Three out of five small-to-midsized businesses (SMBs) permanently shutter their doors within six months of being hit by a data breach or hack, Cybercrime Magazine reports. While it may seem like these are outliers, sophisticated attacks driven by artificial intelligence (AI) are quickly making this the norm rather than the exception. Cyber theft insurance is an essential component in protecting your business from the worst outcomes, but most don’t have it.
In this guide, we’ll walk you through the risks businesses like yours face every day and where cyber theft insurance sits on the coverage spectrum, so it’s easier to identify if coverage is necessary and make sure you’re adequately protected.
Small Business Cybersecurity Risks are Rising and Growing More Costly
Four out of five small businesses were victims of a security or data breach last year, Tech Xplore reports. Two in five say AI was the root cause. And while risks have been rising for some time, this past year has been especially tumultuous as a result, according to Guardz. Their internal tracking revealed that security incidents doubled during the first half of the year.
Small Businesses Are a Primary Target
Whereas most small business owners think their size makes them not worth a cybercriminal’s time, the opposite is true. The general perception is that smaller businesses don’t invest in the same safeguards their larger counterparts do, making it much easier to compromise systems. In fact, employees of small businesses experience 350 percent more social engineering attacks than those at larger enterprises, StrongDM reports.
Financial Losses Are Significant
Half of all SMBs say it took them 24 hours or more to recover from a cyberattack, according to StrongDM. And, more than three-quarters of small businesses say their breach cost them at least $250,000, according to the Identity Theft Resource Center. An unprecedented 37 percent say they lost more than $500,000, up one percentage point from the year before. To cover these costs, nearly three-quarters dip into their cash reserves.
However, given that smaller businesses are often cash-strapped, downtime cuts into revenue, and hackers routinely retarget the same companies, the closure of many small businesses seems all but inevitable.
Some Industries Are Hit More Often Than Others
While no business is completely immune, some industries are on the receiving end of attacks more than others. Nearly 14 percent of all attacks target manufacturing businesses, Guardz reports. Around ten percent target professional services companies, and just over four percent are tied to energy and utilities.
Few Small Businesses Are Implementing Protections
Cyber insurance can help small businesses recover faster, yet only 17 percent have it, StrongDM reports. Moreover, close to half of those who do have it did not purchase it until after an attack.
Worryingly, small businesses are also overlooking basic cybersecurity measures. For instance, just 27 percent have adopted multifactor authentication (MFA), down seven points from last year, according to the Identity Theft Resource Center.
There Are Two Broad Categories of Cyber Insurance for Small Business
Cyber insurance is an umbrella term that refers to a variety of coverages designed to protect businesses from financial losses related to cyber incidents, which are not typically covered under traditional business insurance plans. Most policies are modular and bundle multiple types of coverage together.
There are two main categories, and most subtypes fall under these: first-party and third-party cyber insurance.
1. First-Party Business Cyber Insurance
First-party cyber insurance protects your business when it’s the direct victim of a cyber event.
2. Third-Party Business Cyber Liability Insurance
Cyber liability insurance for SMEs covers your legal liability when a cyber event causes harm to others.
Cybersecurity Insurance Offers Protection, But May Be Limited
As mentioned, cyberattack insurance coverage is typically modular in nature. Because of that, cybercrime protection for companies is often spotty. In other words, you may have a broad policy, but fail to add elective coverage, and not even realize an essential aspect isn’t covered until you attempt to make a claim. We’ll review some of the most common categories below.
Cyber Theft/Cybercrime Coverage
Cyber theft insurance, also referred to as cybercrime coverage, offers first-party protection. It covers theft of funds, which can happen through things like phishing, social engineering, or hacking into bank accounts.
Despite being known as insurance against phishing attacks, it’s important to note that it may not cover incidents where an employee error enabled the theft unless social engineering coverage is added.
Data Breach Response Coverage
Sometimes referred to as “data breach insurance coverage,” data breach response coverage is fairly limited in terms of scope. It covers the costs to respond to a breach, such as notifying customers, forensic investigations, credit monitoring, and PR costs.
Business Interruption Coverage
Also in the first-party category is business interruption coverage. It addresses the loss of income and extra expenses if your business operations are disrupted by a cyberattack, such as ransomware or DDoS.
Depending on your specific policy, it may also cover contingent business interruption, such as losses if your cloud provider goes down.
Digital Asset Restoration Coverage
If you accrue costs to recover or rebuild lost or corrupted data, software, or systems, this would fall under digital asset restoration coverage, another first-party option.
Ransomware and Extortion Coverage
In all, 88 percent of ransomware attacks target SMBs, per Viking Cloud. The average cost is somewhere between $1.8 million and $5 million per incident.
Ransomware and extortion coverage takes care of ransomware payments if your systems are locked and held hostage. Some also cover negotiation services.
It’s worth noting that although many businesses try to find a standalone ransomware insurance policy, it is usually only available as part of a comprehensive cyber insurance policy.
Network Security Liability
As we move into third-party coverage options, network security liability insurance is often selected. It covers lawsuits or claims if your systems spread malware, allow unauthorized access, or otherwise harm others.
Privacy Liability
E-commerce, healthcare, finance, tech, service firms, and other businesses that collect, transmit, or store sensitive customer or employee data often benefit from privacy liability insurance. It covers legal costs, settlements, and fines from mishandling personal or confidential data, such as violating HIPAA.
Regulatory Defense and Penalties
Costs to defend against regulatory investigations and some civil fines are addressed through regulatory defense and penalties coverage.
Media Liability
Lastly, claims related to digital content, such as copyright infringement, defamation, or advertising injury online, are addressed through media liability insurance.
Cyber Theft Insurance is Worth Exploring on its Own Merit
Many businesses think their antivirus software or firewall will protect them from cyber attacks. However, 70 percent of files or links containing malware are not blocked by these measures, according to the Cybersecurity and Infrastructure Security Agency (CISA). Moreover, when the agency runs assessments, at least one person takes the bait in eight out of ten small businesses tested. One in ten people overall clicks on malicious links or opens malicious attachments.
Adding to this, AI makes it easier than ever for cybercriminals to craft realistic emails that mimic the look of trusted entities, such as vendors or company executives. Oftentimes, employees click, assuming the correspondence is from someone they know, never realizing they’ve executed malicious code.
Cyber Theft Insurance Offers Another Layer of Protection
Cyber theft doesn’t require a breach of your systems. In many cases, the loss happens when an employee is tricked into transferring funds or exposing account credentials. These attacks bypass technical safeguards like antivirus software or firewalls, making them harder to catch and harder to insure against unless your policy includes specific protections. Cyber theft insurance fills this gap. It ensures your business is protected from direct financial loss tied to fraudulent transfers, impersonation, and other forms of deception-based theft.
It’s Essential to Ensure You Have the Right Level of Coverage
Many business owners assume cybercrime protection is already included in their broader cyber insurance policy. In reality, that coverage is often limited, sublimited, or excluded altogether, especially when it comes to the theft of funds.
Most cyber theft incidents involve social engineering, such as phishing emails or fraudulent payment requests. These attacks trick employees into transferring money to a criminal’s account, believing the request is legitimate. However, unless the policy specifically includes funds transfer fraud or social engineering fraud, insurers may deny the claim on the basis that the business voluntarily authorized the transaction.
Check Your Cyber Theft Insurance Terms Carefully
To ensure adequate protection, it’s important to review your policy with the following in mind:
- Ask Whether Funds Transfer Fraud is Covered: This is the most common form of cyber theft and may not be included in a standard cyber policy.
- Check For Social Engineering Coverage: Even when cyber theft is covered, employee-initiated transfers based on fraudulent instructions often require a separate rider or endorsement.
- Review the Coverage Limits and Sublimits: Some policies offer only $50,000 or $100,000 in coverage for theft-related incidents, even if the rest of the policy has a much higher cap.
- Clarify How Exclusions Apply: Insurers may exclude theft resulting from internal negligence, such as a failure to verify payment requests or enforce multi-factor authentication protocols.
Safeguard Your Future with a Working Capital Injection
Cyber insurance is surprisingly affordable, with most small businesses paying $200 or less per month, according to Insureon. Costs tend to be higher in certain industries, such as technology and professional services.
However, if cash flow challenges make it difficult to cover your premium, you want to secure a discount by paying annually, or you’re trying to recover from a cyber incident and get coverage at the same time, invoice factoring can help by unlocking the working capital trapped in your unpaid invoices. To learn more or kickstart the approval process, request a complimentary factoring rate quote.
DISCLAIMER:This article is not intended to provide finance, insurance, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, finance, insurance, or legal advice. You should consult your own finance, insurance, or legal advisors before engaging in any transaction.
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