As cyberattacks and data breaches continue to surge, more organizations are turning to cyber insurance as part of their risk management plans. However, as insurance claims rise and the average cost of a security breach exceeds $4 million, insurers are facing higher risks and costs. This has led underwriters to become more cautious, often limiting coverage, tightening policy terms, and introducing additional exclusions.
These limitations and exclusions provide insurers with greater leverage to delay claims processing, demand more detailed information, or even deny claims. Understanding the key reasons behind claim rejections is crucial for organizations looking to avoid these pitfalls.
Top Reasons Cyber Insurance Claims Are Denied
According to research from Delinia, if insurers identify any of these five issues during a post-event investigation, they are likely to void coverage:
- Lack of Security Measures
Insurers typically require policyholders to implement a variety of cybersecurity controls. These may include multi-factor authentication, endpoint detection, email and web security, vulnerability management, system logging and monitoring, regular backups, and staff security awareness training. If the investigation reveals that these mandated controls were not properly implemented or maintained, the insurer can reject the claim outright. - Human Error
If the security incident resulted from human error—such as misconfigured security settings, unaddressed vulnerabilities, lost or stolen employee devices, or successful social engineering attacks—insurers can argue that the breach could have been prevented, leading to a denial of coverage. - Insider Threats
Claims may be denied if the insurer discovers that the breach involved malicious activity from within the organization, such as unauthorized access or cyber extortion initiated by an insider. Attacks originating from third-party vendors, often referred to as supply chain attacks, are also typically excluded from standard cyber insurance policies. - Acts of War
Cyberattacks linked to acts of war or national conflicts are often grounds for claim denial. The high-profile Merck case is a notable example. Additionally, since many attackers go to great lengths to hide their identities, it can be difficult to trace the origin of the attack, complicating the claims process. Insurers may invoke exclusions for "acts of war" or "acts of terrorism" to deny or limit coverage. - Failure to Meet Policy Requirements
Similar to the concept of pre-existing medical conditions, insurers may void coverage if the policyholder failed to disclose critical information during the application process or did not adhere to key policy terms. This could include not reporting incidents in a timely manner or neglecting to fix known vulnerabilities. Such oversights can result in the denial of claims.
How to Avoid Cyber Insurance Claim Denials
Organizations can take several steps to ensure they maintain proper coverage and reduce the likelihood of claim denial:
- Understand Policy Inclusions and Exclusions
Carefully review the fine print of your policy to fully understand what is covered, what is excluded, and any specific requirements or mandates. Consider consulting with an expert to ensure you're in compliance with all terms and adopting necessary tools and procedures. - Focus on Controllable Factors
While cyberattacks themselves are unpredictable, organizations have control over their cybersecurity programs. Prioritize building a strong defense system that includes effective tools, skilled personnel, clear processes, and a solid security culture. - Comprehensive Employee Training
Human error is a leading cause of security breaches. Organizations should invest in a mix of in-person and virtual training, phishing simulation exercises, and clear policies to ensure employees understand their role in maintaining security. - Mitigate Insider Risks
Monitor user activity closely and implement phishing-resistant multi-factor authentication (MFA). Adopting the Principle of Least Privilege (PoLP) and using multi-layered security controls can help minimize the risk of insider threats. Additionally, using AI-based tools can reduce the likelihood of human errors and misconfigurations.
Conclusion
In today's digital landscape, cyber insurance has become an essential risk transfer mechanism, providing a safety net in the event of significant cyber incidents. However, insurance is no substitute for a robust cybersecurity program. It cannot restore intangible assets such as trust or reputation. Organizations must prioritize a defense-in-depth approach, incorporating multiple layers of security controls, comprehensive policies, and continuous employee training. This proactive stance will reduce the likelihood of cyber incidents and ensure compliance with insurance mandates and industry best practices.
