Cybersecurity is no longer just a concern for large corporations. With the rise of digital transactions and remote work, businesses of all sizes face increasing risks of cyberattacks. As many as 50% of small to mid-sized businesses are estimated to have experienced a cyber breach, with significant financial and reputational consequences.
To safeguard against these risks, one essential tool is cyber insurance. However, understanding the difference between first-party vs. third-party cyber insurance is key to ensuring full protection for your business. This guide goes over the coverage differences, when each is useful, and whether your business needs one or both types of policies.
What Is First-Party Cyber Insurance?
First-party cyber insurance protects your business from the direct losses caused by a cyber incident or data breach. Essentially, it covers the costs of addressing and recovering from cyberattacks that affect your own systems.
A first-party policy typically includes coverage for:
- Data Breach Response Costs: Notifying impacted customers, offering credit monitoring, and recovering stolen data.
- Forensic Investigations: Determining the cause and extent of the breach.
- Business Interruption Costs: Covers revenue lost due to incident-related downtime.
- Cyber Extortion: Paying ransom demands in events like ransomware attacks.
- Public Relations: Managing reputational damage through professional PR services.
When Is First-Party Coverage Useful?
If your company relies on storing sensitive information on internal systems, such as customer credit card details, Social Security numbers, or confidential business data, first-party coverage is critical. For example, if a ransomware attack locks you out of your database, this insurance helps cover losses and keeps your operations going while you recover.
What Is Third-Party Cyber Insurance?
Third-party cyber insurance, on the other hand, protects your business from legal claims and liabilities if a cyberattack affects external parties, such as customers or partners.
This type of policy typically includes:
- Legal Costs: Covers attorney’s fees if a client sues you for not safeguarding their information.
- Regulatory Penalties: Covers fines or penalties imposed by regulatory agencies due to a breach.
- Judgments or Settlements: Pays damages awarded to claimants in data breach lawsuits.
- Media Liability: Covers lawsuits related to intellectual property or online defamation that result from a cyber incident your business was involved in.
When Is Third-Party Coverage Useful?
Third-party insurance is vital for businesses providing IT services, handling sensitive customer data, or operating within industries with strict data compliance requirements (e.g., healthcare or finance). For example, if a vulnerability in your software allowed hackers to access a client’s network, this policy would protect you from claims or lawsuits brought against your business.
First-Party vs. Third-Party Cyber Insurance: Key Differences
When it comes to first-party vs. third-party cyber insurance, they both offer important protection against cyber threats, but the coverage and focus differ. Here’s a quick review of the key differences:
- Scope of Coverage: First-party policies focus on losses incurred by your business, while third-party policies cover claims made by others.
- Affected Parties: First-party protects your company and operations, whereas third-party protects you from legal and financial claims stemming from external stakeholders.
- Use Cases: First-party is more relevant for recovering from internal breaches, while third-party is essential for client-facing businesses and IT service providers.
Do You Need Both Types of Cyber Insurance?
If you’re considering first-party vs. third-party cyber insurance, the best answer for many businesses, from tech service providers to e-commerce companies, is both.
Cyber incidents often create both first- and third-party risks. For example, a ransomware attack might disrupt your operations (requiring first-party coverage) and expose a client’s sensitive data stored on your servers (requiring third-party coverage).
By investing in both types of coverage, you ensure comprehensive protection, no matter how a cyber incident unfolds.
Factors to Consider When Choosing First-Party vs. Third-Party Cyber Insurance
Here’s what to evaluate when deciding the type and extent of cyber insurance your business needs:
1. Industry-Specific Risks
Certain industries, like healthcare or finance, handle vast amounts of sensitive data and are often targets of cyberattacks. These sectors should consider robust first-party and third-party policies.
2. Type and Volume of Data You Store
If your business stores significant amounts of personal or confidential client information, third-party coverage is essential. Storing critical operational data? First-party is a must.
3. Regulatory Compliance
Many industries are governed by strict data privacy laws such as GDPR or HIPAA, which in some cases may include requirements for cyber insurance. Failing to meet these requirements can lead to hefty fines.
4. Your Current Security Posture
If your current security measures are not up to par, you are at greater risk. Cyber insurance can help mitigate the risk of financial loss in case of a data breach, though it does not replace the need for improved security measures.
Confident Coverage Starts with Bethany Insurance
Understanding the nuances of first-party vs. third-party cyber insurance is a critical step toward safeguarding your business. Whether you’re recovering from an attack or protecting against external claims, having the right coverage is essential.
At Bethany Insurance, we specialize in cyber insurance policies tailored to your specific needs. With coverage options for small to mid-sized businesses and ongoing support from our experts, we make the process simple and seamless.
To learn more about first-party vs. third-party cyber insurance and secure your business, request a quote from Bethany Insurance today!
