Cyber Insurance for Boards: Everything You Need to Know

Cybersecurity has become a top concern for businesses all around the world, and Canada is no exception. With the increasing frequency and severity of cyber incidents, it’s no longer a question of if a company will be targeted by cyber criminals, but likely when.

And the responsibility of safeguarding a business’ digital assets doesn’t rest solely with IT departments – it extends to the boardroom. Board members, as the fiduciaries of corporate governance, must be proactive in addressing cybersecurity risks. One critical component of this proactive approach is understanding and leveraging cyber insurance.

Below we’ll explore the importance of cyber insurance for boards, the scope of its coverage, and its role in protecting directors and officers.

What is cyber insurance?

Cyber insurance is a specialized insurance product designed to help organizations mitigate the financial impact of cyber incidents. These incidents can range from data breaches and hacks, to ransomware attacks and other forms of cybercrime.

The primary purpose of cyber insurance is to cover the costs associated with responding to a cyber incident – including legal fees, data restoration, public relations efforts and compensation for affected parties.

As cyber threats continue to evolve, cyber insurance policies have become more sophisticated, offering a wide range of coverage options tailored to the specific needs of different industries. For boards of directors, understanding the nuances of cyber insurance is crucial in ensuring that their organization is adequately protected.

Why would boards need cyber insurance?

In 2024, nearly every organization, regardless of industry, is at risk of cyber incidents. According to a recent report by Cisco, nearly two-thirds of organizations experienced major security incidents that jeopardized their business operations.

Given the pervasive nature of these threats, boards must recognize the critical role cyber insurance plays in their overall risk management strategy.

Financial impact of cyber incidents

Cyber incidents can have devastating financial consequences. According to IBM Security and the Ponemon Institute’s 2024 Cost of a Data Breach Report, the average cost of a data breach in the United States is a staggering USD $4.88 million – a 10% increase from 2023. These costs can include everything from regulatory fines and legal fees, to the expenses associated with notifying affected individuals and restoring compromised systems.

For boards, the potential financial consequences of a cyber incident underscore the importance of having a robust cyber insurance policy in place.

Reputation and market value

The effects of a cyber incident extend beyond immediate financial losses. The damage to an organization’s reputation can be long-lasting, particularly for those publicly traded.

Bitglass found that after a data breach, stock prices for publicly traded companies dropped an average of 7.5%. They also found that it took on average 45 days to recover to pre-breach levels.

In a world where reputation carries so much weight, the perception of lack of cyber controls leading to a loss, or proper loss mitigation from insurance could have, long lasting consequences.

Additionally, many cyber policies insurance include coverage for public relations efforts aimed at restoring consumer and investor confidence after a breach. This support can be invaluable in helping an organization recover more quickly.

Business continuity and operational disruptions

Cyber incidents can also disrupt business operations, leading to lost productivity. Ransomware attacks, for example, can encrypt some or all of a company’s systems, rendering them unusable until a ransom is paid or the systems are restored.

The downtime associated with these attacks can be incredibly costly. For example, if a company’s systems are offline for several days, lost revenues could be significant.

Boards should consider that cyber insurance policies often cover the costs associated with business interruption, including lost profits and the expenses incurred during system recovery.

This coverage can be the difference between a company surviving a cyber incident and being forced to shut its doors.

Legal and regulatory compliance

The legal landscape surrounding cybersecurity in Canada is complex and constantly evolving.

Privacy laws at a federal and Provincial level mandate the protection of personal information and impose penalties for non-compliance. A cyber incident that results in the exposure of sensitive data can lead to costly legal battles and significant fines.

Cyber insurance (depending on the insurer) can provide coverage for legal fees, fines and the costs associated with fines and/or regulatory investigations. This protection is particularly important for organizations that operate in highly regulated industries, such as finance and healthcare.

Evolving threat landscape

The threat landscape is constantly evolving, with cybercriminals employing increasingly sophisticated tactics to breach organizational defenses. From advanced persistent threats (APTs) to zero-day exploits, the methods used by attackers are becoming more difficult to detect and defend against

This evolving threat landscape means that even organizations with robust cybersecurity measures in place remain at risk. Boards must recognize that cyber insurance is not a replacement for cybersecurity, but rather a complement to it.

A comprehensive cyber insurance policy can provide a safety net for when preventive measures fail, ensuring that the organization can recover from even the most sophisticated attacks.

What does cyber insurance cover?

Cyber insurance policies vary widely in terms of coverage, so it’s essential for boards to carefully review and understand what their policy includes. Generally, cyber insurance can cover a broad range of expenses related to a cyber incident.

First-party coverage

First-party coverage refers to the costs incurred directly by the organization as a result of a cyber incident. This can include:

Data breach response

Coverage for the costs associated with responding to a data breach, including forensic investigations, legal fees and notification of affected individuals.

Business interruption

This refers to compensation for lost income and additional expenses incurred due to a disruption in business operations caused by a cyber incident.

Cyber extortion

Coverage for ransom payments and the costs associated with negotiating with cybercriminals in the event of a ransomware attack.

Data restoration

Costs associated with recovering or restoring lost or compromised data, including the expenses of hiring external experts.

Reputational damage

Coverage for public relations efforts aimed at mitigating the damage to the organization’s reputation following a cyber incident.

Third-party coverage

Third-party coverage addresses the claims made against the organization by outside third parties as a result of a cyber incident. This can include:

Regulatory fines and penalties

Coverage for fines and penalties imposed by regulatory bodies due to non-compliance with data protection laws and regulations.

Legal defense costs

Coverage for legal fees and expenses incurred in defending against lawsuits related to a cyber incident, including class-action lawsuits from affected individuals.

Liability for data breaches

Coverage for damages owed to third parties as a result of a data breach, including settlements or judgments from legal proceedings.

Does cyber insurance protect directors?

For board members, one of the key concerns is whether cyber insurance offers protection for directors and officers (D&O) in the event of a cyber incident.

It is important to note that cyber insurance is designed primarily to cover the organization as a whole, rather than liability directors and officers may have. D&O insurance is available to protect directors and officers from personal liability arising from their actions or decisions made in their capacity as corporate leaders. Any cyber language in a D&O policy should be reviewed in conjunction with the organizations cyber policy to understand how they work together.

Directors & officers (D&O) insurance

D&O insurance is separate to cyber insurance. It can cover a wide range of risks, including:

Mismanagement claims

Coverage for claims alleging that directors and officers failed to properly manage the organization. This can include a failure to implement adequate cybersecurity measures.

Regulatory investigations

Coverage for the costs associated with defending against regulatory investigations into the actions of directors and officers, including those related to cybersecurity breaches.

Shareholder lawsuits

Coverage for legal defense costs and settlements arising from lawsuits filed by shareholders, particularly in cases where a cyber incident has negatively impacted the company’s stock price.

Questions about cyber insurance for your board?

As cyber threats continue to evolve and become more sophisticated, the need for comprehensive cyber insurance is more critical than ever. Boards of directors have a fiduciary responsibility to protect their organizations from the financial, reputational and operational risks associated with cyber incidents.

Cyber insurance, paired with D&O insurance can help organizations recover swiftly and effectively when breaches occur. If your board is not yet fully prepared to handle the complexities of cyber risk, now is the time to take action.

Partnering with an experienced insurance broker like Axxima can provide you with the guidance and tailored solutions necessary to safeguard your organization’s future.

Reach out to Axxima today to explore how cyber insurance can be an integral part of your risk management strategy. Protect your organization, protect your board and ensure peace of mind by contacting Axxima to discuss your cyber insurance needs.