What is cyber insurance and why do you need it?

Cyber insurance – also known as cyber liability insurance or cyber risk insurance – covers an organization’s liability for a data breach involving sensitive customer information. As security threats continue to grow, businesses should operate under the assumption that they will be breached. And when they are, they need to be prepared for the potential costs.

According to the latest Cost of a Data Breach Report from IBM, the average total cost of a data breach was $4.88 million in 2024. That’s a 10% increase from the year before.

With cyberattacks and data breaches taking such a huge toll on businesses, it’s vital to invest in preventative measures to protect your company’s finances in the case of such an event.

Who needs cyber insurance?

If your business receives, stores or shares data in any capacity, it will benefit from taking out a cyber insurance policy. Cyberattacks often target companies that handle sensitive customer information or rely heavily on digital operations. Insurance can help mitigate the costs of recovering from a cyberattack by covering expenses such as data recovery, legal fees and business interruption losses.

This applies to all businesses that deal with data, no matter the size. Small businesses may be tempted to think that they aren’t likely to be targeted by data breaches, but this isn’t true. In reality, 46% of all cyber breaches impact businesses with fewer than 1,000 employees.

On top of that, small businesses are less likely to be prepared to handle a cyberattack than larger companies with more resources available – making them even more vulnerable to threat.

What does cyber insurance cover?

There are a few different types of cyber insurance. For example, data breach insurance offers protection in the event of sensitive data being stolen in a data breach, and cyber liability insurance specifically targets large businesses that tend to need heightened cyber protection.

The specifics of what cyber insurance covers will vary depending on the exact policy. However, as a general rule, it covers any damage suffered as a result of a cyberattack or data breach.

First-party cyber insurance

First-party insurance specifically covers costs incurred by your business if it experiences a data breach or other security incident that directly affects its own systems or data.

This may include:

• Investigating the source of a cyber attack
• Notifying customers or other affected parties of the data breach
• Measures taken to restore the company’s reputation
• Recovering stolen data
• Extortion payments to hackers holding data hostage
• Loss of income due to cyber attack
• Help with preventing cyber incidents (e.g. assistance with cyber security training or password policies)

Third-party cyber insurance

Third-party insurance coverage protects your business if someone else – like a customer or client – suffers a loss because of a cyber incident connected to your business.

This typically covers things like:

• Legal fees if you’re sued
• Settlements or damages you have to pay
• Costs related to regulatory investigations

Companies that manage sensitive information on behalf of clients can particularly benefit from third-party cyber liability insurance. This may include IT service providers, software developers, accounting firms and marketing agencies.

What does cyber insurance not cover?

What is and isn’t covered by your insurance will vary depending on the exact policy. However, generally speaking, most policies will not cover:

• Any future loss of profits related to the incident (e.g. due to damaged reputation)
• Fines or penalties resulting from non-compliance with regulations
• Post-incident strengthening of cyber security systems (e.g. changing servers or upgrading software in response to an attack)

How much cyber insurance do I need?

How much insurance you need will depend on the size of your business, the type of data you work with, and the state of your cyber security controls.

Businesses using outdated or limited security measures are particularly at risk of a cyberattack, which makes insurance even more vital. Unfortunately, this can also drive up the cost of your cyber insurance policy, as poorly protected companies are more likely to incur higher costs in the event of an attack.

One way to decrease cyber insurance premiums is to invest in both preventative and proactive security measures. For example:

• Technologies such as password policy solutions to block the use of weak or leaked passwords
• Multi-factor authentication (MFA) to move beyond single points of vulnerability
• Security automation tools to speed up incident response time

Is cyber insurance worth it?

Ultimately, cyber insurance is absolutely worth the investment. With consumers more aware of their personal data and the risks of breaches, businesses must take proactive steps to protect themselves.

High-profile incidents like the Equifax breach – where the personal and financial data of over 140 million U.S. consumers was stolen – serve as stark reminders of what’s at stake. That single event cost Equifax over $400 million, with cyber insurance covering more than $100 million of the total.

While most organizations won’t face losses on that scale, even a smaller breach can have devastating financial consequences. Insurance helps absorb the costs of legal action, regulatory investigations, and operational downtime. It acts as a financial safety net, allowing businesses to recover more quickly and continue serving their customers with confidence.

Help reduce the cost of a cyberattack with Specops Password Policy

Cyber insurers are increasingly scrutinizing how well organizations secure their identities and manage access. Weak or breached passwords remain a top entry point for attackers, and a major concern for underwriters. With Specops Password Policy, you can proactively harden your Active Directory environment by enforcing strong, customizable password rules and blocking the use of compromised credentials in real time.

Our Breached Password Protection feature continuously checks passwords against a live database of known breaches, alerting your team before attackers can exploit them. This proactive defense demonstrates to insurers that you’re taking meaningful steps to reduce risk.

Interested to find out how Specops Password Policy could help your organization comply with insurance requirements? Book a free demo today.