What Does Cyber Insurance Not Cover?

Cyber Insurance Exclusions: The Ultimate Guide to What Your Policy Doesn't Cover

You’ve done the responsible thing. You recognize that in 2025, the biggest threat to your Minnesota business might not be a slip-and-fall or a fire, but a silent, digital invasion. So, you invested in a cyber liability insurance policy. You feel protected. But are you?

The hard truth is that a cyber insurance policy is not a magic shield. It's a complex contract filled with specific promises, and more importantly, specific exclusions. Believing you're fully covered when you aren't is one of the most dangerous positions a business owner can be in.

The goal of this guide is simple: to pull back the curtain on what cyber insurance does not cover. We'll go beyond the basics to explore the nuances, the gray areas, and the fine print that can make or break your financial recovery after an attack.

Why Exclusions Exist: The Insurer's Perspective

Before we dive into the list, it's crucial to understand why these exclusions exist. Insurance is a business built on predictable, manageable risk. Insurers exclude certain events for a few key reasons:

• Uninsurable Perils: Some risks are so widespread, catastrophic, or unpredictable (like war) that they cannot be financially modeled.

• Moral Hazard: Insurers need to prevent clients from being reckless because they know they have a safety net. Exclusions for negligence encourage good behavior.

• Preventable Losses: Coverage is meant for unforeseen accidents, not for losses that occur because a business failed to perform basic maintenance or security updates.

• Coverage Overlap: Some losses, like theft of funds, might be better covered under a different policy, such as a Crime Policy.

Understanding this mindset helps you see your policy not as a list of "gotchas," but as a risk management partnership that requires participation from both sides.

Category 1: Catastrophic & External Events

These exclusions deal with massive, often nation-state-level events that are considered beyond the scope of a standard commercial insurance policy.

1. Acts of War & Cyber Terrorism 💣

This is the most talked-about exclusion in cyber insurance today. Nearly every policy contains a "war exclusion," stating that it will not cover losses resulting from hostile or warlike action by a military force or government.

• What It Means: If a foreign government launches a direct, widespread cyberattack against U.S. infrastructure and your business is caught in the crossfire, your claim will likely be denied under this clause.

• The Gray Area: This is where it gets incredibly complex. When is a ransomware attack simply a crime, and when is it a state-sponsored "act of war"? The line is blurry. The famous case where pharmaceutical giant Merck sued its insurers for denying claims after the "NotPetya" attack (widely attributed to Russia) highlights this debate. The courts are still defining the boundaries.

• How to Mitigate Risk: You can't prevent a cyber war, but you can build resilience. Focus on robust, offline backups and a tested incident response plan that allows you to restore operations independently. While you can't insure the event, you can insure your response capability.

2. Critical Infrastructure Failure

Your business relies on power, internet, and cloud services to function. What happens if your internet service provider (ISP) or a major cloud provider like Amazon Web Services (AWS) goes down due to a massive, targeted attack?

• What It Means: Most standard cyber policies do not cover your business interruption losses if the failure originates with your utility or a major infrastructure provider. Your policy typically only triggers if the cyber event directly targets your systems.

• The Insurer's Rationale: Insuring against the failure of a national power grid or a cloud provider for all of their customers would be financially impossible. The concentration of risk is too high.

• How to Mitigate Risk:

  • Vendor Due Diligence: Scrutinize the security and redundancy of your key vendors.

  • Redundancy: If possible, have backup internet providers.

  • Policy Endorsements: Inquire about specific "contingent business interruption" endorsements that may provide a limited amount of coverage for third-party failures.

Category 2: Internal Failures & Preventable Mistakes

This group of exclusions is critical because it relates directly to your company’s actions (or inaction). Insurers expect you to be a proactive partner in your own security.

3. Failure to Maintain Standards (The "Due Care" Clause) 🛠️

This is a huge one. Your cyber insurance application isn't just a questionnaire; it's a representation of your security posture. If you stated that you use multi-factor authentication (MFA) on all critical systems, you are contractually obligated to do so.

• What It Means: If you suffer a breach and the investigation reveals you failed to implement the security controls you promised in your application, or you ignored critical patches for a known vulnerability, the insurer can deny your claim. They will argue you failed to exercise "due care" and breached the terms of the policy.

• The Insurer's Rationale: This is the core of the "moral hazard" principle. Insurers will not pay for losses that could have been easily prevented with standard security hygiene. You can't leave your front door unlocked and expect theft insurance to pay out.

• How to Mitigate Risk:

  • Be Honest on Applications: Never misrepresent your security controls.

  • Implement a Patch Management Program: Ensure all software, firewalls, and systems are updated regularly.

  • Conduct Regular Audits: Periodically audit your own systems to ensure the controls you promised are still in place and working correctly.

4. Intentional Acts by Employees & Internal Fraud

Your cyber policy is designed to protect you from external threats and unintentional internal errors. It is not a policy to protect you from your own rogue employees.

• What It Means: If your head of IT deliberately sabotages the network on their way out the door, or a payroll clerk intentionally wires funds to their own account, this is not a "cyber incident" in the eyes of the policy. It's internal fraud.

• The Gray Area: What if an employee is tricked by a sophisticated phishing email into wiring funds? This is often called "social engineering fraud." Some cyber policies cover this, while others exclude it, pushing it towards a Crime Policy. It's vital to know which policy holds this coverage.

• How to Mitigate Risk:

  • Employee Training: The single best defense is a well-trained, security-conscious workforce.

  • Access Controls: Implement the principle of "least privilege." Employees should only have access to the data and systems absolutely necessary for their jobs.

  • Crime Insurance: Purchase a separate, robust Commercial Crime Insurance policy designed specifically to cover losses from employee dishonesty and fraud.

Category 3: Financial & Intangible Losses

A cyberattack's impact goes far beyond the immediate costs of IT forensics and credit monitoring. However, your policy is very specific about which financial losses it will cover.

5. Future Revenue Loss & Reputational Harm 📉

When your company suffers a major data breach, customer trust plummets. Existing clients may leave, and potential new clients may choose a competitor. This long-term damage to your brand and future revenue stream can be devastating.

• What It Means: Your cyber policy's business interruption coverage is designed to replace income lost during the "period of restoration"—the time it takes to get your systems back online. It does not pay for the revenue you might lose over the next several years because your brand reputation is now damaged.

• The Insurer's Rationale: Calculating future lost profits is highly speculative. It's nearly impossible to prove with certainty that a customer left because of the breach versus other market factors. Insurers stick to the more tangible, calculable losses.

• How to Mitigate Risk: This risk is managed through public relations and operational excellence. Invest in a solid crisis communication plan. Being transparent, honest, and helpful to affected customers is the best way to rebuild trust and mitigate long-term reputational harm.

6. Loss of Intellectual Property (IP) Value

For many Minnesota businesses, especially in the tech and medical device sectors, the most valuable asset isn't a physical machine—it's intellectual property. What if a hacker steals your proprietary source code, a secret formula, or detailed schematics for a new product?

• What It Means: A standard cyber policy will pay the costs to investigate the breach and restore the system. It will not write you a check for the "value" of the stolen IP or the loss of your competitive advantage.

• The Insurer's Rationale: Like reputational harm, the value of IP is highly subjective and difficult to quantify for insurance purposes. How much is a trade secret worth? The market decides that, and it's not a risk insurers are willing to underwrite.

• How to Mitigate Risk: This is purely about prevention. Protect your "crown jewels" with the highest levels of security, including data loss prevention (DLP) tools, zero-trust architecture, and strict access controls.

How a Public Adjuster Can Help Navigate the Nuances

Even with covered events, proving the full extent of your loss is a monumental task. This is where a public adjuster becomes invaluable. While we can't change your policy's exclusions, we can ensure you get the absolute maximum you're entitled to for all the parts that are covered.

After a cyberattack, a public adjuster from a firm like Shoreline Public Adjusters will:

• Forensically Document Your Business Interruption: We work with accountants to create a detailed, undeniable calculation of the income you lost during the downtime, ensuring no revenue stream is overlooked.

• Quantify Extra Expenses: We meticulously track every dollar you spent to get back online faster—from equipment rentals to overtime pay—and present it as part of the claim.

• Manage the Process: We handle the endless paperwork, conference calls, and negotiations with the insurer's team, allowing you to focus on running your recovering business.

Frequently Asked Questions (FAQ)

Q: Is ransomware payment covered by cyber insurance? A: Often, yes. Most modern cyber policies do provide coverage for extortion payments (ransomware), as insurers often find it cheaper to pay the ransom than to pay for a lengthy business interruption. However, this coverage usually requires that you notify the insurer and get their consent before making a payment.

Q: What about regulatory fines from HIPAA or GDPR? A: It depends. This is a critical area to check in your policy. Some policies will cover regulatory fines and penalties, while others explicitly exclude them. Given the high cost of these fines, this can be a make-or-break coverage point.

Q: What is the difference between first-party and third-party cyber coverage? A: First-party coverage pays for your direct losses (e.g., IT forensic costs, business interruption, data recovery). Third-party coverage protects you when someone else sues you over a data breach (e.g., a class-action lawsuit from customers whose data was stolen). You need both.

Final Thoughts: Your Policy Is a Tool, Not a Panacea

Cyber insurance is an essential component of modern risk management. But it is not a substitute for strong cybersecurity practices. By understanding what your policy does not cover, you can more clearly see where you need to invest in prevention, internal controls, and operational resilience.

Review your policy annually, question the exclusions, and work with professionals who can help you bridge the gaps. Your business's survival may depend on it.

If you're facing a complex cyber claim in Minnesota or beyond and feel like you're not getting a fair shake, contact Shoreline Public Adjusters for a free consultation. We are your advocate.

Shoreline Public Adjusters, LLC
780 Fifth Avenue South
Suite #200
Naples, FL 34102

Email: hello@teamshoreline.com
Phone: 954-546-1899
Fax: 239-778-9889