First-Party Vs. Third-Party Cyber Liability Insurance: How Are They Different?

First-party cyber risks are hazards or perils that can directly harm your business. A malware attack that interrupts your operations for three days is a typical example. The damage or loss your organization would incur following the infection is a direct, first-party risk. As such, first-party cyber liability insurance would cover such losses as they directly impact you, the policyholder.

Such policies pay for the costs of actions that the policyholder must take after covered cyber events, such as:

• Data breach
• Extortion
• Hacking
• Denial of service

Typical covered first-party costs include:

• Forensic probe
• Compensation to personal data breach victims
• Reputational damage mitigation (such as hiring public relations consultants)
• Cost of notifying data breach victims, such as customers
• Any ransomware amount the insurer agrees to pay
• Lost profits during downtime caused by a covered incident

Third-party risks are claims against your business by other organizations that somehow blame you for their cyber breach-related losses. The attack that affected them may have occurred on your information technology (IT) infrastructure or the claimant’s computer systems. Either way, they can hold your organization liable.

Companies that purchase third-party cyber liability insurance are usually responsible, to some extent, for protecting other organizations’ data. The policy can cover various costs that you, the policyholder, may incur as a result of:

• Defending your organization in court when third parties allege that they suffered a data breach because you failed in your responsibility to secure it
• A court orders you to compensate third parties that hold you responsible for their hacking-related damages
• Out-of-court settlement after the third-party data breach

Such policies are also helpful to organizations accused of enabling hackers to breach other parties’ IT networks through negligence. They can cover defense attorney fees or any settlements arising from the claim. For example, assume that a business partner, such as a software vendor, gives you login details to access their online portal. If poor password protection policies on your part led to a breach of the provider’s portal, you could be held liable for any losses related to the incident. Third-party coverage would be useful to you in that scenario.

Most organizations face various first-party and third-party risks from time to time, so both coverages are useful. You should invest in both cyber liability insurance policies if you’re responsible for hosting or storing other parties’ data. For example, a managed service provider (MSP) faces multiple outright risks about the breach or theft of clients’ data.

You should consider investing in third-party cyber liability protection even if you’re not an MSP. You may face cyber risks that are common to everyone in business, such as:

• Accidentally forwarding a bugged email message that launches malware on the recipient’s computer
• Hackers exploiting a weakness in your IT defenses to launch a subsequent attack on third-party computers