Cyber Insurance Explained: Benefits, and how it works

Updated • Mar 11th '25

What Is Cyber Insurance?

Cyber insurance, also known as cyber liability insurance, is a policy designed to protect businesses and individuals from financial losses caused by cyber threats such as hacking, ransom ware, and data breaches. It covers costs related to data recovery, legal fees, regulatory fines, business interruptions, and reputational damage. Cyber insurance typically includes both first-party coverage for direct losses and third-party coverage for legal liabilities.

With the rise in cyber-attacks and strict data protection laws like GDPR, cyber insurance has become essential for businesses of all sizes. It helps organizations recover quickly from security incidents, minimize financial risks, and ensure compliance with cybersecurity regulations. In today’s digital world, cyber insurance is a crucial safeguard against evolving online threats.

What Does Cyber Insurance Cover?

Cyber insurance helps businesses and individuals recover from cyber-related incidents such as data breaches, hacking, and cyber-attacks. Coverage varies by policy but generally includes the following:

1. Data Breach & Privacy Protection

Covers costs related to notifying affected customers.
Pays for credit monitoring services for victims.
Covers expenses related to restoring compromised data.

2. Business Interruption

Compensates for lost income if a cyber-attack disrupts business operations.
Covers extra expenses incurred to restore operations.

3. Cyber Extortion & Ransom ware

Pays ransom demands in ransom ware attacks.
Covers costs for negotiation and professional assistance.

4. Legal Fees & Regulatory Fines

Covers legal expenses in case of lawsuits due to data breaches.
Pays regulatory fines and penalties for non-compliance with data protection laws.

5. Network Security & Liability

Covers claims related to unauthorized access, malware, and system failures.
Protects against lawsuits from third parties affected by security breaches.

6. Fraud & Social Engineering Attacks

Covers financial losses from phishing scams and fraudulent transfers.
Protects businesses from employee errors leading to cyber fraud.

What Cyber Insurance Does Not Cover

Bodily Injury or Property Damage: Excludes claims related to physical harm or property destruction; some policies cover emotional distress from data breaches.
Employment Practices Violations: Does not cover discrimination, wrongful termination, or harassment claims.
Intellectual Property Infringement: Excludes patent, copyright, and trademark infringement claims.
War, Terrorism, and Political Unrest: Losses from war, terrorism, or political actions are typically not covered.
Failure to Implement Proper Security Measures: Negligence in maintaining cyber security may result in denied claims.
Loss of Portable Devices: Some policies exclude coverage for stolen or lost laptops, smartphones, and tablets.
Contractual Liabilities: Does not cover financial losses from failure to meet contractual obligations.
Previously Known Incidents: Excludes coverage for vulnerabilities or breaches known but not addressed.

Who Needs Cyber Insurance?

Cyber insurance is crucial for businesses that handle sensitive data and rely on digital operations. Financial institutions, healthcare providers, e-commerce companies, and IT firms face high risks due to the vast amount of confidential information they store. Small and medium-sized enterprises (SMEs) are particularly vulnerable as they often lack strong cybersecurity measures. Without proper coverage, a cyber-attack could lead to financial losses, legal issues, and reputational damage.

Professional service providers, such as law firms, accounting firms, and consultants, should also consider cyber insurance to safeguard client data and maintain trust. Organizations engaged in digital transactions, cloud computing, or remote work can benefit from coverage to mitigate risks associated with data breaches and system failures. As cyber threats evolve, adequate insurance ensures businesses can recover quickly with minimal disruption.

How Much Does Cyber Insurance Cost?

Many small businesses can purchase cyber insurance for around $1,740 per year. The premium your company pays depends on various factors, including business size, industry type, the volume of sensitive data handled, and existing security measures. For example, a plumbing contractor will typically pay less than an investment services firm. Additionally, your chosen coverage limits, policy features, and claims history will influence the final cost of your cyber insurance policy.

Examples of Claims Covered by Cyber Insurance

In today's digital world, businesses and individuals are increasingly vulnerable to cyber threats. Cyber insurance helps mitigate financial losses resulting from cyber-attacks, data breaches, and other security incidents. Here are some key claims covered by cyber insurance:

Data breaches and customer lawsuits
Business interruption losses due to cyber attacks
Ransom ware attacks and extortion demands
Legal and regulatory expenses
Third-party liability for security failures
Fraud and phishing-related financial losses
Hardware and data restoration costs

With the increasing sophistication of cyber threats, having cyber insurance is essential for businesses of all sizes. It provides financial protection and ensures a quick recovery from cyber incidents.

Cyber Insurance vs. Data Breach Insurance: Key Differences

Cyber insurance and data breach insurance both provide protection against digital threats, but they differ in scope. Cyber insurance offers broad coverage, including financial losses from cyber-attacks, ransom ware, business interruptions, and third-party liabilities. It helps businesses recover from various cyber incidents, such as hacking, phishing, and network failures. On the other hand, data breach insurance specifically focuses on incidents where sensitive information is exposed or stolen. It covers costs related to notifying affected individuals, credit monitoring, legal fees, and regulatory fines. While data breach insurance is a subset of cyber insurance, businesses looking for comprehensive protection against cyber threats should consider cyber insurance for a wider range of coverage.

Technology E&O Insurance vs. Cyber Insurance: What's the Difference?

Technology Errors and Omissions (E&O) insurance and cyber insurance are different but complementary. Technology E&O insurance protects businesses from claims of negligence, errors, or failures in delivering technology services or products. It covers legal fees, settlements, and damages if a client experiences financial losses due to a company’s mistake or failure to meet contractual obligations.

Cyber insurance, on the other hand, focuses on financial losses from cyber threats like data breaches, ransom ware attacks, and network security failures. While cyber insurance protects against external cyber risks, Technology E&O insurance addresses professional liability related to technology services. Businesses in the tech industry may benefit from both types of coverage for comprehensive protection.

Do Businesses Need Cyber Insurance?

Cyber insurance isn’t required by state or federal laws, even for banks and financial institutions. Consequently, most businesses can choose whether or not to purchase it. However, businesses involved in designing, manufacturing, or installing technology may need tech E&O insurance to comply with contractual requirements.

For example, if A-1 University hires Tip-Top Tech to overhaul its computer system, Tip-Top may be required to provide a certificate of insurance before beginning work. This certificate must show that it has purchased tech E&O insurance with the coverage’s and limits specified in the contract.

The Bottom Line

Any business that relies on technology is at risk of a cyber-attack. A security breach can lead to significant financial losses, operational disruptions, and reputational harm. Investing in cyber insurance helps safeguard your business by covering essential expenses like customer notifications, data recovery, and legal fees. Additionally, it can cover settlements and defense costs in case of lawsuits, providing critical financial protection.