12 Common Exclusions Hidden in Cybersecurity Insurance Policies

Policy Coverage & Exclusions | Cybersecurity Insurance | USA Market Focus (2024 Edition)

Cyber insurance premiums in the United States have grown by +28% year-over-year (Marsh, 2023), yet claim denials are also climbing because insureds overlook — or flat-out misunderstand — policy exclusions. This ultimate guide demystifies the 12 most common exclusions buried in “boiler-plate” cybersecurity insurance contracts, explains why carriers use them, and shows you how to close the gaps before you sign on the dotted line.

Quick Stat: The average total cost of a data breach in the U.S. hit $9.48 million in 2023, the highest globally (IBM Cost of a Data Breach Report 2023).

Why Exclusions Matter for U.S. Companies
The 12 Hidden Exclusions
Carrier-by-Carrier Comparison
How to Spot & Negotiate Coverage Gaps
Key Takeaways & Next Steps

1. Why Exclusions Matter for U.S. Companies

Escalating Loss Severity

$1.2 billion in ransomware losses were reported to FinCEN in 2022—double the prior year.
Average cyber premium for a 50-employee tech firm in California now tops $4,750/year (AdvisorSmith).

Regulatory Minefield

• California’s CPRA, New York’s DFS 23 NYCRR 500, and Texas House Bill 4 create new liabilities that many legacy cyber forms exclude by default.

Claims-Made Trap

Most cyber policies are claims-made and reported, meaning the exclusionary language often intersects with retroactive dates and late-reporting provisions.

For a deep dive on how coverage parts interlock, see What Does Cybersecurity Insurance Cover? Comprehensive Breakdown by Coverage Part.

2. The 12 Hidden Exclusions

Below are the exclusions most frequently cited in claim denials across New York, Texas, and California—the three largest cyber-insurance markets.

2.1 War, Terrorism & Cyber Warfare

Typical wording: “This Policy excludes loss arising out of war, invasion, act of foreign enemy, hostilities, or warlike operations… including cyber operations.”

Why it exists: Carriers fear nation-state events that could generate systemic losses.

Real-world scenario (New York): A Manhattan fintech’s AWS infrastructure was bricked by NotPetya-style malware traced to Russian GRU actors. Total loss: $17 M. Claim denied under war exclusion.

Getting coverage: Request a “full cyber terrorism buy-back” or ask for the London Market Cyber War Exclusion LMA5564 to be replaced with LMA5570 (broader carve-back).

2.2 State-Sponsored Attacks

Closely related to war exclusions but broader.

Hidden Pitfall: Some policies exclude any attack “attributable to, or in concert with,” a foreign government even if attribution is merely alleged.

Negotiation Tip: Push for an affirmative coverage endorsement that requires the U.S. State Department to formally attribute the attack before the exclusion applies.

2.3 Bodily Injury & Property Damage (BIPD)

Why you care: Operational Technology (OT) shops in Houston and Dallas have seen cyber incidents trigger explosions, yet most cyber forms exclude BIPD.

Solution Paths

Seek a “silent cyber” carve-back on your General Liability policy.
For manufacturers, negotiate a Cyber-Physical Damage extension—around 15%–20% premium load, according to Chubb underwriting guidelines (2023).

2.4 Contractual Liability

If your SaaS contract promises 99.999% uptime, a policy may exclude losses “assumed under contract.”

• Coalition limits the carve-back to merchant services contracts only.
• Travelers offers broader coverage but caps at $250k sublimit.

2.5 Prior Known Incidents & Retroactive Date

Problem: An incident discovered today but dating back six months in log files can be excluded if your retroactive date is the policy inception.

Best Practice: Buy “full prior acts”; it raises premium by roughly 5% but saves headaches.

2.6 Failure to Maintain Minimum Security Standards

What carriers require: MFA, EDR, off-site backups.
Denial trend: 27% of denied claims in 2023 cited this exclusion (NetDiligence 2024 Spotlight).

Risk Mitigation: Document compliance quarterly; submit progress reports to your carrier.

2.7 Social Engineering & Funds Transfer Fraud (FTF)

Many buyers think “cyber” equals wiring-fraud coverage—wrong. SEF/FTF is usually:

Sub-limited ($100k at Hiscox).
Subject to a higher retention ($50k vs. $10k standard).
Excluded entirely unless an endorsement is purchased (average cost: +8% premium).

2.8 Unencrypted Portable Devices

Example (San Jose, CA): A stolen laptop with PHI triggered a HIPAA breach. Chubb denied $1.1 M in response costs because the device lacked encryption.

Fix: Add an “Encryption Exclusion Carve-Back” endorsement. Premium impact: minimal (<2%).

2.9 Insider or Employee Malfeasance

Most cyber forms cover negligent acts but exclude criminal acts by insiders.

Coverage Hack: Blend a Crime Policy with Cyber; CNA offers a “Fuse” hybrid policy starting at $3,750/year for SMBs (<$50 M revenue) in Austin, TX.

2.10 Utility or Infrastructure Failure

Blackouts in California’s PG&E service territory caused network downtime for a Sacramento healthcare group. The cyber carrier denied the $600k business-interruption claim.

Solution: Secure a “Contingent Business Interruption – System Failure” endorsement; AIG sells it for an extra $0.10 per $100 of revenue insured.

2.11 Regulatory Fines & Penalties

Due to public-policy concerns, some carriers exclude:

SEC fines
FTC consent decrees
CCPA statutory damages

Coalition’s “Regulatory Defense & Penalties” insuring agreement grants coverage but specifically carves out SEC Rule 38-2 fines.

2.12 Loss of Intellectual Property & Trade Secrets

Why excluded: Hard to quantify damages.

Work-around: Purchase a “Media & IP Infringement” extension or explore specialty markets (e.g., Lloyd’s syndicates) that offer patent IP coverage.

3. Carrier-by-Carrier Exclusion Snapshot

Exclusion	AIG CyberEdge	Chubb Cyber ERM	Travelers CyberRisk	Coalition Active Insurance
War/Terrorism	Excluded, buy-back available	Excluded, limited endorsement	Excluded	Excluded, partial carve-back
Social Engineering	Optional endorsement, $250k sublimit	Endorsement, up to $1 M	Standard, $100k sublimit	Included, sub-limit equals policy limit
BIPD	Excluded	Optional OT carve-back	Excluded	Excluded
Minimum Security Controls	Warranty language	Exclusion with materiality threshold	Strict exclusion	Continuous monitoring—denial rare
Utility Failure	Optional system-failure endorsement	Excluded	Optional	Excluded

Pricing Benchmarks (2024 renewals):
• AIG: $0.30–$0.45 per $100 of revenue in New York for limits ≤$5 M.
• Chubb: $0.25–$0.40 per $100 in Texas.
• Coalition: Flat rates start at $1,099/year for micro-businesses (<$1 M revenue) nationwide.

4. How to Spot & Negotiate Coverage Gaps

Step-by-Step Playbook

Gather All Forms & Endorsements
Insurers often issue 30+ pages of endorsements. Exclusions may hide in definitions or conditions.
Create an Exclusion Matrix (Excel or Notion)
Map each exclusion against your specific risk profile.
Leverage Broker Expertise
Choose brokers with cyber specialization (e.g., Lockton, Marsh McLennan). Ask for alternative manuscript wording.
Request Loss Scenarios
Carriers like Beazley provide sample claim summaries illustrating when exclusions apply.
Negotiate Sub-Limits Upward
Boost social engineering limits to at least 10% of your total policy limit.
Align Retroactive Dates
Push for “full prior acts”—especially critical after M&A events.

For a granular approach, read How to Read a Cybersecurity Insurance Policy: Clause-by-Clause Analysis.

5. Key Takeaways & Next Steps

• Exclusions are not boiler-plate fluff; they are actionable deal-breakers.
• State-sponsored attack and minimum-security controls are the two fastest-growing denial triggers.
• Compare carriers side-by-side—coverage variances exceed 40 % on critical exclusions.
• Always bundle endorsements for social engineering, system failure, and cyber terrorism.
• Consider higher limits; consult Ransomware Coverage Limits in Cybersecurity Insurance: How to Get Adequate Protection.

Call to Action

Ready to audit your policy? Contact a cyber-focused broker or risk advisor, and use this guide as your negotiation checklist. A few minutes spent dissecting exclusions today could save millions in uncovered losses tomorrow.

Sources

IBM. “Cost of a Data Breach Report 2023.” https://www.ibm.com/reports/data-breach
AdvisorSmith. “Average Cost of Cyber Insurance.” https://advisorsmith.com/insurance-research/average-cost-of-cyber-insurance
Marsh. “Global Insurance Market Index Q4 2023.” https://www.marsh.com/us/insights/research/global-insurance-market-index-q4-2023.html

Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice. Always consult a licensed insurance professional.