The “failure to patch” exclusion in cyber insurance policies typically denies coverage for losses stemming from known vulnerabilities that the insured failed to address with available patches. Insurers assess due diligence by examining the insured’s vulnerability management program, including patch deployment timelines, risk prioritization, and documentation. Nevada Revised Statutes (NRS) 679B.130 grants the Commissioner the authority to examine insurers’ practices, which could extend to evaluating the reasonableness of their expectations regarding patching. The exclusion’s interaction with the insured’s program hinges on whether the program aligns with industry best practices (e.g., NIST Cybersecurity Framework) and whether deviations from the program contributed to the loss. A robust, documented program demonstrating reasonable efforts to patch vulnerabilities can mitigate the impact of this exclusion.

Nevada’s data breach notification law, NRS 603A, mandates specific timelines and content requirements for notifying affected individuals and the Nevada Attorney General following a data breach. Failure to comply with NRS 603A can significantly impact cyber insurance claims. Delayed or inadequate notifications can lead to increased legal liabilities, regulatory fines, and reputational damage, potentially exceeding policy limits or triggering exclusions related to non-compliance with laws. Insurers often require prompt notification of breaches as a condition of coverage, allowing them to assist with incident response and manage potential liabilities. The content of the notification must accurately reflect the nature and scope of the breach, as misrepresentations can further complicate legal and insurance matters. Therefore, adherence to NRS 603A is crucial for maintaining coverage and mitigating legal risks.

“Betterment” in cyber insurance refers to improvements made to a system during restoration after a cyber incident that enhance its functionality or security beyond its pre-incident state. Insurers generally aim to indemnify the insured for the actual loss sustained, not to provide a windfall. Therefore, they may deduct the value of the betterment from the claim payment. In Nevada, the handling of betterment is typically outlined in the policy language. Insurers might cover the cost of restoring the system to its original functionality but exclude the incremental cost of upgrades. However, some policies may cover reasonable security enhancements necessary to prevent future incidents, particularly if mandated by regulations or considered standard industry practice. The Nevada Insurance Code (NRS 687B.030) requires fair and equitable claims handling, which implies a reasonable approach to betterment considerations.

The “war exclusion” in cyber insurance policies typically excludes coverage for losses arising from acts of war, including cyber warfare. Applying this exclusion to state-sponsored cyberattacks presents significant challenges. Attribution of cyberattacks is often difficult, as attackers can mask their identities and origins. Even with attribution, determining the intent behind an attack is complex. Was the attack intended as an act of war, or was it primarily for espionage, theft, or disruption? The ambiguity surrounding attribution and intent makes it challenging for insurers to invoke the war exclusion definitively. Courts may require clear and convincing evidence that the attack constituted an act of war, considering factors such as the scale of the attack, the targets involved, and the statements or actions of the alleged state sponsor. The Nevada Insurance Code requires policies to be clear and unambiguous, meaning insurers must clearly define what constitutes an act of cyber war to successfully invoke the exclusion.

Forensic investigations play a crucial role in cyber insurance claims by determining the cause, scope, and impact of a cyber incident. These investigations are typically conducted by independent cybersecurity experts hired by the insurer or the insured. The findings of the investigation directly impact coverage decisions. For example, if the investigation reveals that the incident was caused by a pre-existing vulnerability that the insured failed to patch, the “failure to patch” exclusion might be invoked. Conversely, if the investigation confirms that the incident was caused by a sophisticated attack that bypassed reasonable security measures, coverage is more likely to be granted. The investigation also helps determine the extent of data compromised, the cost of remediation, and the potential legal liabilities. Under Nevada law, insurers have a duty to conduct a reasonable investigation of claims (NRS 686A.310), and the forensic investigation is a key component of fulfilling this duty.

Vicarious liability refers to the legal responsibility an organization bears for the actions of its agents, employees, or third-party vendors. In cyber insurance, vicarious liability is relevant when a data breach or cyber incident is caused by a third-party vendor or contractor who has access to the insured organization’s systems or data. Cyber insurance policies may or may not cover losses arising from the actions of third-party vendors, depending on the policy language and the nature of the relationship between the insured and the vendor. Insurers often require insureds to have contracts with vendors that include specific cybersecurity requirements and indemnification clauses. If the vendor’s negligence or intentional misconduct caused the incident, the insurer may seek to subrogate against the vendor to recover the claim payment. Nevada law recognizes the principle of vicarious liability, and courts will consider the degree of control the insured organization had over the vendor’s actions when determining liability.

Social engineering involves manipulating individuals into divulging confidential information or performing actions that compromise security. In cyber insurance, social engineering often manifests as fraudulent transfers induced by phishing, business email compromise (BEC), or other deceptive tactics. Policies vary in their coverage of social engineering losses. Some policies may specifically exclude coverage for losses resulting from voluntary transfers of funds, even if induced by fraud. Others may offer limited coverage, subject to specific conditions and sub-limits. Insurers often require insureds to implement robust security controls, such as multi-factor authentication and employee training, to mitigate the risk of social engineering attacks. The burden of proof typically rests on the insured to demonstrate that the transfer was induced by fraud and that reasonable security measures were in place. Nevada’s fraud statutes (NRS 205.083) define various forms of fraud, and insurers may consider whether the insured’s actions contributed to the success of the social engineering attack when evaluating coverage.

The “failure to implement” exclusion in cyber insurance policies typically denies coverage for losses arising from a failure to implement specifically recommended or required security measures. This exclusion is often contentious because the definition of “reasonable security measures” is frequently vague and subject to interpretation. Nevada law, while not explicitly defining “reasonable security measures” in the context of cyber insurance, does address data security through statutes like NRS 603A, which requires businesses to implement reasonable security measures to protect personal information. The interaction between the exclusion and Nevada law hinges on whether the insured’s security posture aligns with what is considered “reasonable” under NRS 603A and industry best practices. For example, if a cyber insurance policy requires multi-factor authentication (MFA) and the insured fails to implement it, a subsequent breach exploiting the lack of MFA could trigger the “failure to implement” exclusion. Similarly, if a vulnerability scan reveals a critical vulnerability that the insured fails to patch within a reasonable timeframe, a breach exploiting that vulnerability could also be excluded. To mitigate this risk, insureds should meticulously document their security measures, conduct regular risk assessments, and promptly address identified vulnerabilities. They should also ensure their security policies and procedures are aligned with industry standards and Nevada law. Furthermore, insureds should seek clarification from their insurers regarding the specific security measures required under the policy and obtain written confirmation that their existing security posture is deemed acceptable. This proactive approach can help avoid disputes over the applicability of the “failure to implement” exclusion.

The “war exclusion” in cyber insurance policies typically excludes coverage for losses arising from acts of war, including cyberwarfare. However, the absence of a universally accepted definition of “cyberwar” creates significant ambiguity and challenges in determining whether a particular cyberattack falls within the scope of this exclusion. This ambiguity is further complicated by the increasing prevalence of state-sponsored cyberattacks, which often blur the lines between espionage, sabotage, and acts of war. The lack of a clear definition means insurers and insureds may disagree on whether a specific cyber incident constitutes an act of war. Factors considered might include the attribution of the attack, the severity of the impact, the intent of the attacker, and whether the attack was part of a broader military conflict. Several recent cyber incidents have sparked debate over the applicability of the war exclusion. For example, the NotPetya attack, attributed to Russia, caused widespread damage to businesses worldwide. Some insurers initially invoked the war exclusion, arguing that the attack was an act of cyberwarfare. However, this interpretation was challenged, as the attack did not directly target military objectives and caused significant collateral damage to civilian entities. Similarly, attacks attributed to North Korea, such as the WannaCry ransomware attack, have raised questions about whether they qualify as acts of war. The interpretation of the war exclusion in these cases often depends on the specific policy language and the legal jurisdiction.

“Betterment” in cyber insurance refers to the situation where a covered loss results in the insured being in a better position than they were before the loss occurred. Insurers may argue that a claim should be reduced to account for this betterment, preventing the insured from receiving a windfall. An insurer might argue betterment in several scenarios. For example, if a company’s outdated server is destroyed in a cyberattack and the insurance policy covers the cost of replacement, the insurer might argue that replacing the server with a newer, more powerful model constitutes betterment. Similarly, if a company’s security software is compromised and the insurance policy covers the cost of upgrading to a more advanced version, the insurer might argue that the upgrade provides a benefit beyond simply restoring the company to its pre-loss condition. An insured can counter a betterment argument by demonstrating that the replacement or upgrade was necessary to restore functionality or meet current security standards. They can argue that the “betterment” is incidental to the primary goal of restoring their business operations and mitigating future risks. For example, if a new server is required to run essential software or comply with industry regulations, the insured can argue that it is a necessary replacement, not a betterment. Similarly, if an upgraded security system is required to protect against evolving threats, the insured can argue that it is a reasonable and necessary expense. The insured should also consult with legal counsel to understand their rights and obligations under the insurance policy and Nevada law.

Quantifying business interruption losses in cyber insurance claims presents significant challenges, especially when intangible assets or reputational damage are involved. Unlike physical damage, which can be readily assessed, the financial impact of a cyberattack on a company’s reputation, customer trust, or intellectual property is often difficult to measure precisely. Forensic accountants play a crucial role in quantifying these losses. They analyze financial records, sales data, and other relevant information to determine the extent of the business interruption. They may also conduct market research and customer surveys to assess the impact of the cyberattack on the company’s brand and reputation. Other experts, such as cybersecurity consultants and public relations specialists, may also be involved in the claims process. Cybersecurity consultants can help determine the root cause of the attack and assess the extent of the damage to the company’s systems and data. Public relations specialists can help assess the impact of the attack on the company’s reputation and develop strategies to mitigate the damage. The challenge lies in establishing a direct causal link between the cyberattack and the claimed losses. For example, if a company experiences a decline in sales after a data breach, it may be difficult to determine whether the decline is solely attributable to the breach or whether other factors, such as economic conditions or increased competition, also contributed. Forensic accountants and other experts must carefully analyze all available evidence to provide a reasonable and supportable estimate of the business interruption losses.

“Notification costs” coverage in cyber insurance policies typically covers the expenses associated with notifying affected individuals and regulatory bodies following a data breach. These expenses can include legal fees, forensic investigation costs, notification mailings, call center services, credit monitoring services, and public relations expenses. However, notification costs coverage is often subject to limitations and exclusions. For example, some policies may limit the number of individuals who must be notified or the duration of credit monitoring services. Others may exclude coverage for notification costs if the breach was caused by the insured’s intentional misconduct or gross negligence. Nevada’s data breach notification law, NRS 603A, significantly influences the scope of this coverage. NRS 603A requires businesses that experience a data breach involving personal information to notify affected Nevada residents within a specified timeframe. The law also outlines the required content of the notification and provides for penalties for non-compliance. Cyber insurance policies with notification costs coverage are designed to help businesses comply with these legal requirements. The coverage typically extends to the expenses associated with fulfilling the notification obligations under NRS 603A, such as preparing and sending notification letters, providing credit monitoring services, and establishing a call center to answer questions from affected individuals. However, the policy may not cover penalties or fines imposed for non-compliance with NRS 603A.

Incident response plans are crucial for mitigating cyber risks and securing cyber insurance coverage. A well-defined and regularly tested incident response plan enables an organization to quickly and effectively respond to a cyberattack, minimizing damage and disruption. Insurers typically evaluate the adequacy of an insured’s incident response plan during the underwriting process. They may review the plan’s scope, content, and testing procedures. Key elements of an effective incident response plan include: clear roles and responsibilities, procedures for identifying and containing incidents, protocols for preserving evidence, communication plans, and procedures for restoring systems and data. Insurers may also assess whether the plan is aligned with industry best practices and legal requirements. Having a deficient incident response plan can have several negative consequences. First, it can increase the likelihood of a successful cyberattack and the severity of the resulting damage. Second, it can make it more difficult to secure cyber insurance coverage or increase the cost of coverage. Insurers may view a deficient plan as evidence of inadequate risk management and may be unwilling to provide coverage or may charge a higher premium to reflect the increased risk. Third, it can lead to delays and inefficiencies in responding to a cyberattack, further exacerbating the damage. Finally, it can increase the risk of regulatory penalties and legal liabilities.

“Social engineering” refers to the manipulation of individuals into divulging confidential information or performing actions that compromise security. In the context of cyber insurance, social engineering attacks often involve phishing emails, business email compromise (BEC) scams, or other deceptive tactics designed to trick employees into transferring funds or providing access to sensitive data. Cyber insurance policies typically address losses resulting from social engineering attacks, but coverage may be subject to specific limitations and exclusions. Some policies may cover losses resulting from fraudulent transfers of funds, while others may exclude coverage if the employee acted with gross negligence or failed to follow established security procedures. To minimize the risk of falling victim to social engineering schemes and improve their chances of coverage in the event of a loss, an insured can take several steps. First, they should implement robust security awareness training programs to educate employees about the risks of social engineering and how to identify and avoid these attacks. Second, they should implement strong authentication measures, such as multi-factor authentication, to prevent unauthorized access to systems and data. Third, they should establish clear procedures for verifying requests for funds transfers or changes to account information. Fourth, they should regularly review and update their security policies and procedures to address evolving threats. Finally, they should maintain adequate cyber insurance coverage that specifically addresses the risks of social engineering attacks.