The Cyber Deception coverage extension provides coverage for the intentional misleading of the Applicant by means of a dishonest misrepresentation of a material fact contained or conveyed within an electronic or telephonic communication(s) and which is relied upon by the Applicant believing it to be genuine. This is commonly known as “spear-phishing”, CEO Fraud or “social engineering”, which is defined by Wikipedia as “psychological manipulation of people into performing actions or divulging confidential information.” In recent years, hackers and cyber-thieves have been developing new techniques to infiltrate insureds’ bank accounts. Early phishing scams were fairly easy to spot: a request from a Nigerian prince or a link purported to take you to your bank’s customer service center were tell-tale signs of suspicious email traffic. It was recommended to never click on the link and delete the email immediately. In response to the masses becoming more aware of these red flags, thieves have countered with more sophisticated attacks.
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Here are some examples of what CEO Fraud or Social Engineering Fraud might look like:
Example #1
An email, purportedly from the CEO, is sent to the firm’s accounting department authorizing an urgent payment to a new vendor with a bogus bank account number. Not wanting to disappoint the CEO, the amount is transferred only to find out the CEO never requested any new vendor payments. Hackers might follow a CEO or CFO’s social media posts to see when they are traveling to make verbal confirmation more difficult for the target.
Example #2
After months of monitoring transactions from accounts payable to a foreign vendor, hackers create a fake email address that is similar to that of the foreign vendor. They then use the fake email address to inform the accounts payable representative that the bank account number has changed and to please send payment to the new account number. Often, the company will only be aware of these fraudulent payments when the real vendor follows up for payment. By then the money is unrecoverable.
As of April 2016, the FBI has estimated that CEO Fraud has cost businesses $2.3 billion. In an effort to recoup these losses, insureds are looking to their crime policies for reimbursement for their losses. Specifically, they are looking to the Funds Transfer Fraud (“The company shall pay the parent organization for direct loss of money sustained by an insured resulting from funds transfer fraud committed by a third party”) and Computer Fraud (“The company shall pay the parent organization for direct loss of money sustained by an insured resulting from computer fraud committed by a third party”) insuring agreements.
Unfortunately, under the CEO Fraud scenario, funds are transferred willingly, with the insured’s knowledge; therefore, claims are declined under the Funds Transfer Fraud insuring agreement. Similarly, under the Computer Fraud insuring agreement, the carrier can argue that coverage has not been triggered as the fraudulent payment instructions came into the company via email, and email by its nature is an authorized entry. Another method most commonly used is the Voluntary Parting Exclusion, which excludes coverage when an insured willfully parts with title to, or possession of, any property.
Cyber carriers are beginning to offer policy enhancement endorsements that affirm sub-limited coverage for CEO Fraud or Social Engineering Fraud. The wording to look for which confirms coverage may look similar to this:
“The Insurer will pay the Insured Entity for Social Engineering Fraud Loss resulting directly from a Social Engineering Fraud Event, in excess of the applicable retention and within the applicable Limits of Insurance.
It is a condition precedent to coverage under the Social Engineering Fraud Coverage that the Insured attempted to Authenticate the Fraudulent Instruction prior to transferring any Money or Securities.”
How we do we address this increasing risk as an industry? Traction is gaining and more carriers are beginning to extend coverage by endorsement, albeit under sub-limits, in both Crime and Cyber lines. Even these small improvements show signs of progress in the industry. To get a cyber liability quote with Cyber Deception Coverage endorsement complete this short 15 questions application and get a formal proposal within 15 minutes or less.
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[framed_box]The original article by Brandyn Surprenant and Mikkel Vogele of AmWINS Brokerage in Chicago, Illinois was edited and optimized for Paperless Insurance blog. This article was originally published by AmWINS Group, Inc., a distributor of specialty insurance products and services.
Legal Disclaimer: Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.
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