Why Do Cyber Insurance Claims Get Rejected?

March 19, 2024

1. Inadequate Security Measures One primary reason claims are denied is the insured’s failure to implement adequate security measures. Insurers often stipulate specific security standards in the policy, such as regular software updates, use of firewalls, and multi-factor authentication. If an audit reveals that a breach occurred due to non-compliance with these required safeguards, insurers may reject the claim.

2. Misrepresentation of Risk During the application process, businesses must accurately disclose their cybersecurity practices and risk exposures. Misrepresentation or failure to disclose key information can lead to denied claims. For example, if a company underreports the amount of sensitive data it holds or overstates its security measures, an insurer may use this discrepancy as grounds for rejection.

3. Claims for Excluded Incidents Cybersecurity insurance policies typically come with exclusions; not all cyber incidents are covered. Common exclusions include acts of war, infrastructure failure, and sometimes, specific types of cyberattacks like state-sponsored attacks or those involving negligent insider actions. Businesses must thoroughly understand these exclusions to avoid surprises when a claim is filed.

4. Violations of Policy Terms Claims can be denied if the insured violates terms and conditions of the policy. This can include failing to notify the insurer in a timely manner after a breach or not following the prescribed procedures during the incident response. Delayed notifications can hinder the insurer’s ability to mitigate damages, leading to claim denial.

5. Insufficient Documentation Insufficient documentation of the cybersecurity incident and its impacts can also lead to claim rejections. Insurers require detailed records of the attack’s nature, the response actions taken, and the damages incurred to process a claim. Inadequate documentation often results in disputes over claim validity and value.

6. Prior Knowledge If a business was aware of vulnerabilities or previous breaches before obtaining a policy and did not take adequate measures to address them, any claim arising from these known issues could be denied. This is often stipulated as the “prior knowledge” exclusion.

7. Direct vs. Indirect Losses Some policies differentiate between direct losses (money stolen due to a breach) and indirect losses (e.g., business interruption). If a claim is filed for a loss not explicitly covered under the policy’s terms, it will likely be rejected.

Conclusion The road to a successful cybersecurity insurance claim is paved with diligence, transparency, and compliance. Businesses must invest time in understanding the breadth and limitations of their policies, ensure accurate and full disclosure of their cyber risk profile, and maintain rigorous cybersecurity practices. It is also advisable to regularly review and update these practices and the corresponding insurance coverage in response to evolving cyber threats. This proactive approach not only minimizes the risk of claim rejection but also fortifies the business’s overall cybersecurity posture, protecting its assets, reputation, and future.