How Cyber Insurance Really Works (and What It Doesn’t Cover)

Introduction: Insurance Is Not a Security Strategy

More small businesses than ever are asking the right question:

“Do we need cyber insurance?”

The short answer is: yes — probably.
The better answer is: yes, but know what you’re really buying.

Cyber insurance isn’t a magic shield.
It’s a financial safety net. And like all insurance, it comes with fine print, limitations, and expectations.

In this blog, we’ll break down how cyber insurance actually works, what it usually covers, what it often doesn’t, and how to make sure your policy isn’t a false sense of security.

What Is Cyber Insurance?

Cyber insurance (sometimes called cyber liability insurance or data breach insurance) is designed to help businesses recover financially from a cyber incident.

It can cover things like:

• Data breach costs

• Forensics and recovery

• Legal fees

• Ransomware payments

• PR and crisis communications

• Notification to clients or regulators

• Downtime losses

But only if:

• You’re compliant with the policy

• You’ve done your due diligence

• The cause of the breach is included in your coverage

What Cyber Insurance Typically Covers

1. First-Party Costs

These are direct costs to your business.

• Incident response and IT forensics

• Customer notification

• Data recovery

• Legal defence

• Loss of income from downtime

• Extortion payments (e.g. ransomware)

2. Third-Party Costs

If your breach impacts others, like clients or suppliers, insurance may help cover:

• Compensation claims

• Legal action taken against you

• Regulatory fines (in some cases)

3. Crisis Management

Some policies include support for PR, reputation damage, or crisis comms to clients and the public.

What Cyber Insurance Often Doesn’t Cover

Here’s where most businesses get caught out.

• Old software with known vulnerabilities

• Negligence or poor security practices

• Untrained staff falling for phishing scams

• Data stored in unsupported systems

• Losses due to unapproved third-party vendors

• Social engineering attacks (many policies exclude them unless explicitly added!)

In other words:
If you don’t have proper security in place — you might not get paid.

Real-World Example: Claim Denied

A UK consultancy suffered a breach after a staff member clicked a phishing link.

Their policy was meant to cover losses up to £100,000.
But the claim was denied.

Why?

• MFA wasn’t enforced

• Backups weren’t tested

• They hadn’t completed required annual training

The insurer argued they failed to meet basic cyber hygiene.
And they were right.

The Most Common Pitfalls with Cyber Insurance

1. Assuming You’re Covered for Everything

Spoiler: you're not.

Each policy is different. You need to read the exclusions — especially for things like:

• Insider threats

• Third-party vendor breaches

• Delayed reporting

2. Buying a Policy Without an Audit

If your business hasn’t had a proper cybersecurity assessment, you might miss critical gaps that void your coverage.

3. Forgetting the “Reasonable Precautions” Clause

Most policies have a clause that says you must take “reasonable precautions” to secure your systems.
What’s “reasonable” is open to interpretation — unless it’s written clearly.

How to Make Sure Your Cyber Insurance Actually Works

1. Get a Deep-Dive Cybersecurity Audit

Know your risks and fix the basics before you apply.
This helps you get better premiums and shows insurers you take security seriously.

2. Ask the Right Questions

When reviewing a policy, ask:

• What are the exclusions?

• Are ransomware and phishing covered?

• Are fines and third-party claims included?

• What are the requirements for MFA, backups, and training?

• What’s the claims process and response time?

3. Review and Update Annually

Your systems, staff, and data change.
Make sure your insurance reflects your current setup.

4. Get Help from an Expert

Work with a cyber-aware broker and a cybersecurity provider (like us) to bridge the gaps.

Cyber Insurance Doesn’t Replace Cybersecurity — It Complements It

Think of it like car insurance.

If your brakes don’t work and you crash — the insurer isn’t going to pay out.
Cyber insurance works the same way.

✅ You need both prevention and protection.
✅ You need security and a safety net.
✅ You need clarity, not just a checkbox.