Do You Need Cyber Insurance?

Cyber insurance provides financial protection through two types of coverage:

• First-party coverage: Covers your direct costs like system recovery, data restoration, business interruption losses, forensic investigations and employee notification expenses.
• Third-party coverage: Covers lawsuits, regulatory fines and legal defense costs when customers or partners sue you over a breach.

When a cyberattack happens, you file a claim with your insurer like any other business insurance. You'll pay your deductible (if applicable; some cyber policies have no deductible for certain services), then your insurer covers eligible expenses up to your policy limits, subject to policy terms and conditions. Your provider assigns specialists to help with incident response, legal requirements and getting your business back online.

Coverage varies by policy and may exclude certain types of attacks or pre-existing vulnerabilities.

Cyber insurance is needed because health care practices handle sensitive patient information, from medical histories to Social Security numbers. Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) regulations, medical practices must put safeguards in place to keep patient data secure. This federal law holds health care providers accountable for protecting patient information, creating major compliance obligations.

When a data breach happens, you have 60 days to contact your patients. Otherwise, you'll face regulatory fines, legal fees and potential lawsuits, which can strain your resources and disrupt business. Cyber insurance helps you manage these costs so that you can focus on patient care during crises.

No federal or state laws require retail and e-commerce businesses to carry cyber insurance. But all states have data breach notification laws that create costs when incidents occur.

A data breach means contacting customers, reporting to government agencies, and often paying for credit monitoring. In Massachusetts, you must notify state agencies when breaches happen. Washington, D.C. goes further: you must cover 18 months of identity theft protection if social security numbers get exposed.

The Federal Trade Commission recommends cyber insurance to help protect your business against losses from cyber attacks. It covers breach response costs and business interruption expenses that most general liability policies won't cover.

State breach notification laws and cyber insurance requirements vary greatly. Consult local regulations for your specific jurisdiction.

No laws require professional services businesses to carry cyber insurance, but these firms face unique risks that make coverage valuable.

Professional firms like law practices, consultants and accounting offices hold valuable client data but typically don't have robust security systems. This combination makes them attractive targets, according to Cybersecurity and Infrastructure Security Agency (CISA). A data breach can trigger state notification rules, expose you to lawsuits over broken confidentiality and seriously damage your reputation.

Cyber insurance helps cover these costs, from hiring breach response specialists to managing client notifications and defending against malpractice claims.

Technology and IT services companies aren't legally required to purchase cyber insurance. But many don't realize that even the best cybersecurity can't prevent every breach. When it happens, the costs add up fast.

Cybercriminals love targeting smaller tech companies because they're easier to break into than large corporations, but still handle valuable client data. When a breach happens, you're looking at substantial recovery costs that could be more than what most small businesses can handle out of pocket.

Cyber insurance covers the basics, but many businesses need additional protection depending on their industry and operations. For instance, if a health care provider's electronic medical records (EMR) system gets hacked due to poor implementation, cyber insurance covers the breach response, but Errors & Omissions (E&O) insurance covers the malpractice claim.

You're not legally required to buy cyber insurance, but that doesn't mean you should skip it. Companies in health care, finance and tech are most affected when data breaches happen. Basic cyber insurance helps, but you'll need other coverage, like professional liability and crime insurance.

MoneyGeek's experts answered common questions business owners ask about cyber insurance requirements: