Cyber Insurance: Having Coverage Isn't Enough – You Must Meet the Requirements Too
Key Takeaways:
Coverage ≠ Guaranteed Payout: More than 40% of cyber insurance claims were denied in 2024, often because policyholders failed to meet their policy’s security requirements. Simply buying insurance isn’t enough – you must uphold all the stipulated cybersecurity measures.
Costly Example – Hamilton, Ontario: After a February 2024 ransomware attack crippled 80% of its network, the City of Hamilton faced $18.3 million in recovery costs. Their insurer denied the claim because the city hadn’t fully implemented multi-factor authentication (MFA) as required by the policy. Taxpayers were left footing the bill.
Critical Security Requirements: Modern cyber insurance policies commonly mandate controls like multi-factor authentication, advanced endpoint protection (EDR), employee cybersecurity training, robust data backup strategies, and incident response plans. Failing to have any of these in place can nullify your coverage.
Hidden Policy Exclusions: Fine-print exclusions can void coverage even after years of paying premiums. Claims can be denied due to issues like prior breaches, known but unpatched vulnerabilities, human errors, or generally poor security practices by the insured. It’s crucial to understand these exclusions before an incident occurs.
“Prove It” Compliance: Insurers will not take your word for it – they require documentation to prove you implemented and maintained the required security measures. If you can’t show evidence (reports, training logs, test results, etc.), your claim may be denied even if you thought you were compliant.
Introduction: The Expensive Wake-Up Call
Hamilton, Ontario learned the hard way that owning cyber insurance isn’t the same as being protected by it. In February 2024, the city suffered a devastating cyberattack that disabled roughly 80% of its IT network and disrupted critical services for weeks.
Attackers demanded a ransom of $18.5 million for a decryption key, which the city refused to pay, managing instead to contain the incident within two days. When the dust settled, Hamilton had spent $18.3 million on system recovery, upgrades, and third-party support to rebuild its operations.
City officials assumed these costs would be covered by their cyber insurance. Instead, they were met with a painful truth: the insurer denied the claim entirely because Hamilton had not fully implemented multi-factor authentication (MFA) on all of its online services – a clear requirement of their policy.
According to the policy terms, any losses caused by a breach where MFA was absent would not be covered. In other words, a single unmet security condition voided an $18 million claim, leaving taxpayers on the hook for the full amount.
This isn’t an isolated incident. Across the board, cyber insurers have tightened their rules, and many businesses are discovering that having a policy doesn’t guarantee a payout. In fact, over 40% of cyber insurance claims in 2024 were denied, often because the claimant failed to meet the policy’s security requirements or fell into an exclusion.
The sobering reality is that cyber insurance has evolved from a simple safety net into a complex contract with stringent compliance demands. If you’re not continually meeting those demands (and proving it), your “coverage” may be effectively useless when a cyber disaster strikes.
The Hidden Reality: Why Claims Get Denied
Cyber insurance was once seen as a failsafe – a financial backstop after crippling cyberattacks. Today, that backstop comes with a lot of caveats. Insurers have learned which mistakes and oversights cost them money, and they’ve adjusted policies accordingly.
Policy Exclusions Are Everywhere: Insurers often won’t pay if the cause or response to the attack hits an exclusion. Many exclusions are tied to preventable causes or timing. For example, cyber policies frequently exclude losses that stem from:
Poor security processes or negligence: They expect you to have taken reasonable precautions; if not, they won’t pay for your lapse.
Prior incidents: If attackers were already in your system or you were breached previously and hadn’t disclosed or remediated it, the insurer can deny coverage for the “pre-existing condition.”
Human error or insider actions: For instance, if an employee falls for a phishing email or misconfigures a server leading to a breach, the insurer might cite a human-error exclusion. (Some policies offer add-ons for social engineering coverage – but it’s not always standard.)
Unpatched vulnerabilities: If the attack exploited a known vulnerability that you failed to patch, that might void the claim. Don't forget patch Tuesday! Update those operating systems, browsers, and apps.
The Essential Requirements: What Insurers Actually Demand
Cyber insurance applications have become lengthy checklists of controls, and if you can’t check “Yes” to most (and prove it), you may not even get the policy – let alone a paid claim. Here are some of the critical requirements that most cyber insurers demand today:
Multi-Factor Authentication (MFA) – The Non-Negotiable
Multi-factor authentication is perhaps the #1 requirement in cyber insurance right now. Insurers have made it mandatory for good reason: Microsoft’s analysis shows that enabling MFA can block over 99.9% of account compromise attacks. Given how many breaches begin with stolen or guessed passwords, an MFA requirement drastically lowers the insurer’s risk – so much so that it’s basically impossible to get or keep a policy without MFA in place. Review your policy -- carriers typically specify exactly where you need MFA.
(Pro tip: Document your MFA implementation – which systems have it enforced, and how – so you can show auditors or insurers. Also, don’t forget to cover non-standard scenarios like service accounts or legacy apps; if they can’t do MFA, have compensating controls.)
Endpoint Detection and Response (EDR)
Traditional antivirus software is no longer sufficient in the eyes of insurers. Today’s threats (like fileless malware, advanced ransomware, etc.) often evade basic antivirus. Insurers now often require Endpoint Detection and Response (EDR) tools on all endpoints (workstations, laptops, servers) because EDR provides a much higher level of protection.
What’s the difference? A good EDR platform continuously monitors device behavior and can detect suspicious patterns that old-school antivirus would miss. EDR solutions don’t just block malware; they also flag potential intrusions and usually record a rich timeline of events, contain threats, use behavioral analytics (often powered by AI) to catch previously unknown threats, allow security teams (or the insurer’s incident responders) to remotely access an endpoint, kill malicious processes, pull memory dumps, etc., which is invaluable during an investigation.
From an insurer’s perspective, a company with robust EDR is far less likely to suffer a massive breach or unchecked malware outbreak. If you’re seeking cyber insurance, expect to answer questions about your endpoint protection. Companies that still rely on only basic antivirus may be required to upgrade to an EDR suite as a condition of coverage.
Comprehensive Backup Strategy
With ransomware as a top threat, insurers are laser-focused on backups. It’s not enough to have backups – they must be structured in a way that ransomware cannot easily compromise them. If your backups fail, the insurer’s payouts (for data restoration, business interruption, maybe even ransom) go way up. Thus, most policies now come with stringent backup requirements.
A solid backup strategy gives insurers confidence that you won’t have to pay ransom and can rebound quickly, minimizing losses. On your side, it’s just good practice. Note that some policies also require you to follow certain procedures during an incident – for example, not deleting evidence or not rebuilding systems until an insurance-approved incident responder has assessed things. Always loop in your insurer promptly during a ransomware event; they may provide guidance (and even their own experts) to ensure the backups are used properly and coverage remains intact.
Employee Training and Awareness
Humans continue to be one of the weakest links in cybersecurity. Phishing emails, bogus links, malicious attachments – these are still extremely common breach entry points. Insurers know this, so they often require businesses to conduct regular cybersecurity training for employees and to have measures in place to test and maintain awareness.
Incident Response Planning
Having a detailed incident response plan is another must-have. An incident response plan is essentially a playbook for handling security incidents: what to do, who does it, how to communicate, etc. Insurers expect you to not only have a plan but to practice it regularly. Why? Because a well-executed response can dramatically limit the damage (and costs) of an incident. Conversely, a chaotic, ad-hoc response often makes things worse – and more expensive.
When an incident occurs, time is of the essence. A strong incident response plan can reduce downtime and losses – which is exactly what insurers want to see. Some policies even have clauses that if you don’t follow an agreed-upon response plan, the coverage could be limited. So make sure your team is prepared to act swiftly and in accordance with both the plan and any policy requirements (like reporting timelines or using certain vendors). It could make the difference between a covered loss and a protracted fight with your insurer.
The Documentation Dilemma: Proving Compliance
Having all the right security measures in place is vital, but there’s another piece to the puzzle: documentation. From an insurer’s perspective, if a control isn’t documented, they might as well assume it doesn’t exist. When it comes time to file a claim, the insurer will often launch an investigation or ask detailed questions. You’ll need to demonstrate that you were in compliance with the policy’s security requirements before the incident (as well as during and after).
In the Hamilton case, for example, the city knew MFA was required and even claims to have been working on it – but they hadn’t fully implemented it at the time of the attack. Unfortunately, knowing isn’t enough. Insurers require tangible proof. Here are some types of documentation you should maintain (and may be asked to produce) to support a cyber insurance claim: security assessments and audits, employee training records, backup and recovery test logs, incident response drills and plan updates, and vendor security and contracts.
In short, document everything you reasonably can when it comes to security controls and compliance. It can feel like overkill – until you’re in a dispute with an insurer and that documentation saves your claim.
Red Flags That Will Doom Your Claim
Even with robust security and documentation, certain missteps can practically guarantee a claim denial. Watch out for these red flags – if they occur, your chances of a successful payout drop dramatically:
Misrepresentation on Applications: Lying or bending the truth on your insurance application is a recipe for disaster. Many policies have provisions requiring you to maintain the stated controls – if you don’t, claims can be denied because you didn’t keep the warranties you made at policy issuance. Honesty up front is truly the best (and only) policy here.
Delayed Incident Reporting: Most cyber policies have a clause that you must notify the insurer “promptly” or within a specified timeframe after discovering a cyber incident. This could be 24 hours, 48 hours, or “as soon as practicable.” If you delay reporting – perhaps out of fear, confusion, or an attempt to resolve it quietly – you might violate the terms and give the insurer a reason to deny coverage. Even if you’re not 100% sure an incident is claim-worthy, err on the side of notifying (many have 24/7 hotlines). It’s better to keep them in the loop than to argue later about why you waited.
Using Unauthorized Software or Services: If you go outside the bounds of what your insurer considers acceptable risk – for instance, using outdated software that’s reached end-of-life, or hiring an unapproved data recovery firm that botches things – you could void your claim. Some policies stipulate that in the event of an incident, you must use their approved vendors for services like forensics and restoration.
In summary, be truthful, be prompt, and follow the rules. A cyber insurance policy is a contract with obligations on both sides. If you don’t hold up your end (by providing accurate information and adhering to conditions), the insurer is within rights to deny coverage.
The Fine Print: Understanding Exclusions
We touched on some common exclusions earlier, but it’s worth spotlighting a few that are especially relevant in today’s cyber risk climate. Exclusions are specific situations or types of damage that the policy will not cover. Always read the exclusions page of your policy carefully – it’s not fun reading, but it tells you the boundaries of your coverage. If something is excluded that you think is a significant risk to your business, discuss with your broker or insurer whether it can be endorsed (added) or if you need a different product. Knowing ahead of time what’s not covered is key to avoiding nasty surprises later.
Best Practices for Maintaining Coverage
Given all we’ve covered, it’s clear that keeping your cyber insurance intact and effective is an active process. You can’t just buy a policy and forget about it until renewal. Here are some best practices to ensure you remain in good standing with your insurer and are truly covered if an incident occurs:
Regular Compliance Audits: Conduct periodic reviews (quarterly, if possible) of your environment against your policy requirements. Make a checklist from your policy and application – are we still doing all these things? Some companies engage outside consultants or Managed Security Service Providers to perform these compliance check-ups, which can provide extra assurance and evidence.
Maintain Approved Vendor Relationships: As discussed, work with your insurer’s approved vendors for things like incident response, forensics, and security services whenever possible. Many insurers have partnerships or panels of experts who know how to work with the insurance process. Talk to your insurer about pre-incident services too – many policies now come with access to preventive resources (like free security training modules, or a hotline to an incident coach).
Keep Detailed Records: We cannot emphasize enough – keep evidence of everything related to your cybersecurity program. Create a repository for policies and procedures, network diagrams, logs of security appliance alerts, patch management reports, etc. Also, track all changes – for example, if you had to temporarily disable a security tool for any reason, log when and why and for how long. This level of record-keeping can be tedious, but it’s crucial during claim investigations.
Review Policies Annually (and When Things Change): Cyber threats evolve rapidly, and so do insurance products. Each year, at renewal, carefully review your policy’s terms, limits, and requirements. What was acceptable last year might not meet new standards. For example, a year ago insurers might not have explicitly required MFA for all privileged accounts – now nearly all do. Or the insurer might introduce a new exclusion (perhaps excluding a certain type of attack that became prevalent).
Test Everything (Regularly): Security is not “set and forget,” and neither is insurance compliance. We’ve mentioned testing backups and IR plans already, but it bears repeating broadly: regularly test your controls. Make sure you know which tests are expected and get them done. Think of it as part of the cost of maintaining the policy, just like an annual physical for health insurance. It will pay dividends by reducing your risk and smoothing any claim that does arise.
By treating the insurer’s requirements as a baseline and continuously improving on them, you’ll strengthen your defenses and potentially even earn premium discounts. Remember, insurers want you to be a lower risk – it’s in both parties’ interest for you to never have to file a claim at all!
The Financial Stakes: Why This Matters
Why all this emphasis on compliance and coverage? Because the financial stakes in cyber incidents are enormous – and rising. If your claim is denied, your organization could be looking at costs that few can absorb out-of-pocket.
To put it plainly, a cyber incident can be an existential event for a business. Cyber insurance was supposed to be the safety net to catch you in that worst-case scenario. It still can be – but only if it functions as intended.
Conclusion: Protection Requires Preparation
Don’t wait for an attack to find out that your cyber insurance won’t pay. By then, it’s too late. Instead, take action today. Treat your cyber insurance requirements as minimum standards and strive to exceed them. Cyber insurance can be a lifesaver, but only if you’ve done your part to let it work. Prepare diligently now, and you’ll truly be protected later.
