Cyber Insurance Against Phishing? There’s a Catch

By Jeremy Zoss, Managing Editor, Code42

If one of your employees gets duped into transferring money or securities in a phishing scam, don’t expect your cyber insurance policy to cover it. And even your crime policy won’t cover it unless you purchase a specific social engineering endorsement. Many companies have learned the hard way and tried to sue their insurance carriers, with little luck.

Aqua Star, a New York seafood importer, expected to be covered after a spoofed email from a supplier drove an employee to change the supplier’s bank account, causing Aqua Star to wire more than $700,000 to a hacker instead of the supplier. Aqua Star has a crime policy through Travelers, which includes Computer Fraud coverage that applies to loss caused by the fraudulent entry of electronic data into any computer system owned, leased or operated by the insured. But when Aqua Star filed the claim, Travelers pointed out an exclusion if the data was entered by an authorized user. Aqua Star then sued Travelers, but the court agreed with Travelers, ruling that the employee was clearly an authorized user.

A similar phishing scam resulted in Apache Corp., an oil and gas producer, wiring $2.4 million to cybercriminals. It’s insurance company, Great American, denied the payout, so Apache went to district court and won. However, Great American appealed to a higher court, which reversed the decision, saying the bogus email didn’t directly cause the loss.

What commercial cyber insurance policies do cover

Cyber insurance policies cover losses that result from unauthorized data breaches or system failures. But they vary greatly in the details and exceptions. Most will cover forensic investigation fees, monetary losses caused by network downtime, data loss recovery fees, costs to notify affected parties and manage a crisis, legal expenses, and regulatory fines.

When it comes to ransomware, you need to look closely at the policy’s Cyber Extortion coverage. If it offers only third-party coverage, then ransomware isn’t covered.

Crime insurance policies cover losses that result from theft, fraud or deception. But as the Aqua Star and Apache examples illustrate, insurers typically deny coverage for social engineering fraud, claiming that the loss didn’t result from “direct” fraud. Insurers contend that the crime policy applies only if a cybercriminal penetrates the company’s computer system and illegally takes money out of company coffers.

Some crime policies also contain a “voluntary parting” exclusion that specifically bars social engineering claims by barring coverage for losses that arise out of anyone acting with authority who voluntarily gives up title to, or possession of, company property.

Fishing for a solution? Add an endorsement

Many insurance companies offer a social engineering fraud endorsement, like this one from Chubb. It’s offered under a crime policy for a nominal additional premium. The coverage, sometimes referred to as an impersonation fraud or fraudulent instruction endorsement, is typically up to $250,000 per occurrence, with no annual aggregate, but higher limits are available for a higher premium.

The net lesson: a phishing endorsement is an easy fix to a potentially costly oversight.