The “failure to patch” exclusion in cyber insurance policies typically denies coverage for losses resulting from cyber incidents that exploit known vulnerabilities for which a security patch was available but not applied by the insured within a reasonable timeframe. This exclusion underscores the insured’s responsibility to maintain a reasonable level of cybersecurity hygiene. Under New York law, while there isn’t a specific statute mandating patching, failure to do so could be construed as negligence, potentially impacting liability in the event of a data breach. New York’s data security laws, such as the SHIELD Act (Stop Hacks and Improve Electronic Data Security Act), require businesses to implement reasonable security measures to protect private information. Failure to patch known vulnerabilities could be seen as a violation of this requirement, potentially leading to regulatory action by the New York Attorney General under General Business Law § 899-aa and potentially impacting the availability of insurance coverage. The insured must demonstrate due diligence in vulnerability management to avoid policy exclusions.

The NYDFS Cybersecurity Regulation (23 NYCRR 500) significantly impacts cyber insurance underwriting and claims processes in New York. This regulation mandates that covered entities (financial institutions operating in New York) establish and maintain a comprehensive cybersecurity program. Compliance with 23 NYCRR 500 directly influences an organization’s insurability. Insurers often assess an applicant’s adherence to the regulation’s requirements, such as conducting regular risk assessments, implementing multi-factor authentication, and having incident response plans. Non-compliance can lead to higher premiums, coverage limitations, or even denial of coverage. During the claims process, insurers may investigate whether the insured complied with 23 NYCRR 500. A failure to comply could be used as grounds to deny a claim, particularly if the cyber incident resulted from a deficiency in the organization’s cybersecurity program that was required by the regulation. Insurers may request documentation demonstrating compliance, such as risk assessment reports and cybersecurity policies.

“Betterment” in cyber insurance refers to improvements or upgrades made to an insured’s systems during data restoration or system recovery following a cyberattack, which result in the systems being more valuable or resilient than they were before the incident. Insurance policies often address betterment by excluding coverage for the incremental cost of these improvements. The rationale is that the insurer should only be responsible for restoring the insured to its pre-loss condition, not for providing a windfall benefit. Disputes can arise when determining what constitutes betterment. For example, if an insured upgrades to a newer operating system during recovery to address vulnerabilities exploited in the attack, the insurer might argue that the upgrade cost is betterment. The insured, however, might contend that the upgrade was necessary to restore functionality and prevent future attacks. Policy language regarding “reasonable and necessary” expenses and “like kind and quality” replacements is crucial in resolving these disputes. New York law generally requires insurance policies to be interpreted according to their plain meaning, but ambiguities are construed against the insurer.

The “social engineering” exclusion in cyber insurance policies typically excludes coverage for losses resulting from the manipulation of employees or other authorized users into transferring funds or divulging confidential information. Common social engineering tactics include phishing emails, pretexting (impersonating a trusted individual), and business email compromise (BEC). Insurers differentiate between employee negligence and sophisticated social engineering attacks by examining the circumstances surrounding the incident. Factors considered include the level of sophistication of the attack, the employee’s training and awareness of social engineering risks, and the organization’s internal controls. If the attack was highly sophisticated and difficult to detect, and the employee had received adequate training, the insurer may be more likely to cover the loss. However, if the employee acted negligently, such as by ignoring clear warning signs or violating established security protocols, the claim may be denied. Insurers often rely on forensic analysis and expert opinions to determine the nature of the attack and the employee’s culpability. New York courts generally uphold policy exclusions as long as they are clear and unambiguous.

Incident response plans are crucial in mitigating cyber insurance claims. A well-defined and effectively executed incident response plan can minimize the damage caused by a cyberattack, reduce recovery costs, and demonstrate the insured’s commitment to cybersecurity best practices. The quality and execution of the plan significantly impact the insurer’s assessment of a claim. Insurers often review the plan to determine whether it was followed appropriately and whether it was adequate to address the specific type of incident. In the context of New York’s data breach notification law (General Business Law § 899-aa), a robust incident response plan is essential for complying with the law’s requirements. This law mandates that businesses notify affected individuals and relevant authorities of a data breach involving private information. A prompt and thorough incident response can help the insured identify the scope of the breach, contain the damage, and provide timely notifications, potentially reducing legal and regulatory liabilities. Failure to comply with General Business Law § 899-aa due to a deficient incident response plan could negatively impact the insurer’s assessment of the claim and potentially lead to denial of coverage.

The “war exclusion” in cyber insurance policies typically excludes coverage for losses resulting from acts of war, including cyberattacks conducted by or on behalf of a nation-state. The applicability of this exclusion to state-sponsored cyberattacks is a complex and evolving issue. Insurers face challenges in determining whether a cyberattack qualifies as an act of war. Factors considered include the attacker’s identity, motivation, target, and the severity of the attack. Attribution of cyberattacks to specific nation-states is often difficult due to the use of sophisticated techniques to mask the attacker’s origin. Legal challenges arise in proving the necessary elements to invoke the war exclusion, such as demonstrating that the attack was directed by a state actor and intended to achieve a military or political objective. Courts may consider evidence such as intelligence reports, expert testimony, and government statements. The burden of proof typically rests on the insurer to demonstrate that the war exclusion applies. The interpretation of the war exclusion in the context of cyberattacks is an area of ongoing legal development.

“Cyber extortion” coverage in cyber insurance policies provides coverage for expenses incurred as a result of a ransomware attack or other cyber extortion threat. This coverage typically includes the cost of ransom payments, as well as expenses for forensic investigation, negotiation with the threat actor, and data restoration. To maximize the likelihood of coverage when faced with a ransomware attack, an insured should take the following steps: immediately notify the insurer of the incident; engage a qualified cybersecurity firm to investigate the attack and determine the extent of the damage; preserve all evidence related to the attack; cooperate fully with the insurer’s investigation; and follow the insurer’s instructions regarding negotiation and payment of the ransom. The insured should also consult with legal counsel to ensure compliance with applicable laws and regulations, such as those related to sanctions and money laundering. Insurers may require the insured to obtain pre-approval before making any ransom payments. New York law prohibits insurance policies from covering illegal activities, so the insurer will assess the legality of any proposed ransom payment before providing coverage.

The SHIELD Act, an amendment to New York’s General Business Law § 899-aa, broadens the scope of private information protected and mandates reasonable security measures. This directly impacts cyber insurance underwriting. Insurers must assess an applicant’s adherence to these measures to gauge risk. Documentation required might include: a written information security program (WISP) detailing administrative, technical, and physical safeguards; evidence of employee training on data security; vulnerability assessments and penetration testing reports; incident response plans; and data encryption protocols. Insurers evaluate these documents to determine if the applicant has implemented reasonable security, considering the organization’s size, complexity, and sensitivity of the data. Failure to demonstrate reasonable security, as defined by the SHIELD Act, can lead to higher premiums or denial of coverage, as it signifies a greater risk of a data breach and associated liabilities. The NYDFS Cybersecurity Regulation (23 NYCRR 500) also plays a role, particularly for financial institutions, and compliance with it can be used to demonstrate a strong security posture.

The “failure to maintain” exclusion in cyber insurance policies typically denies coverage for losses resulting from a failure to apply security patches, maintain software updates, or implement other necessary security measures. New York’s data breach notification law (General Business Law § 899-aa) implicitly requires organizations to exercise due care in protecting personal information. If a breach occurs due to a known vulnerability that the insured failed to address despite available patches or updates, the insurer might invoke the “failure to maintain” exclusion. To do so, the insurer would need to demonstrate that the insured was aware of the vulnerability and the available mitigation, yet failed to take reasonable steps to address it. This requires a thorough investigation of the insured’s security practices, including patch management policies, vulnerability scanning procedures, and incident response protocols. The insurer would argue that the breach resulted directly from the insured’s negligence in maintaining reasonable security, thus falling under the exclusion. The burden of proof lies with the insurer to demonstrate the causal link between the failure to maintain and the resulting breach.

The NYDFS Cybersecurity Regulation (23 NYCRR 500) mandates comprehensive cybersecurity programs for financial institutions operating in New York. This regulation significantly impacts cyber insurance. Compliance with 23 NYCRR 500 generally reduces the perceived risk by insurers, potentially leading to broader coverage and lower premiums. Insurers view compliance as evidence of a robust security posture, minimizing the likelihood and impact of cyber incidents. Conversely, non-compliance increases the perceived risk, potentially resulting in narrower coverage, higher premiums, or even denial of coverage. Insurers may require detailed documentation demonstrating compliance with specific sections of the regulation, such as the implementation of a cybersecurity program, the appointment of a Chief Information Security Officer (CISO), and the performance of regular risk assessments. The cost of implementing and maintaining compliance with 23 NYCRR 500 can be substantial, but it is often offset by the benefits of reduced cyber insurance premiums and enhanced security.

Cyber insurance policies typically cover business interruption losses resulting from ransomware attacks, but the extent of coverage hinges on specific policy language. Key clauses include: the definition of “business interruption,” which specifies the covered causes of interruption (e.g., system downtime due to ransomware); the “waiting period” or “deductible period,” which defines the time that must elapse before coverage kicks in; and the method of calculating lost profits, which may be based on historical data or projected revenue. Under New York law, courts interpret insurance contracts according to their plain meaning, so clear and unambiguous language is paramount. Crucial policy language includes provisions addressing contingent business interruption (losses resulting from disruptions to suppliers or customers), data restoration costs, and the availability of coverage for increased costs of working (expenses incurred to mitigate the interruption). Insureds should carefully review these clauses to understand the scope of coverage and potential limitations. Disputes often arise over the calculation of lost profits and the determination of whether the interruption was directly caused by the ransomware attack.

The “war exclusion” clause in cyber insurance policies typically excludes coverage for losses resulting from acts of war, including cyber warfare. The increasing prevalence of state-sponsored cyberattacks raises complex questions about the applicability of this exclusion. If a large-scale cyber incident is attributed to a nation-state, an insurer might attempt to invoke the war exclusion, arguing that the attack constitutes an act of cyber warfare. However, proving that an attack qualifies as an act of war can be challenging. Courts often require evidence of a formal declaration of war or a sustained military conflict. The attribution of cyberattacks to specific nation-states is often difficult and subject to uncertainty. Legal challenges may arise over the interpretation of the war exclusion clause, the standard of proof required to establish an act of war, and the causal link between the state-sponsored attack and the insured’s losses. Insureds may argue that the attack, even if state-sponsored, does not meet the legal definition of war and that the exclusion should not apply. The burden of proof lies with the insurer to demonstrate that the war exclusion applies.

“Betterment” in cyber insurance refers to improvements made to an insured’s systems or data during the restoration process following a data breach that go beyond simply restoring the system to its pre-breach state. Insurers generally do not cover the cost of betterment, arguing that it provides the insured with a benefit beyond indemnification for their losses. However, the line between restoration and betterment can be blurry. For example, if an insured upgrades to a more secure version of software during data restoration, the insurer might argue that the upgrade constitutes betterment and is not covered. Under New York law, courts typically interpret insurance contracts to provide reasonable coverage for losses directly resulting from the covered event. If the security improvements are necessary to prevent future breaches and are inextricably linked to the restoration process, a court might find that they are covered, even if they technically constitute betterment. The specific policy language and the circumstances of the breach will be crucial in determining whether betterment costs are covered. Insureds should seek clarification from their insurers regarding the treatment of betterment costs before implementing security improvements during data restoration.

Vicarious liability refers to the legal responsibility of an organization for the actions of its third-party vendors or service providers. In the context of cyber insurance, an organization may be held liable for data breaches caused by the negligence or misconduct of its vendors, even if the organization itself was not directly at fault. Cyber insurance policies may or may not explicitly cover vicarious liability. Some policies may exclude coverage for breaches caused by third parties, while others may provide coverage subject to certain limitations. To mitigate the risk of vicarious liability and ensure adequate cyber insurance coverage, organizations should: conduct thorough due diligence on their vendors’ security practices; include strong indemnification clauses in their vendor contracts; require vendors to maintain adequate cyber insurance coverage; implement robust security controls to monitor vendor access and activity; and carefully review their own cyber insurance policy to understand the scope of coverage for third-party breaches. Under New York law, courts consider various factors in determining vicarious liability, including the degree of control the organization exercises over the vendor, the nature of the vendor’s services, and the foreseeability of the breach.