What Is Cyber Liability Insurance and Why Is It Important?

If your business carries out any operations, transactions, or communications online, it may be vulnerable to a cyberattack, data breach, or debilitating software virus. That’s why it’s recommended to not only examine and optimize your business’s cybersecurity best practices, but also consider purchasing a robust cyber insurance policy to help protect your business from significant monetary loss.

Cyberattacks from bad-faith hackers unfortunately aren’t new for businesses to contend with. With the growing sophistication of hackers and influence of artificial intelligence (AI)-powered tools, your online data may be more susceptible than ever to exposure. Just one security breach, no matter its origin, can result in a potentially catastrophic financial loss for your business. And according to our 2025 Priorities for Business Leaders survey, 77% of business leaders at companies with 100 to 499 employees cited cybersecurity as a high-impact challenge for their business. So, what is cyber liability insurance and how can it help you financially recover from the encroaching cyber threats that modern technologies and AI can present?

What Is Cyber Liability Insurance?

Cyber liability insurance is a type of business insurance coverage that offers financial protection in the event of an electronic data breach, cyberattack, or some other cybersecurity issue. A cyber liability policy generally covers financial losses arising from data breaches, viruses, hacking, denial of service, cyber extortion, and other cyber incidents. Examples of financial losses may include legal fees stemming from civil suits, regulatory fines and penalties, and the cost of mandatory forensic examinations.

Crucially, a cyber liability policy protects your business beyond the basics of a general liability policy, which on its own typically does not protect against the operational, legal, and other costs arising from cyberattacks and data breaches. Instead, cyber liability may be an optional add-on to a Business Owner’s Policy, which includes general liability coverage as well as additional coverages and endorsements.

Furthermore, your business may already have a robust cybersecurity plan to stave off hackers, leaks, and data loss. (And if you don’t have one in place, consider that now!) But sophisticated security infrastructure is not the same as insurance coverage that protects your business’s financials.

Who Needs Cyber Liability Insurance?

All businesses can benefit from cyber insurance coverage. For example, businesses that sell online — a process that typically involves maintaining and storing sensitive data such as personally identifiable information, credit card numbers, and contact information — should consider cyber liability.

Consider these potential threats to your business:

• The leaking of confidential client information
• Compromised data security due to employee errors
• Identity theft, malware, or email phishing scams
• A breach of your social media account

Any of these scenarios can have a devastating effect on a business – including significant financial loss.

If your organization stores and manages any type of data online, cyber liability insurance offers an additional layer of protection in the event of a data breach. Consider how much confidential employee-specific or otherwise sensitive information your system may store, and how much capital, time, and trust you risk losing in the face of their exposure: cyber liability insurance for small to mid-size businesses may be a lifeline. If you're asking yourself if cyber insurance is necessary, think of the potential costs that would be associated with handling any of those potential threats on your own.

Keep in mind that no business is too small to catch a hacker's eye. For instance, an experienced hacker may easily infiltrate your point-of-sale (POS) system.

If your clients or corporate partners trust you to keep their data safe, they may require you to have cyber insurance – perhaps even as a contractual obligation.

What Cyber Liability Insurance Does (and Doesn’t) Cover

What does cyber insurance cover? Cyber liability insurance could pay out for losses arising from the following computer- and computer system-related crimes and exposures, among others:

• Hacking and cyberattacks
• Data corruption and/or theft
• Stolen electronic devices (e.g., mobile phones, laptops, tablets)
• Online slander or libel

What does cyber insurance not cover? Many cybersecurity liability plans do not cover losses arising from:

• Preventable security issues, such as poor configuration management or the mishandling of digital assets.
• Acts initiated and caused by the insured.
• Infrastructure failures not caused by a purposeful cyberattack.
• Costs incurred to improve cybersecurity after an attack or breach has already happened.
• Loss of or damage to property (e.g., physical assets covered by business property insurance).
• Incidents that occurred before the policy went into effect.
• Other expenses beyond the coverage limits of the policy.

Keep in mind that standard Business Owner’s Policies usually cover physical property, but not digital property. So, if an irate customer destroys a server that stores cardholder information and client data, you may be covered by your Business Owner’s Policy at least for the damaged equipment. But say an employee falls for an email phishing scam and accidentally discloses protected customer information: that’s when cyber insurance would kick in.

Insurers can offer multiple forms of cyber insurance, and premiums and coverage limits may depend on the scope of coverage you buy. For instance, first-party insurance applies to the direct costs you incur as the result of a data breach. It can help cover notification costs, loss of income while your business was unable to operate or provide service, and customers' credit monitoring services. Third-party insurance, on the other hand, covers litigation defense costs if clients or customers file suit against your business for neglecting to protect their data. Companies can buy either or both types of coverage.

Why Is Cyber Liability Insurance Important?

Any quick glance at the news will show you the increasing threat of cyberattacks, ransomware, and data breaches on businesses of all sizes across the U.S.

The benefits of cyber insurance cannot be overstated. That’s because the fiscal impact of a cyberattack or data breach may be difficult to calculate. Several steep costs may come in the wake of a breach, depending on the nature of the incident – including but not limited to:

• Incident response and customer notification
• Credit monitoring for affected customers
• Recovering compromised data, including in the case of a ransomware attack
• Repair to damaged software
• Attorneys' fees and legal settlements
• Regulatory and law enforcement fines
• New malware detection software
• Crisis management and related communications

Most business insurance policies may not cover the range of expenses incurred by a cyberattack, such as:

Interruption of Business Operations

A business that gets hacked may need to shut down temporarily to investigate how the attack occurred and the extent of data compromised (which may require hiring experts to analyze and recover lost information). This can result in days or even weeks of lost revenue — not to mention a further loss of sales due to bad publicity and a drop in customer confidence.

Customer Notification and Discounts

In the event of a cyberattack or data breach that directly affects customers, businesses may expend time and capital notifying customers of the nature of the breach, and even offer discounts or credit card monitoring services.

Investigation Costs

Many merchant service arrangements stipulate that the business owner is liable for the costs of forensic experts, reissuing of credit cards, and other related costs.

Rebuilding Reputation

Depending on the size and scope of a business, it may be necessary in the wake of a cyberattack to hire a crisis management firm to help reestablish the damaged brand through media and client communications.

The scale of potential damage may be more than most small business owners can sustain without proper insurance coverage.

How Does Cyber Liability Protect My Business From AI?

It’s the technology trend that makes many business owners tremble: artificial intelligence. The proliferating use (or misuse) of generative AI tools, by either attackers or the security specialists on your team, may further expose companies to security breaches and cyberattacks.

Generative AI tools that leverage large language models (LLMs), like chatbots, have the potential to be abused by bad-faith actors for the following:

• Targeted phishing attacks: Cyber attackers can use large language models to quickly create more specific, realistic, and personalized messages using aggregated company data.
• At-scale cyberattacks: AI tools allow users to write code (read: create malware) with much more accuracy than ever before.
• Vulnerability detection: Threat actors may be able to more quickly expose and exploit vulnerabilities in your network security system.

Of course, if AI can be used against your business, it can be employed to defend it, too. Sophisticated AI tools can continuously analyze your system’s traffic and user logs, and proactively prevent any potential breaches. But does your IT team or systems administrator know exactly how new technologies interact with your current security infrastructure? For instance, the 2023 Paychex Pulse of HR Survey revealed that over 75% of HR leaders will use AI tools to improve worker experience and increase productivity.

Artificial intelligence in and of itself does not necessarily pose a unique threat to your business, provided you follow cybersecurity best practices. But the introduction of any new AI tool or service, like the implementation of any system that interacts with confidential data, could be an inherently risky practice.

Not sure about the future of generative AI? Neither are most experts, including those in the cybersecurity and business insurance industries. Choosing a robust cyber liability insurance policy is a business’s best bet against an ever-changing threat landscape.

Choosing the Right Cyber Liability Insurance

Even if you already have general liability coverage or a Business Owner’s Policy in place, you may not have sufficient cyber insurance protection. Talk to your insurance agent about what your current policy covers, and what type of insurance might be best based on your unique business risk profile.

It's difficult to overstate the importance of cyber insurance in protecting the software and data used by your business, as well as the trust of your customers. A customized cyber liability policy may make the difference between bouncing back stronger from a cyberattack and your business shuttering altogether.

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