Content taken from Andrew G. Simpson’s May 2021 article in the Insurance Journal and is a reformatted post.
While a typical business interruption can often be a confusing insurance situation, the picture gets even muddier when it involves cyber coverage.
According to Chris Mortifoglio, who is a Certified Public Accountant and a Certified Fraud Examiner (CFE), understanding the “nuances and differences” of a cyber insurance business interruption exposure or claim compared to a traditional one is more important now than ever.
“I will tell you that in my experience business interruption is often the most misunderstood part of property coverage. Part of that has to do with the fact that it can be very subjective. If you have 10 accounts looking at the same set of financial data, you’ll oftentimes receive 10 different calculations or estimates of what a business interruption loss might be,” said Mortifoglio, who has been dealing with business interruption exposure assessments and claims for more than a decade as the director of forensic accounting at Procor Solutions and Consulting in New York.
A cyber business interruption risk can be difficult to estimate and manage. To further the understanding of cyber BI, Mortifoglio identified five areas where cyber BI differs from traditional BI: period of measurement; period of restoration; personnel involved; geographic constraints, and reputational risk.
1. PERIOD OF MEASUREMENT
The differences between traditional and cyber business interruption begin with the period of measurement or evaluation of lost business income, a period that typically runs shorter for cyber. The timing of a cyber incident can have a major effect on the amount of a potential loss. “Traditionally, when you have a property loss, you’re usually valuing the disruption for a period of weeks or months or years as it takes time to physically repair the property damage that was occurring,” he said. In a cyber incident, the loss may last for just a few hours or a few days. This much shorter time period requires detailed or as Mortifoglio refers to it “granular” on the impact and the disruption on a company. “This means that in order to properly evaluate cyber business interruption, you need much more granular levels of data, maybe even hourly revenue data, or certainly daily sales data, as opposed to a traditional business structure loss where, in some cases, monthly profit and loss statements are enough to evaluate the impacts of the loss,” he said. The granular data is particularly important, for example, when the business operates 24 hours a day, 7 days a week making online sales. “There may be much more greater impacts, and there may be more of a need to really drill down into the disruptions that happen at different times of the day. What happened at midnight versus what happened at 8:00 am?” he explained. When comparing traditional versus cyber BI coverage, the waiting periods following an event before coverage begins are usually different as well. The waiting period for a cyber policy is often denoted in hours, whereas a traditional policy is typically for at least a few days, although it may be written as 48 hours or 72 hours, as opposed to perhaps a 12 hour waiting period for a cyber business interruption loss.
2. PERIOD OF RESTORATION
Another difference is the period of restoration. Defining the period of restoration is very important because that drives the ultimate value of a cyber business interruption loss. The period of restoration is defined as starting on the date of loss, which is the date of physical damage, and ending on the date “when the repairs should have been completed if the insured had utilized due diligence and dispatch.” That period of time is the period of time that an insurance policy will provide coverage for any loss of business income. But determining when this period starts or ends is not always easy. “When it comes to property losses, there’s usually a very clearly defined start to that business interruption period, known as the date of loss. We can define very easily what that period of indemnity is and what a potential extended period of indemnity is because it all depends on the physical damage,” he said. If a fire, earthquake or hurricane impacts an organization, it’s not hard to define when that physical damage occurred. That is the starting point for the period of restoration. However, when it comes to cyber, “there is much less certainty, not only to when a cyber event has started, but also when a cyber event ended” including when the system was repaired and there no longer is a breach. These dates are critical to figuring out the period of time that’s going to be evaluated for a cyber business interruption loss. Mortifoglio recited some questions that come up when evaluating cyber business interruption: “When did the loss start? How do we know that it started at this point in time? Was there a full disruption for an organization or just partial. For example, was it a specific system that was impacted, an email system or an accounting system that went down? And then when did this loss end?”
3. PERSONNEL INVOLVED
So in addition to requiring more and different types of data, and presenting complexities around the period of restoration, cyber business interruption also typically calls for more personnel to become involved from an organization. Mortifoglio cited a need for personnel from the risk manager and legal counsel to financial, technology and operations officers as well as others to contribute to the assessment. First and foremost is the risk manager, the “quarterback of the insurance recovery process” who is helping to manage the actual claims process once something happens, not to mention being the purchaser of the insurance on the front end. After a loss has happened, somebody from the accounting or finance department — perhaps the CFO or the controller—should be called upon to provide the financial data required to quantify any business interruption loss. In addition, it’s important to have someone from operations to assure that the full impacts of the loss are being documented and also connected to the actual financial calculation. And there’s more. “You now have to bring in more folks from your organization to help really provide the picture in the story of what happened and help to properly and accurately quantify cyber business interruption,” Mortifoglio added. This means calling in folks from the IT team to help to identify the status of the cyber incident and define the period of indemnity and the period of restoration. “That’s going to help narrow down the exact period of time that we need to evaluate from a financial perspective to quantify the loss,” he said. Also, the chief systems or technology officer may be needed to oversee data privacy and records issues that may come up in a cyber incident. The legal department may also deal with privacy issues, general legal ramifications and coverage issues, as well as interface with outside counsel brought in to help deal with a cyber breach. “The addition to these extra personnel can add to the complexity of the process,” the Procor executive said.
4. GEOGRAPHIC CONSTRAINTS
Whereas a traditional business interruption claim may be geographically constrained, the same is not always true for cyber exposure. In a traditional scenario, the property damage is contained to either a single location or region that has been hit by a widespread catastrophe. “Think of a hurricane that hit the state of Florida, and if you’re an organization that has multiple locations there, you may have multiple instances of damage. You may have multiple locations that are being impacted,” he noted. When it comes to a cyber loss, these geographic constraints do not exist and an entire organization could be impacted around the globe at the same time. “If you are an organization with a global presence and you have systems that are connecting all of your physical locations around the globe, then a cyber incident may impact you around the globe without any sort of restraints as far as geographic regions. With traditional business interruption, organizations can mitigate their risk by spreading out their operations geographically to avoid a catastrophe, really hampering the entire organization. When it comes to a cyber loss, those types of geographic constraints no longer apply,” he said. For risk mitigation purposes, Mortifoglio stressed the importance of understanding that if a global organization is running systems used by the entire workforce, all operations around the globe can be impacted immediately. “It can make it more complex because you can’t just look at a single isolated location. You have to look at the interconnectivity of your systems to see if something were to happen to them, what would the operational impacts be on your organization? And that’s what’s going to help you evaluate the potential cyber business interruption,” he said. In short, there are no geographic constraints with cyber business interruption and therefore it is harder to mitigate.
5. REPUTATIONAL RISK
Finally, cyber BI carries with it a reputational risk that traditional property business interruption does not. When there is a traditional BI loss such as a fire at a factory, customers and the general public usually do not to have any sort of reaction. Most of the time, the general public is not even aware of the fire and here is no effect on the company’s reputation. However, if a company is hacked and customer records are stolen, Mortifoglio said this can result in a “breach of trust in the public’s eye” and the reputation of an organization can be significantly harmed, often resulting in extended financial losses. In the case of a data breach, even though the system has been repaired and the breach fixed quickly, customers may be hesitant to return to do business with the organization “until they have absolute confidence that it won’t happen again. It’s hard to determine how long that might go on.” However, the forensic specialist noted, cyber business interruption policies are building in coverage to help recover any losses tied to the transitional risks, in a way that is similar to the extended period of indemnity coverage in traditional property policies. “The thought is that once a cyber incident is repaired and a breach is fixed, there may be lingering impacts due to some reputational risk” and there should be coverage there to help capture those losses, Mortifoglio said.
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