dollars, even though many policies can still leave them exposed to
Companies are having to enhance not just their information
technology practices but also their human resources and employee training
functions just to get adequate coverage against intrusion - and in some cases,
they are also accepting deductibles in the tens of millions of dollars.
Insurers and insurance brokers say demand is soaring, as
companies try to protect themselves against civil suits and the potential for
fines by governments and regulators, but also as they seek help paying for
mundane costs like "sorry letters" to customers.
"When you have a catastrophic type of data breach then
yes ... the phones ring off the hook," said Kevin Kalinich, co-national
managing director of the professional risk group at insurance broker Aon Corp.
In the past few weeks, the US Senate, the International
Monetary Fund, defense contractor Lockheed Martin, banking concern Citigroup,
technology giant Google and consumer electronics group Sony are among those who
have disclosed hacker attacks of various kinds.
In the days after Sony disclosed it had more than 100
million customer accounts compromised, the company said its insurance would
help cover the costs of fixing its systems and providing identity theft
services to account holders.
That helped drum up business for the still-growing segment
of the industry, and the demand has only intensified since a more recent breach
at Citigroup, which security experts said was the largest direct attack on a US
bank to date.
Some insurers say this is the moment the industry has been
waiting for as the tide of bad news becomes so overwhelming that customers have
no choice but to seek coverage. On Tuesday, Travelers became the latest insurer
to launch a package of policies covering various fraud and expense liabilities.
Aon's Kalinich said fewer than five percent of data breaches
lead to costs of more than $20m, and yet more and more companies are seeking to
be insured for that and more to protect themselves against the shifting risk.
Large customers are going to extremes, taking out coverage
for data breach liabilities of as much as $200m, while also taking $25m deductibles to keep their premiums down.
As with any kind of insurance, data breach policies carry
all sorts of exclusions that put the onus on the company.
Some, for example, exclude coverage for any incident that
involves an unencrypted laptop. In other cases, insurers say, coverage can be
voided if regular software updates are not downloaded or if employees do not
change their passwords periodically.
"Insurers are all looking for good risks, whether it is
a fire insurance company that wants a building that is sprinklered and doesn't
have oily rags laying around - this is the equivalent in the IT area. They want
good systems, they want good protection, they want good risk," said Don
Glazier, a principal at Integro Insurance Brokers in Chicago.
Given that the average data breach cost $7.2m last year,
according to a March study from the Ponemon Institute, hundreds of millions of
dollars of cover may seem extreme. But with the scale and scope of hacking
attacks growing daily, some companies can not be cautious enough.
Of course, the risk they face is a moving target, both for
them and for the insurance companies. After 10 years of writing policies,
industry experts say a consensus is building on what "cyberinsurance"
Generally, such policies now cover third-party liability,
like suits filed by customers whose accounts have been hacked; direct costs
like notification letters sent to affected customers; and, increasingly, fines
and penalties associated with data breaches.
What is missing from the equation, however, is standards.
Insurers can try to standardise the risk from hacking attacks, but
cyberinsurance is still not auto insurance, where carriers can make their
customers wear seat belts as a condition of a policy.
"One day the industry will actually be so robust that
... we'll have the leverage to actually create standards," said Tracey
Vispoli, a senior vice president at insurer Chubb. "We're not there yet
but that to me is a win to the industry."
Consumers are increasingly finding themselves less protected
and more liable as well. Courts are siding with vendors and not their customers
in some cases when it comes to the misuse of data.
In late May, a US magistrate judge in Maine recommended the
district court throw out a lawsuit filed against a bank by one of its
customers, a construction company.
The customer had suffered a series of unauthorised
withdrawals from its account after some employees' computers were infected with
a virus that captured their banking information. The company sued the bank on
the grounds that the bank's systems should have caught the clearly unusual
Lawyers who litigate cyberrisk say in the current
environment, many companies are only looking out for themselves, not for their
customers or suppliers.
"Most companies are looking more for first party
(coverage), they're worried more about their own systems," said Richard
Bortnick, an attorney with Cozen O'Connor and the publisher of the digital law
"Not all companies deem it necessary to provide
notification of a cyberbreach or incident for reasons of reputation and other
marketing-related bases," he said.