5 Ways Cyber Insurance Exclusions Are Creating Zombie Policies

By: Stephanie Snyder Frenier | September 12, 2022

Stephanie Snyder Frenier is SVP with CAC Specialty’s Professional & Cyber Solutions practice. Stephanie has over 18 years of experience engaging with clients and prospects to develop tailor-made cyber and technology errors & omissions risk transfer solutions, while also supporting marketing and sales strategy.

Topics: Cyber | Risk Insider

Is it the night of the living dead for cyber insurance? New clarifications of coverage — seeking to exclude losses for certain types of events — should be concerning for cyber insurance buyers.

While carriers cite loss aggregation, portfolio sustainability and access to new capital as reasons for these changes, the outcome is new exclusions on top of an already challenging cyber insurance offering.

These coverage amendments have the potential to exclude losses for insurance buyers’ most concerning cyber loss scenarios. This could render the insurance less meaningful, should it lack material coverage for large financial losses, turning it into an undead shell of its former self — essentially, a zombie policy.

Let’s look at the top five zombie policy characteristics in today’s cyber insurance market:

1) Zombie from the Grave

After years of no sub-limits on cyber insurance policies, this coverage structure came back from the grave in response to ransomware attacks and IT supply chain losses. Sub-limits may be related to dependent business interruption coverage, malware/ransomware losses, or may include regulatory fines, payment card loss, hardware replacement, technology betterment, and/or reputational harm coverage. Sub-limits create an additional coverage concern as excess carriers may not follow these primary sub-limits.

2) Biting Zombie

Like the bite that results in zombie transmission, some carriers have introduced catastrophic loss exclusions for events impacting more than one organization at the same time. Coverage is available for an attack against one company only, and should there be “transmission” to another company coverage is excluded. Examples of these “bites” include events impacting the software supply chain, zero-day exploits, unpatched known vulnerabilities, and events impacting internet and telecommunications service providers.

3) Runner Zombie

The runner zombie remains dormant until it is reanimated and becomes aggressive. This is a zombie who lies in wait until a triggering event, like the limitation to systemic event cyber coverage after a 72-hour period of indemnity. While this coverage provision appears to be docile as coverage is available for systemic events — such as an operating system or cloud provider outage — after 72 hours, this zombie attacks and excludes further loss.

4) Walker Zombie

The walker zombie is slow and tends to congregate in groups. These exclusions are more specific to individual security controls and may be batched together. Several carriers have introduced specific exclusions addressing losses associated with end-of-life software that is no longer supported, common vulnerabilities, and software that is not patched. Some carriers have introduced co-insurance that incrementally shifts more risk to the insurance buyer if the vulnerability is not patched after various time periods.

5) New Zombie

Lloyd’s Market Association recently shared a Market Bulletin indicating that starting in March 2023, Lloyd’s cover holders must add language excluding state-backed cyberattacks. This will also require language in terms of determining attribution of the cyberattack. This new zombie is one to watch, as it has the potential to be particularly deadly to coverage.

How can cyber insurance buyers ensure that they are not purchasing a zombie policy? Find a good broker who specializes in cyber insurance coverage and can help negotiate with underwriters in multiple markets (U.S. retail, U.S. wholesale, London, and Bermuda) to determine the broadest possible coverage at the best possible price.

Even more importantly, buyers should ensure that they are investing in cybersecurity posture improvements and are maintaining best practices relative to ever-evolving cybersecurity standards. A good broker cannot overcome poor cybersecurity hygiene, and the worse a company’s hygiene, the more their coverage is apt to be a zombie. With work on all sides — buyer, broker, and carrier — the cyber insurance market can remain sustainable while avoiding a dawn of the dead. &

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.