The “failure to patch” exclusion in cyber insurance policies typically denies coverage for losses resulting from exploits of known vulnerabilities for which a patch was available but not applied within a reasonable timeframe. Demonstrating due diligence requires a robust vulnerability management program. This includes regular vulnerability scanning, timely patch deployment following vendor advisories (e.g., from CISA, NIST), and documented exceptions for patches that cannot be immediately applied due to compatibility issues or operational constraints. Exceptions should include compensating controls. Insureds should maintain detailed records of patching activities, vulnerability assessments, and risk mitigation strategies. Legal precedents regarding negligence and reasonable security practices may be considered in claim disputes. The North Dakota Century Code does not specifically address patching requirements for cyber insurance, but general principles of contract law and the duty of good faith apply.

The “war exclusion” in cyber insurance policies typically excludes coverage for losses arising from acts of war, including cyber warfare. The difficulty lies in attributing cyberattacks to specific nation-states. While governments and cybersecurity firms may offer attribution assessments, these are often based on circumstantial evidence and may be contested. If an attack is definitively attributed to a nation-state acting in a hostile manner, the war exclusion may be invoked, potentially denying coverage. The burden of proof for invoking the war exclusion generally falls on the insurer. The lack of clear legal definitions of cyber warfare and the challenges of attribution create significant uncertainty in applying this exclusion. North Dakota insurance regulations do not provide specific guidance on war exclusions in cyber policies, so standard insurance contract interpretation principles apply.

The “betterment” exclusion prevents an insured from receiving a windfall gain as a result of a covered loss. It typically applies when a damaged or destroyed asset is replaced with a newer, more advanced version. For example, if a server is destroyed in a ransomware attack and the insured replaces it with a server that has significantly higher processing power and storage capacity, the insurer may argue that the replacement constitutes a betterment. The insurer would likely calculate the covered loss by determining the cost of replacing the server with a comparable model to the one that was destroyed, rather than the actual cost of the upgraded server. The difference in cost represents the betterment, which is excluded from coverage. North Dakota law generally follows standard insurance principles regarding indemnity and preventing unjust enrichment.

Business interruption coverage in a cyber insurance policy provides compensation for lost profits and continuing expenses incurred as a result of a covered cyber incident that disrupts the insured’s business operations. Covered losses typically include lost revenue, extra expenses (e.g., overtime pay, temporary office space), and potentially reputational harm leading to decreased sales. To substantiate a business interruption claim, the insured must provide detailed documentation, including financial statements, sales records, tax returns, and expert analysis demonstrating the causal link between the cyber incident and the business interruption. Forensic reports detailing the incident’s impact on IT systems are also crucial. The insured must demonstrate that the losses are directly attributable to the covered cyber event. North Dakota law requires insurers to handle business interruption claims in good faith and to conduct a reasonable investigation.

Incident response coverage in a cyber insurance policy provides access to a range of services designed to help an insured organization respond to and recover from a cyber incident. These services typically include forensic investigation, legal counsel, public relations management, data breach notification, and credit monitoring for affected individuals. The coverage is intended to supplement the insured’s own incident response plan, providing access to specialized expertise and resources that may not be available in-house. The insurer often maintains a panel of approved vendors, and the insured may be required to use these vendors to qualify for coverage. The policy may also cover the costs of implementing security enhancements to prevent future incidents. North Dakota regulations require insurers to act reasonably and promptly in providing incident response services.

Social engineering coverage in cyber insurance policies typically covers losses resulting from fraudulent schemes where an attacker deceives an employee into transferring funds or releasing sensitive information. Common examples include phishing attacks, business email compromise (BEC), and invoice fraud. To reduce the risk of social engineering attacks and maintain coverage, insured organizations should implement robust security awareness training programs, multi-factor authentication, and strict internal controls for financial transactions. They should also verify payment requests through multiple channels and regularly audit their security practices. Insurers may deny coverage if the insured’s security practices are deemed inadequate or if the employee acted with gross negligence. North Dakota law emphasizes the importance of reasonable care in preventing fraud.

The retroactive date in a cyber insurance policy specifies the date from which the policy will cover incidents. If an incident occurred before the retroactive date, even if it is discovered during the policy period, it will generally not be covered. The retroactive date is designed to prevent insureds from purchasing coverage after becoming aware of a potential claim. When selecting a retroactive date, an insured should consider the length of time they have been operating, their past security practices, and any known vulnerabilities or incidents. A longer retroactive period provides broader coverage but may also increase the premium. Insureds should carefully review their policy terms and conditions to understand the implications of the retroactive date. North Dakota insurance regulations require clear and unambiguous policy language regarding retroactive dates.

The principle of “reasonable security” under North Dakota Century Code (NDCC) 51-30, which addresses the protection of personal information, significantly shapes cyber insurance underwriting. Insurers must assess whether a prospective client’s security measures are “reasonable” given the nature and sensitivity of the data they handle, the size and complexity of their operations, and the available technology. This assessment goes beyond simple compliance checklists. Due diligence steps include: (1) Reviewing the client’s written information security program (WISP) to ensure it aligns with industry best practices (e.g., NIST Cybersecurity Framework, ISO 27001). (2) Evaluating the client’s risk assessment process, including the identification of potential threats and vulnerabilities. (3) Assessing the client’s implementation of security controls, such as access controls, encryption, intrusion detection systems, and data loss prevention measures. (4) Verifying the client’s incident response plan and its ability to detect, contain, and recover from cyber incidents. (5) Examining the client’s employee training programs on data security and privacy. Insurers may also conduct on-site audits or penetration testing to validate the client’s security posture. Failure to meet the “reasonable security” standard can lead to policy exclusions or higher premiums.

North Dakota Century Code (NDCC) 51-30-06 mandates specific actions following a data breach involving personal information. A cyber insurance policy’s “incident response” coverage is designed to assist in fulfilling these legal requirements. This coverage typically includes forensic investigation to determine the scope of the breach, legal counsel to advise on notification obligations, public relations support to manage reputational damage, and notification costs (e.g., postage, call center services). The policy assists in meeting notification requirements by providing access to experienced professionals who can help determine the individuals affected, the content of the notification, and the timing of the notification. However, potential pitfalls exist. The insured must promptly notify the insurer of the breach to trigger coverage. Delays in notification to the insurer could jeopardize coverage. The insured must also carefully coordinate the insurance claim with the statutory obligations. For example, the insurer may want to control the notification process to minimize costs, but the insured has a legal duty to provide accurate and timely notification. Conflicts can arise if the insurer’s preferred approach does not fully comply with NDCC 51-30-06. The insured should ensure that the policy allows them to retain control over the notification process and to comply with all applicable laws.

The “failure to maintain” exclusion in cyber insurance policies typically excludes coverage for losses resulting from the insured’s failure to implement or maintain reasonable security measures. In the context of a ransomware attack where the insured failed to apply readily available security patches, an insurer might invoke this exclusion, arguing that the failure to patch constituted a lack of reasonable maintenance. The interpretation of this exclusion is fact-specific and depends on the policy language and the circumstances of the breach. The insurer would likely argue that the insured had a duty to apply patches, especially if the patches addressed known vulnerabilities that were exploited in the attack. The insured might counter that the failure to patch was unintentional or that the patches were not readily available or applicable to their systems. While specific legal precedents in North Dakota directly addressing this exclusion in cyber insurance are limited, general principles of contract interpretation and insurance law would apply. North Dakota courts generally interpret insurance policies in favor of the insured, resolving ambiguities against the insurer. The insurer would need to demonstrate that the insured’s failure to patch was a material breach of the policy and that the breach directly caused the loss. The availability and applicability of the patches, the insured’s knowledge of the vulnerability, and the reasonableness of the insured’s security practices would all be relevant factors.

Social engineering attacks, which manipulate individuals into divulging confidential information or performing actions that compromise security, can bypass even robust technical defenses. Cyber insurance policies address losses from these attacks through various provisions, but coverage is not always guaranteed. North Dakota laws concerning electronic funds transfers and fraud (e.g., NDCC Title 41, Uniform Commercial Code) may be relevant in determining liability and coverage. Specific policy provisions crucial for coverage in social engineering scenarios include: (1) “Computer Fraud” coverage, which typically covers losses resulting from fraudulent entry of data or changes to electronic data. (2) “Funds Transfer Fraud” coverage, which covers losses resulting from the fraudulent transfer of funds due to unauthorized access to the insured’s computer system. (3) “Social Engineering Fraud” coverage, which specifically addresses losses resulting from the insured’s employees being tricked into transferring funds or divulging confidential information. Coverage often depends on whether the attack directly involved unauthorized access to the insured’s computer system. Some policies require a direct compromise of the system, while others may cover losses even if the attack only involved manipulation of employees. Insureds should carefully review their policy language to understand the scope of coverage for social engineering attacks and ensure that the policy includes provisions that address these types of threats.

Cyber insurance policies often include business interruption coverage to compensate for lost profits and extra expenses incurred due to a covered cyber event, such as a denial-of-service (DoS) attack. However, claiming business interruption losses requires meeting specific evidentiary standards, which can be challenging. To successfully claim business interruption losses under North Dakota law, the insured must prove: (1) That the DoS attack was a covered event under the policy. (2) That the DoS attack directly caused a disruption to the insured’s business operations. (3) The extent of the business interruption loss, including lost profits and extra expenses. Proving causation can be difficult, as the insured must demonstrate that the DoS attack was the proximate cause of the business interruption. This may require expert testimony to establish the technical details of the attack and its impact on the insured’s systems. Quantifying damages can also be challenging, as the insured must provide evidence of lost profits, such as historical sales data, financial statements, and expert projections. The insured must also document any extra expenses incurred to mitigate the business interruption, such as hiring temporary staff or implementing alternative systems. Insurers may scrutinize these claims closely, and the insured must be prepared to provide detailed and credible evidence to support their claim.

“War exclusions” in cyber insurance policies typically exclude coverage for losses resulting from acts of war, including cyber warfare. The applicability of these exclusions to state-sponsored cyberattacks is a complex and evolving issue. In the event of a cyberattack attributed to a foreign government, an insurer might attempt to invoke the war exclusion, arguing that the attack constituted an act of war. However, the insured could raise several legal arguments to challenge such an invocation. First, the insured could argue that the cyberattack did not meet the traditional definition of “war,” which typically involves armed conflict between states. Second, the insured could argue that the attribution of the attack to a foreign government is uncertain or unreliable. Third, the insured could argue that the policy language is ambiguous and should be construed against the insurer. The interpretation of war exclusions in cyber insurance policies is a developing area of law, and there is limited legal precedent on this issue. Courts may consider factors such as the intent of the parties, the nature of the attack, and the involvement of state actors in determining whether the war exclusion applies. The insured should carefully review the policy language and consult with legal counsel to assess the potential applicability of the war exclusion in the event of a state-sponsored cyberattack.

Vicarious liability holds a party responsible for the actions of another, even if they were not directly involved in the wrongdoing. In the context of a cyber incident caused by a third-party vendor, a North Dakota-based company could be held vicariously liable if the vendor’s negligence or security breach resulted in harm to the company’s customers or data. This liability could extend to data breach notification costs, regulatory fines, and lawsuits. To mitigate its own liability and ensure coverage under its cyber insurance policy, the company has significant due diligence obligations regarding its vendors’ cybersecurity practices. These obligations include: (1) Conducting thorough due diligence on prospective vendors to assess their security posture, including reviewing their security policies, certifications (e.g., SOC 2), and incident response plans. (2) Including strong cybersecurity requirements in vendor contracts, such as requiring vendors to maintain reasonable security measures, comply with applicable laws and regulations, and promptly notify the company of any security breaches. (3) Regularly monitoring vendors’ compliance with these requirements, including conducting audits or penetration testing. (4) Implementing appropriate access controls to limit vendors’ access to sensitive data and systems. (5) Ensuring that the company’s cyber insurance policy covers losses resulting from vendor breaches and that the policy does not exclude coverage for failures to perform adequate vendor due diligence. Failure to perform adequate vendor due diligence could expose the company to significant liability and jeopardize its cyber insurance coverage.