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What Cloud Computing Means for Cyber Liability

What Cloud Computing Means for Cyber Liability

Cloud computing is allowing businesses to work from many different locations, growing business fast. But before you put your head in the cloud, make sure you're not vulnerable to the real life risk of data breach with Cyber Risk Insurance.

Friday, January 10, 2014/Categories: cloud-insurance

What was once floating above our heads is reachable - well, sort of…. Cloud computing has boomed over the past few years and is only continuing to grow. It saves individual companies storage space and simplifies the transfer of information, communication, and documents between companies that are working together.

According to InsuranceTech.com, worldwide spending on cloud computing is expected to reach $42 billion in 2013. However, all of this information wirelessly entering a cloud creates a number of vulnerabilities for businesses using it.

As with anything up in the air, there comes a risk that information will be stolen, destroyed, or lost - which means money can be lost, too. And the IT businesses responsible can be held financially liable if someone decides to sue.

This risk of financial liability exposure is why, with the rise of cloud computing, there has also been a rise in the popularity of Cyber Insurance, which protects small businesses from lawsuits stemming from the use of virtualized data storage. If your company isn't insured against the risks of using technology, it's a good idea to investigate how to incorporate Cyber Risk Insurance into your standing policy. Below is an overview of why companies need Cyber Risk Insurance and how to ensure that your cloud computing activities are protected under your policy.

Does Your Small Business Need Cloud Computing Insurance?

It's a no-brainer - your business needs Cyber Risk Insurance if you conduct a business in "the cloud." But what exactly does that entail? Essentially, cloud computing occurs when data is kept on another company's server, as with the Google Drive or online software like Basecamp.

Imagine you've recommended that one of your clients keep all or most of their business information on these servers and rely on that cloud computing system to do their work. What happens if there's a problem with these outside servers, such as a power outage or malfunction? What happens is your client's business and projects are inaccessible, compromised, or (gasp) deleted?

I'll tell you what happens: your clients lose money. And depending on how things shake out, they could sue you for recommending the cloud server in the first place. Why? Because the terms of service on all of these cloud computing systems most likely protect them from liability, leaving you on the hook. Third-party Cyber Risk Insurance is your company's best bet protect your finances when the cloud turns stormy.

What Cyber Liability Insurance Covers

Cyber Risk Insurance (also called Cyber Liability Insurance or Data Breach Insurance) comes in two flavors: first-party and third-party. First-party Cyber Liability Insurance is usually not the kind IT companies need: it protects businesses that are victimized by data breaches, essentially funding the cost of cleaning up after a breach. First-party coverage might offer payments that can be used to inform affected customers and create a PR campaign to restore a company's reputation.Third-party Cyber Risk Insurance protects the IT companies and consultants who advise clients about cyber matters, build software or cloud systems, or otherwise facilitate the use of digital data management systems. Your third-party coverage will cover you if and when a client sues because your advice or work allowed a data breach to happen or failed to stop a data breach.

If the distinction sounds confusing, that's because it's pretty complex. For a more thorough explanation of the difference between first-party and third-party Cyber Risk Insurance, check out the post "Third-Party Vs. First-Party Cyber Risk Insurance: Protect Your IT Firm Right."

Benefits of Cyber Liability Insurance for Providers

Cloud computing providers should also invest in Cloud Computing Insurance, as it will refund companies who rely on their servers to do business.

When Amazon's servers experienced outages,, fewof the major companies who relied on their cloud servers were protected and many lost revenue. But Amazon was not liable due to their terms of service, leaving these other companies without legal recourse.

However, a number of them left and took their business elsewhere-- namely to providers who agreed to cover them through their cloud computing insurance policies. If you're a provider, having Cloud Computing insurance is just a good business policy --it takes care of your customers, and happy customers means better business for you.

Differences Between Cyber Insurance and Business Liability Insurance

Although you might already have a standard business liability policy, these often don't cover electronic or internet-based liabilities. Most of the time, you'll need to add a separate Cyber Risk policy that incorporates cloud computing - this will fully cover your business and its technical operations.

How are the Costs of Cyber Risk Policies Determined?

It's tough to determine how much the data stored on a cloud is worth and how much exposure you face in the work you do. Most underwriters will consider the nature of your work (i.e., are you giving advice about which systems to use or actually building and managing cloud-based systems?), the type of information your clients store, and the overall net worth of your clients.

The higher the value of the work you do, the more Cyber Risk coverage you'll need - and the higher your premiums will be.

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