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What is data breach insurance?

Data breach insurance can refer to several different policies that protect a company from financial losses as a result of a data breach. These policies include data breach insurance, cyber liability insurance, and technology errors and omissions insurance (tech E&O).

Why is data breach insurance important?

With data breaches all over the news, IT consultants are increasingly interested in how small business insurance can help them manage the financial risk from cyber threats.

This coverage is especially important because of the high cost of data breaches. According to a 2019 study by RSM, the average cost of a data breach for a small to medium enterprise is $178,000.

Unsurprisingly, few small business owners can afford to pay that out of pocket. Because of that, IT professionals need insurance to reduce data breach financial risk. Companies most commonly invest in cyber liability insurance. a data security policy that protects them from the cost of a data breach.

In the tech industry, cyber liability insurance is most often bundled with errors and omissions insurance in a package called tech E&O.

Which data breach insurance do I need?

While data breach insurance can refer to any policy that protects against data breaches, it typically refers to cyber liability insurance. There are two different types of cyber liability insurance that address two different types of data breach risk: data breaches that happen to your tech company, and those that happen to your clients:

First-party cyber liability insurance covers the cost of a breach on your own network.

Third-party cyber liability insurance covers the costs of lawsuits when an IT consultant is sued because his client’s data is compromised.

Data breach insurance usually refers to first-party cyber liability insurance, especially for companies outside of the IT industry. In this context, data breach insurance is typically an endorsement to your general liability insurance or business owner's policy, and it only protects against data breaches that affect your company directly.

First-party cyber liability insurance normally has low limits, which is why tech professionals should consider tech E&O instead. This tech-specific package includes the protection that all tech professionals need when handling sensitive data.

Let’s explore the differences between first-party and third-party cyber liability insurance, and how to choose the coverage you need.

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What is first-party cyber liability insurance?

First-party cyber liability insurance can cover many of the costs you’d have to pay if a breach occurred on your network. If your own data is compromised, this policy can help pay for:

  • Customer notification
  • Security experts to investigate the breach
  • Call centers to handle customer questions
  • Crisis management teams
  • Anti-fraud protection for parties whose data has been compromised

Web hosting companies and others with lots of stored or sensitive data are the IT businesses that benefit most from first-party coverage.

If you store customer data on your network (e.g., if you provide data mining or business intelligence services), you may also benefit from carrying first-party data breach insurance. This is because, a breach of your network could result in steep costs associated with notifying clients, paying for credit monitoring services, and even paying state fines. First-party coverage offers funds to do exactly that.

What is third-party cyber liability insurance?

Third-party cyber liability insurance covers the costs of a lawsuit if a client’s data is compromised, and they claim that your professional oversight or error resulted in the breach.

Third-party cyber liability insurance is the popular choice among IT companies, who are usually most concerned with safeguarding their clients’ data, which is stored on their clients’ servers or somewhere in the cloud.

For instance, IT consultants typically don’t have a lot of data on their own network that needs protecting, so third-party cyber liability insurance makes the most sense. For many IT businesses, third-party coverage can be included in an errors and omissions insurance policy (tech E&O). When it's included, a data breach lawsuit can be treated like any other E&O lawsuit.

Let's look at an example of how third-party cyber liability insurance can help IT consultants manage the risk of client lawsuits:

Say you help a client update to a new ERP platform, but the software is hacked. The client sues you, claiming you didn’t configure it properly, and recommended software that wasn’t secure.

We all know that any lawsuit can be expensive, But in a data breach lawsuit, you might have to pay:

  • Attorney's fees
  • Court costs
  • Settlement
  • Judgment (if you lose in court)

Third-party cyber liability insurance can help cover these costs, and protect your business from the financial devastation a successful data breach lawsuit can have on your bottom line.

What types of data breaches are covered?

Data breaches come in many shapes and sizes. The average person probably hears “data breach” and thinks of hackers. But there are many kinds of cyber incidents, including:

  • Malware attacks
  • Malfunctions
  • Insider data breaches
  • Data theft by employees
  • Ransomware
  • Employee mistakes

Cyber liability insurance covers both accidental data breaches and incidents where a hacker targets your business or a client.

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