Why Cyber Insurance for Hedge Funds is a Good Idea.
Cyber insurance and cyber related losses are constantly in the news, but few hedge fund managers really understand what this form of insurance is really all about and why purchasing it is a good idea. In this article we explore the coverage features of cyber insurance for hedge funds.
There are two major parts to a cyber policy;
- First-party coverages – those are claims you file directly with your insurer for reimbursement of costs, expenses, and loss; and
- Third-party coverages which are claims from other parties alleging some form of liability.
- A third part can be added to a cyber policy to cover cyber crime which well discuss below.
Under the first-party portion of the policy there are several key coverage points worth discussing:
- Today one of the biggest risks today is ransomware, which can infect an entire network, shut it down and hold all your data ransom. Until you pay the ransom, you data is locked by hackers and even if you do pay the ransom you’re not going to be sure if the data is corrupted or laced with a future ransom event. Most policies will pay for the ransom as well as the remediation to “clean” your data, and find out how your data was seized. The policy will also pay for the loss of income you suffer during the shutdown and subsequent remediation.
- When management learns that their systems have been compromised they often don’t know where to turn. Who do they tell, who don’t they tell? The cyber policy can be an important source of expertise and direction when an event occurs by providing insureds a specific dollar limit (usually starting at $1M) for crisis management expenses, expertise to the right lawyers and IT experts to coordinate a proper response under state and federal laws.
- A potentially huge expense which is covered under most cyber policies is notification costs. As mentioned above, when personally identifiable information is potentially released into the public realm, state and federal laws govern how you must notify those record holders. In many cases you’ll be required to provide written notice and two years of credit monitoring services.
Under the third-party portion of the policy here are the key issues to be aware of:
- Cyber Liability claims – these are claims made by third parties (typically your clients) who allege that their private information was compromised. These claims often are combined into a class-action which can be very expensive to defend against.
- Media Liability – these are less frequent of a claim for hedge funds, but media liability covers the “publishing” activities of the insured. Today, blogging, social media posts and the like all form publishing activities which can lead liability claims for infringement, slander, defamation, ad invasion of privacy.
- The last third-party coverage commonly found on a cyber policy is Regulatory Defense Expenses. When a cyber event occurs, such as a data breach, there may be an investigation or inquiry by any number of state or federal regulatory agencies. The cost of defending yourself in these actions is covered by the policy, but the potential fines or penalties are not covered.
The Cyber Crime portion of the policy is typically added as an option and covers loss of money and securities due to theft via the internet. Depending on the circumstances we will either add coverage here for these perils or include them on a commercial crime policy. Either way, this is an important coverage feature for hedge funds.
The bottom line is that cyber risk is a situation where the potential for loss is very high and the severity of any claim that arises can also be very high. The good news is that the cost of cyber insurance for hedge funds is relatively inexpensive and underwriting for several insurers has been simplified. For a startup fund, cyber insurance may only cost about $1,500 per year, so we’ll recommend the purchase of this coverage from the beginning with your business owners policy.
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Have questions or concerns you’d like to discuss? Give me, Gordon Coyle a call or drop me an email – 845-474-2924 / email@example.com. Thanks!