Businesses today face a myriad of cyber risks, from data breaches to operational disruptions and reputational damage. Cyber insurance can help protect against risks like these. Understanding the differences between types of coverage, including first-party vs. third-party, is vital in making sure your business has the insurance it needs.
What is first-party cyber insurance?
First-party cyber insurance is designed to cover direct losses that a business may face when its own systems, networks or data are compromised by a cyber incident. Unlike third-party coverage, first-party cyber insurance focuses on the internal response and recovery efforts of the business. This type of insurance may include coverage for:
- Financial losses
- Customer notification costs
- Forensic investigations
- Business interruption and lost income
- Reputational damage control services
For example, if your company’s network is infected with ransomware and falls victim to a data breach, first-party coverage can help pay for the ransom, along with the cost of investigating the breach and restoring your data. If customer information is exposed, it can also help cover the cost of notifying affected individuals and providing them with credit monitoring services.
What is third-party cyber insurance?
While first-party cyber insurance helps cover a business’s own losses from a cyber incident, third-party cyber insurance helps to protect your business if a data breach leads to legal action from clients, vendors or other affected parties. This coverage is designed to help with legal fees, settlements or other costs related to claims made by outside parties that are affected by the breach.
Third-party cyber coverage is especially important for businesses that manage sensitive customer data or provide digital services, such as online retailers, IT service providers and medical practices.
Legal Defense Costs
If a data breach leads to legal action, third-party cyber insurance can help cover defense costs, including attorney fees, court costs and settlements. This protection can be critical for businesses that could be held liable for lost or stolen data.
Liability for Client Data
Businesses that store or manage customer data could face lawsuits if that information is compromised in a data breach. Third-party cyber insurance can help cover liability for claims alleging negligence or failure to protect sensitive data, which may otherwise result in significant financial losses for the business.
Vendor and Partner Risks
Working with outside vendors or service providers can create additional cyber exposures. If a breach involving a third-party vendor leads to data exposure, your business could still face legal claims, especially if clients hold you accountable.
For example, if your company’s cloud storage provider is hacked and your client data is exposed, your business could face legal claims even though the breach occurred outside of your systems.
First-Party vs. Third-Party Cyber Insurance
First-party and third-party cyber insurance serve distinct purposes. First-party insurance helps businesses recover from internal breaches, while third-party coverage helps cover claims from clients or others affected by the breach. Here are a few other key differences:
- Coverage Scope: First-party cyber policies focus on internal risks like operational disruptions and data recovery costs. They help to cover costs associated with data breaches within the company’s own systems, including notification and recovery efforts. Third-party policies focus on expenses incurred from claims made by external parties impacted by cyber incidents. This could include legal fees, court costs and settlements.
- Common Exclusions: Both first-party and third-party cyber insurance policies typically exclude coverage for incidents related to the physical act of war or terrorism. Additionally, first-party coverage may exclude certain forms of fraud and cyber extortion, and third-party policies may exclude claims arising from contractual obligations.
- Cost Considerations: The cost of cyber insurance can vary significantly depending on your business’ size, industry and specific coverage needs. Both first-party and third-party insurance policies have unique cost implications that businesses must consider when selecting coverage.
Cyber Risk Management
Minimizing cyber risks is crucial for protecting your business. Effective strategies could include proactive measures like developing a prevention plan, restricting data access, enhancing security protocols and conducting staff training.
Implementing multi-factor authentication and conducting regular risk assessments may help reduce unauthorized access to sensitive information and help your organization stay ahead of evolving cyber threats.
To build a strong defense against cyber threats, consider working with a trusted cyber insurance and risk management advisor who can help tailor strategies to your company’s unique risks and regulatory requirements.
Is your business protected?
Cyber threats can impact both your internal business systems and your external relationships, so it’s important to have the right coverage in place. At Higginbotham, we help businesses navigate the complexities of cyber insurance and build solutions that are tailored to their specific needs.
To learn more about how Higginbotham can help protect your business, connect with one of our cyber insurance specialists today.
