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Spoofing Losses Not Covered – Captives Are Better For Cyber Insurance
April 24 2018

Spoofing Losses Not Covered – Captives Are Better For Cyber Insurance

Randy Sadler Captivating Thinking

BUSINESS INSURANCE recently reported that Traveler’s Insurance was not required to pay for losses due to Spoofing (a form of cyber-attack).  According to a lower court and a federal appeals court, Traveler’s computer fraud policy had an exclusion that saved the insurer from paying over $700,000 for a cyber loss by a Seattle based seafood company.

As we regularly contend in Captivating Thinking, the issue here is not whether or not the courts were correct in denying the insureds cyber claim.  Instead, the issue is why commercial insurance is often a poor choice for cyber risk, and a captive insurance approach can provide a far more robust solution.   Commercial cyber / computer fraud policies are layered with exclusions, rendering them worthless in many cases.

What is Spoofing?  In writing about the cyber loss, BUSINESS INSURANCE described Spoofing:

[The Insured’s] computer system was hacked in the summer of 2013, according to court papers. The hacker apparently monitored email exchanges between an [insured’s] employee and a [vendor’s] employee before beginning to intercept the email exchanges and sending fraudulent emails using spoofed email domains that appeared similar to the employees’ actual email, for instance by substituting the number 1 for the lower-case i.

The hacker directed the [insured’s] employee in these emails to change the bank account information for [the vendor] for future wire transfers, and the [insured’s] employee complied, resulting in the company being defrauded of $713,890.

To read the article in BUSINESS INSURANCE – CLICK HERE.

Cyber risk is rapidly evolving, and businesses must be vigilant about protecting their systems, data and employees.  This emerging threat also requires meaningful employee training.  Consider the list of emerging and evolving threats below:

  • Hacking
  • Spamming
  • Phishing
  • Data theft
  • Data loss
  • Malware
  • Ransomware
  • Spyware
  • Spoofing
  • And the list goes on…

Is this a good time to have insurance that is riddled with policy exclusions?

In addition to vigilance and employee training, small and mid-market businesses need cyber insurance that really works for them and is there when they need it.  The customizable nature of captive insurance and ability to reduce or severely limit exclusions makes it a superior approach for many companies.

To Captive Or Not To Captive? That Is the Question. Should Fear Of An Audit Chill Prospective Captive Owners?

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Knoxville, TN 37932
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Stronger Business Model

Businesses who implement ERM programs combined with a captive to plan for unforseen risks stand a better chance of surviving, and passing to the next generation.

Improved Cost Controls

Captive owners can leverage their ERM and captive programs to improve their negotiating ability when renewing their commercial insurance coverages.

Wealth Accumulation

Profitable captives will see their reserves grow over time to significant sums which can be utilized by their owners for retirement or other life cycle needs.

Advantageous Tax Treatment

Insurance companies are the only entities allowed to expense projected future expense against current-year revenues (claim reserves). Small captives (premiums of $2.2M or less per year) may also elect to only be taxed on their investment income, potentially resulting in substantial tax savings for their owners.

Insurance Profits

Utilizing your captive to reduce or replace your commercial insurance coverage with policies issued by your captive allows you to capture insurance profits previously realized by the carriers.

Improved Risk Management

Adding a captive and ERM program will result in a higher awareness and enhanced strategies for how your organization thinks about and plans for all risks.

Asset Protection

The assets held by a properly organized and managed captive enjoy a very high degree of protection from both the business’ and business owner’s creditors.