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First-party vs. third-party cyber insurance
The more information you have stored online, the more vulnerable you are to someone trying to steal it. We’ll explain how two different types of business insurance, first-party and third-party cyber coverage, can protect you.
Why do you need cyber liability insurance?
Cybercrimes, including data breaches, ransomware attacks, and cyber extortion, are all on the rise. That’s because businesses are dealing with more sensitive information than ever before, and unscrupulous individuals and organizations want to get their hands on it for profit.
This could include personal information, like names, phone numbers, and email addresses, as well as financial information, such as credit card numbers, bank details, and social security numbers. Business data—for example, intellectual property, trade secrets, and legal contracts—can also be targeted.
Dangers come in all forms
There are various types of cyberattacks. Below are the most common, but hackers are coming up with new ones all the time.
- Malware is malicious software that typically makes its way onto a network when a user unknowingly downloads it through a link or attachment. It could be a virus, worm or spyware.
- Ransomware is a sophisticated type of malware that blocks users from accessing their files.
- Phishing is a common communication, such as an email or text message, disguised to look legitimate in order to draw out personal information, like passwords or credit card numbers.
- Denial-of-service (DoS) attacks flood a website or network, slowing it down considerably or crashing it entirely—making it unavailable for users.
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Small businesses are threatened
You may think that just because you’re a small business, you won’t be on the radar of online criminals, but that’s not true.
In fact, a 2024 report from Insurance Business magazine says “41% of small businesses fell victim to a cyberattack in 2023, a rise from 38% in the 2022 report.”
That’s made evident by the fact that for businesses with ten to 49 employees, cyberattacks rose from an average of 31% a year to 56%, and for organizations with less than ten employees, it quadrupled from 11% to 40%.
Attacks are expensive
Cyber incidents can be very costly. In the United States, the average cost of a data breach was $9.36 million in 2024. Of course, that includes major firms and huge, headline-making events. But small businesses are feeling the hit, too.
The U.S. Small Business Administration said in 2020 alone, there were over 700,000 attacks against small businesses, with damages totaling $2.8 billion.
With all of this in mind, it’s important to take proactive measures to shield yourself from the losses cyberattacks cause. Small businesses should pay particular attention to cyber insurance, which comes in first-party and third-party forms.
What is the difference between first-party and third-party cyber insurance coverage?
Cyber insurance, or data breach insurance, is an important type of business insurance that most organizations should seriously consider. It’s classified into two types of coverage: first-party liability and third-party liability. Both lessen the financial impact of cyber incidents, but in very different ways.
First-party cyber insurance covers financial losses related to a direct attack on your business. There are a lot of expenses that can result from being a victim of internet crime. A first-party cyber policy helps defray costs so you can get your business back up and running again.
On the other hand, third-party cyber coverage steps in when a client sues your company for failing to prevent—or causing—a data breach or cyberattack at their company. It pays legal fees related to the lawsuit.
The more information you have stored online, the more vulnerable you are to someone trying to steal it.
When first-party cyber coverage is important
The majority of businesses today would benefit from first-party cyber liability insurance. That’s because in the digital world we live in, almost every company runs the risk of a data breach. If you store any sort of sensitive information online, that includes you.
Certainly if you’re a retailer that deals with credit card information, you want to be protected. Medical offices that handle healthcare records should also be vigilant, especially since they need to comply with HIPAA security rules.
First-party cyber insurance covers the insured. So as the policyholder, your business would be protected from the fallout of a data breach or cyberattack. This can include the following scenarios:
| If this happens... | Then your first-party cyber insurance would... |
|---|---|
Your customer list is stolen... | Pay for the cost of data breach notification for those affected. |
Your clients’ data, including names, dates of birth, and social security numbers, is leaked... | Foot the bill of credit monitoring services for them. |
A DoS attack is launched on your retail website, and it goes down for several days... | Cover the loss of income due to the business interruption. |
Your hard drive is infected with a virus or spyware... | Reimburse you for hiring a cybersecurity specialist to handle forensic investigations and restore affected systems. |
Your network is held hostage... | Help you pay the ransom. |
Your company suffers reputational damage from a cyber attack... | Compensate you for the cost of public relations services to repair or mitigate any bad publicity. |
When third-party cyber coverage is important
Third-party cyber liability insurance is a bit more specialized and generally applies to people in the IT sector. If you are responsible or make recommendations for another business’s online security, then you should definitely look into getting third-party cyber insurance. It’s designed to help pay for legal expenses if a cyber incident occurs with your client and they blame you.
If one of your customers sues you, then your third-party cyber policy can help pay for:
- Lawyers’ fees
- Settlements
- Judgments if you are found liable
- Court costs (e.g., docket fees, filing fees, transcriptions, certifications)
- Fines and penalties assessed by regulators
It's also important for the following technology professionals, as well.
Top professions that need cyber insurance
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Does my business need both first- and third-party cyber insurance?
Whether or not you need both first- and third-party cyber liability coverage depends mostly on what your business does. The extent to which your company is involved in information technology and provides those services to others will most likely determine what coverage you need.
If you're not responsible for someone else’s cybersecurity and do not make IT recommendations, then you would probably be sufficiently covered by a first-party cyber insurance.
If you're in the technology field, then you most likely want to go with a first- and third-party cyber insurance. That way, you’re protected from attacks against your own company, and if a client sues you, your legal expenses will be covered.
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How can I minimize my cyber risks?
Of course, the best way to protect yourself from cyber attacks is by preventing them in the first place. To do that, you need to be proactive. One of the most important things business owners can do is be aware of the latest trends among cyber criminals. Unfortunately, they’re constantly coming up with new ways to defraud people.
Additionally, take the following steps to lower your chances of becoming a victim:
- Regularly assess vulnerabilities specific to your business
- Consult with security experts about ways to mitigate risks
- Use strong passwords
- Keep defensive systems like antivirus software and firewalls up to date
- Encrypt sensitive data
- Utilize backups so you always have a second source
- Conduct regular employee training
- Create a data breach response plan
If you’re an IT professional, you’ll also want to implement these best practices to minimize your exposures:
- Limit product or service warranty times
- Limit the types of damages for which you are liable
- Limit the amount of money for which you are liable
- Hold the original software or hardware manufacturer liable for product defects
- Ensure your clients have a first-party cyber insurance policy so they have their own safeguards in the event of a security failure
How can I get cyber insurance?
You can choose to buy a standalone cyber insurance policy. The average monthly premium for Insureon’s small business customers is $145 per month. Of course, that figure can vary based on your limits and deductibles, as well as factors like how many employees you have and how much data you manage.
If you simply require a first-party cyber policy, you can typically add this to your general liability insurance as an endorsement. The insurance cost of a data breach rider is much less than a full policy. However, they generally come with smaller limits. This is only recommended if you have lower risks and store limited amounts of sensitive information.
An option for a tech-based company that needs third-party cyber insurance is to get it bundled with their errors and omissions insurance, or E&O. This package is referred to as tech E&O and is often cheaper than purchasing the two policies separately.
In addition to receiving liability coverage for data breaches, you’ll also be covered for things like work mistakes and oversights, missed deadlines, undelivered services, and accusations of professional negligence.
Find cyber insurance quotes with Insureon today
If you need any help choosing the right cyber coverage or any other types of coverage, you can consult with an insurance agent about all your business insurance needs. We can help you find the right cyber coverage at the best insurance cost.
You can also fill out Insureon’s easy online application to get quotes from top-rated U.S. insurance companies. Once you find the right policies for your small business, you can begin coverage and get your certificate of insurance (COI) in less than 24 hours.
Updated: November 15, 2024
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