The Pitfalls of Cybersecurity Insurance

The worst has happened.

A finance employee with access to perform wire transfers has had their password phished. Thieves have moved tens of thousands of dollars out of your bank accounts and converted it into cryptocurrency. There are many factors which will determine whether your cybersecurity insurance pays, or whether your business absorbs the full loss.

When you are caught in this situation, how you engage with your legal team, your IR team, and your cybersecurity insurance provider should already be built into your organization’s incident response policy and procedure. Unfortunately, most companies don’t realize how narrow and conditional cybersecurity insurance coverage really is until they need it.

A Common Scenario

These situations often play out in similar ways: within minutes of discovering the fraudulent transfer, you call the hotline provided by your cybersecurity insurer. A polished incident response team joins the bridge, collects details, and starts asking sharp questions. But as the situation unfolds, the tone changes. They point out that multi-factor authentication was not enabled for the finance employee, despite the fact that the third-party’s site used for wire transfers doesn’t support it. They highlight that your password policies weren’t aligned to the strictest standards they could find, despite the fact that the password was phished, not cracked. Soon it becomes clear they are building a case that your company failed to follow “minimum required practices.”

The insurer’s team manages the technical response, but their final report emphasizes these gaps. What the report doesn’t contain is a remediation plan, an evaluation of future risk and how to mitigate it, or anything you can actually use to solve real problems that you have.  Weeks later, your claim is denied on the basis that the loss stemmed from a policy exclusion. The stolen funds are gone. Your business faces not only the financial hit, but also the disruption of dealing with regulators, auditors, and the reputational fallout. Meanwhile, the insurer has successfully limited its liability while diverting your own staff’s resources from a total focus on incident response to a mix of response and gathering information to help the insurance company limit your claim.

Cybersecurity Coverage Today

Much like property owners in coastal states who discover that hurricane damage is excluded from their “comprehensive” policies, many organizations only learn after a breach that their cybersecurity insurance is riddled with carve-outs. Common exclusions include:

• State-sponsored hacking – Any incident attributed to a foreign government or “nation-state actor” is often excluded outright.

• Failure to follow security best practices – Not enforcing multi-factor authentication, skipping security updates, or lacking documented procedures can void coverage.

• Acts of employees or contractors – Insider threats are frequently excluded, even though they remain one of the leading causes of breaches.

• Social engineering and fraud – Business email compromise and wire transfer fraud may only be covered in narrow circumstances.

• Ransomware payouts – Some policies limit reimbursement for ransom payments, especially if cryptocurrency is involved.

Before finalizing your cybersecurity insurance, make sure your legal team has carefully reviewed and explained all exclusions. Understanding these restrictions before you sign is critical. When the incident hits, it’s too late to renegotiate the fine print.

Call Your Own Experts First

When an incident occurs, your first calls should not be to your insurance carrier. Call your legal counsel and your retained third-party incident response (IR) team. Bring them onto the call immediately. Once they are managing the response, then notify your insurance provider.

Why this order matters: your legal team ensures communications are protected and helps preserve your ability to recover damages. Your legal team will also work to ensure you are compliant with the various legal privacy regimes.  Your independent IR team works for you, not for the insurer, and will act in your best interest, protecting your company and minimizing the damage.

Their Incident Response Team Isn’t Your Team

Most cybersecurity insurance providers advertise “rapid response teams” you can access during a crisis. The catch? Those teams ultimately work for the insurer, not for you.

Much like health insurers use prior authorizations to delay or deny care, cybersecurity insurers use their IR teams to reduce their liability. Their goal is not to fully remediate your incident or maximize your recovery. These teams are incentivized to minimize payouts, sometimes by shifting blame back onto your organization or arguing that exclusions apply.

No insurance company spends money out of goodwill. Their response teams serve the insurer’s interests first.

Conclusion

The decisions you make in the first hours of a cyber incident can determine whether your insurance policy pays, whether you face a costly lawsuit against your provider, or whether you suffer a loss that threatens your business.

Cybersecurity insurance can be part of your risk management plan—but it cannot replace preparation, independent expertise, and disciplined incident response. Treat it as a financial backstop, not a rescue plan.