Is cyber insurance worth it for small businesses?

Cyber liability insurance is an important safety net that can protect your business from the significant expenses of a cyberattack. There are two different types: first-party and third-party coverage. Many businesses have both types as part of their risk management strategy to ensure they’re fully protected.

First-party coverage protects against damage to your business. It typically includes expenses like hiring experts to investigate a breach, restoring lost data, and covering lost income while your systems are down.

Third-party coverage pays for all of your legal fees tied to the lawsuit, but credit monitoring services are typically tied to first-party coverage. I would recommend focusing on the legal fees for this section.

Cybersecurity insurance typically covers:

• Data breaches: A data breach involves the theft of personal data or business records. Coverage includes the costs related to investigating how the breach happened, recovering lost or stolen data, and restoring systems.
• Ransomware: A ransomware attack is when cybercriminals break into your computer systems, lock up your files, and demand payment through cyber extortion. Coverage can include ransom payments to recover data or expert IT services to restore your data and systems.
• Business interruption: If you’re locked out of your computer systems, a cyberattack can shut down your operations. Cyber insurance helps replace lost revenue until you get back up and running again.
• Notification costs: In many states, businesses are legally required to notify customers that their information was compromised after a cyberattack.
• Legal expenses: If affected customers sue your business after a cyberattack, the legal expenses can be significant. Cyber insurance typically covers legal fees, settlements, and judgments up to your policy limit.
• PR management: You may need to hire a public relations company to rebuild your business’s reputation after a cyberattack.

As a small business owner, you may think investing in the latest firewalls, antivirus software, multi-factor authentication, and other cybersecurity measures will protect your business from cyberattacks.

Although these measures are essential, they don't guarantee that you won't experience cybercrime. Cybercriminals are getting increasingly more sophisticated, their methods are evolving, and even the most security-conscious businesses can fall victim.

Cyberattacks can infiltrate your systems in many ways, including:

• Third-party vendors: Many small businesses rely on vendors and service providers who have access to their computer systems. For example, a breach at your payroll company or cloud storage provider could expose your business data.
• Employee error: Employees can accidentally click on malicious links, download infected attachments, or accidentally send protected information to the wrong person.
• Phishing scams: Cybercriminals often send official-looking emails to trick employees into sharing passwords or other sensitive information.
• Social engineering scams: In social engineering scams, cybercriminals pose as a boss, vendor, or other trusted individual to trick employees into giving them company data, passwords, or other sensitive information. 
• Weak or stolen passwords: Employees may reuse passwords across multiple accounts or choose weak passwords that are easy to guess or crack.
• Malware infections: Malicious software can infiltrate your system through infected websites, email attachments, USB drives, or software downloads. Once installed, malware can steal data or encrypt files for ransom.
• Outdated software vulnerabilities: Cybercriminals often take advantage of security weaknesses in outdated software. Employees may forget or neglect to apply software security updates, which allows attackers to get in.

Cyber insurance provides a critical safety net against cyberattacks. If your business is hit, the costs begin accumulating immediately and can quickly spiral into hundreds of thousands or even millions of dollars. The average cost of a ransomware attack in 2024 was $4.88 million. Even a fraction of that amount is enough to force many small businesses into bankruptcy without coverage.

The financial impact of a cyberattack can be devastating for small businesses, especially if they don't have cyber insurance. The costs can be far more than what most owners anticipate.

A study from the IBM/Ponemon Institute found the average U.S. data breach cost was $4.4 million in 2024. That number is expected to increase as cybercriminals develop more advanced methods and target small businesses with weaker defenses.

Artificial intelligence (AI) is likely to make these attacks even more dangerous. Hackers may use the technology to automate phishing campaigns, scan systems for vulnerabilities faster than ever, and launch attacks that adapt in real time.

When a cyberattack occurs, small businesses face a long list of incident response expenses, including:

• Ransom demands: According to NetDiligence’s 2024 Cyber Claims Study, the average ransom demanded in 2023 was $3.1 million, and the average ransom payment was $700,000.
• Investigating and eliminating security weaknesses: After a cyberattack, you'll likely need specialized experts to track down how hackers got in and patch vulnerabilities. A professional forensic investigation can cost anywhere from $10,000 to over $100,000, according to SecurityMetrics. The cost depends on the complexity of your systems, the size of your business, and the number of locations affected.
• Regulatory fines/penalties: Regulators take data protection seriously, and businesses of all sizes are held accountable when customer information isn’t properly safeguarded. Failing to meet compliance standards can result in steep fines and even criminal charges.
• Customer notification costs: Following a data breach, you must contact all affected parties, including customers, which can be expensive. Notification costs in the U.S. average $270,000.
• Credit monitoring: Your business will also need to provide credit monitoring services for all affected parties for at least two years. The cost of credit monitoring is anywhere from $10 to $30 per month for each customer, meaning two years of coverage per customer could range from $240 to $720. 
• Potential lawsuits from customers or clients: Lawsuits are always a risk after a data breach. According to NetDiligence’s 2024 Cyber Claims Study, the average legal expenses involving cyber incidents in 2023 were $383,000 for small- and medium-sized businesses.

Without cyber insurance, a cyberattack could drain your savings, or force your business into bankruptcy or closure.

By covering most of these expenses up to your coverage limits, cyber insurance provides peace of mind knowing an attack won’t destroy everything you’ve worked hard to build.