1st Party Cyber and 3rd Party Cyber refer to the types of coverage and liabilities associated with cyber risks in cyber insurance policies. They address different aspects of risk based on whether the affected entity is the policyholder (1st party) or another party (3rd party).
1st Party Cyber
1st party cyber coverage focuses on the direct costs and losses that a business or individual incurs as a result of a cyber incident.
What It Covers:
- Data Breach Response Costs: Expenses related to investigating, containing, and remediating a data breach (e.g., hiring forensic experts).
- Business Interruption: Lost revenue and extra expenses incurred due to downtime caused by a cyberattack.
- Ransomware Payments: Coverage for ransom demands made by attackers, including costs of negotiation and cryptocurrency payments (if allowed by law).
- Data Restoration and Recovery: Costs to restore or recover corrupted or lost data.
- Cyber Extortion Costs: Costs associated with handling extortion threats, such as hiring cybersecurity experts or public relations specialists.
- Notification Expenses: Costs of notifying affected parties, such as customers or employees, about a data breach.
- Reputation Management: Expenses to manage reputational damage caused by a cyber incident.
Example Scenarios:
- A ransomware attack encrypts your systems, and you need funds to recover your data and operations.
- A hacker steals your customer database, and you incur costs notifying customers and offering credit monitoring services.
3rd Party Cyber
3rd party cyber coverage protects the policyholder from claims and liabilities arising from cyber incidents that affect other entities due to the policyholder’s actions or negligence.
What It Covers:
- Legal Defense Costs: Expenses for defending against lawsuits from third parties claiming damages due to a data breach or cyber incident.
- Settlement Costs: Payments to settle claims from third parties, including regulatory fines and penalties (if insurable in the jurisdiction).
- Regulatory Investigations: Costs of responding to investigations by regulators, including legal representation.
- Liability for Data Breaches: Claims arising from unauthorized access to third-party data stored or processed by the policyholder.
- Network Security Liability: Damages caused to third parties due to failures in the policyholder’s cybersecurity, such as spreading malware.
- Media Liability: Coverage for intellectual property infringement or defamation claims related to digital content.
Example Scenarios:
- Your company’s network is hacked, and malware spreads to a client’s system, causing their business to suffer downtime.
- A partner sues you for negligence after their customer data is exposed due to a breach in your systems.
Key Differences
| Aspect | 1st Party Cyber | 3rd Party Cyber |
|---|---|---|
| Who is Protected? | The policyholder (direct losses) | Other entities affected by the policyholder |
| Focus | Internal costs and recovery | Liability and claims from external parties |
| Examples of Coverage | Ransomware payments, data recovery | Lawsuits, regulatory penalties, third-party damages |
Why Both Are Important
- 1st Party Cyber helps organizations recover quickly from direct impacts of cyber incidents.
- 3rd Party Cyber safeguards against financial and reputational harm caused by lawsuits or claims from external parties.
Organizations often combine both types of coverage in a comprehensive cyber insurance policy to protect themselves fully against the multifaceted risks of cyber threats.