Why Your Cyber Insurance Claim May Get Denied

Your company just experienced a ransomware attack. Systems are down. Clients can't access your services, and you're staring at six-figure recovery costs. You breathe a sigh of relief as you remember your generous cyber liability insurance policy.

Then your claim gets denied.

Cybersecurity gaps prevented the carrier from paying.

Despite paying premiums for years, you're facing the full financial burden of the breach. This scenario is playing out with alarming frequency as insurers deny cyber risk insurance claims at unprecedented rates, scrutinizing security practices more intensely than ever before.

Cyber liability insurance, also referred to as cyber protection insurance, data breach insurance, cyber attack insurance, and information security insurance, isn't a safety net for the unprepared. Whatever you call it, the carrier expects a partnership that demands investment in robust cybersecurity protection.

Inadequate Cybersecurity Hidden Costs

Business email compromise (BEC) and funds transfer fraud accounted for 60% of all cyber insurance claims in 2024, according to Coalition's 2025 Cyber Claims Report . While these attacks may seem less sophisticated than ransomware, they're devastating. The average business email compromise costs $35,000. When it escalates to funds transfer fraud, losses skyrocket to $106,000.

The 2025 Cyber Claims Report was drawn from reported claims data from Jan. 1 to Dec. 31, 2024. Coalition defines a claim as “an adverse cyber matter reported by a policyholder that incurred a gross loss.”

Ransomware remains the costliest threat, with average losses of $292,000 per incident. Beyond the ransom payment itself, firms face an average of $102,000 in business disruption costs, $58,000 for forensic investigation, and $18,000 for digital asset restoration. These figures reveal why insurers have become increasingly selective about who and what they'll cover.

Why Claims Get Denied

The most common reason for cyber insurance claim denials isn't policy exclusions or fine print technicalities. It's the failure to implement and maintain basic security controls. Insurers now routinely deny claims when they discover businesses lacked MFA, failed to patch known vulnerabilities, or couldn't prove staff take at least annual cybersecurity training.

A Metro Atlanta manufacturing company learned this lesson after a ransomware attack. The insurer initially denied their cyber liability claim because firewall logs were incomplete and backups hadn't been tested in over a year. After weeks of documentation and external validation, the provider paid a fraction of the losses.

Human error drives 95% of cybersecurity breaches. When insurers investigate claims, they look for evidence that companies took reasonable steps to prevent attacks. Misconfigurations, unaddressed vulnerabilities, lost devices, or social engineering attacks can all trigger claim denials. Insurers argue these incidents could have been prevented, voiding coverage entirely.

The MFA Mandate

Multi-factor authentication has transformed from a recommended practice to a non-negotiable requirement. Most cyber insurance providers now refuse to offer coverage to businesses without MFA protection on email access, remote access, and network administration. Microsoft reports that MFA can block over 99.9% of account compromise attacks, making it the single most effective security control insurers can require.

The mandate extends beyond simple implementation. Insurers expect MFA on all business-critical accounts, cloud platforms like Microsoft 365 and Google Workspace, and any system containing sensitive client records. Some cyber liability insurance carriers won't even provide a policy quote without verified MFA implementation. Others restrict specific coverage like invoice manipulation protection when email lacks MFA.

Beyond MFA: Complete Security Checklist

While MFA serves as the baseline requirement, insurers evaluate several additional security controls when determining eligibility and pricing:

Endpoint Detection and Response (EDR) or Managed Detection and Response (MDR): These tools recognize and shut down high-risk or unusual behaviors. Lacking proper endpoint security is one of the fastest paths to cyber security insurance claim denial. EDR refers to the monitoring tool itself, while MDR includes security analysts who investigate and respond to threats.

Offline Backups: A single backup isn't enough. Insurers require businesses to maintain backups disconnected from their network or stored with cloud service providers. Cyber liability policyholders must demonstrate they keep multiple copies in different locations and test restoration procedures regularly.

Encryption: Laptops, desktops, and portable media devices must all implement encryption for sensitive information. This requirement extends to data in transit and at rest.

Patch Management: Regular software updates and vulnerability remediation demonstrate proactive security management. Running unsupported or unpatched software is viewed as negligence.

Security Awareness Training: Documented, ongoing employee training on phishing and social engineering attacks is essential. Insurers want proof of when training occurred, who attended, and what topics were covered.

Documentation Requirement

Claims frequently fail due to inadequate documentation. Insurers require detailed evidence supporting every claim, including records of the cyber incident, steps taken to mitigate damages, and all expenses incurred. This documentation must be submitted within specific timeframes outlined in the policy.

Successful claims depend on thorough, accurate, and updated documentation at all times. Businesses need incident response plans detailing exactly how they'll document and respond to attacks. This includes maintaining firewall logs, backup test results, training attendance records, vulnerability scan reports, and vendor security assessments.

Supply Chain Vulnerability

Network security extends beyond internal systems to encompass every third-party vendor and partner. Due to the interconnectedness of modern technology, attackers increasingly target outside partners as entry points to larger enterprises. Supply chain attacks can provide easier access when third-party entities lack equivalent security measures.

The 2024 Change Healthcare ransomware attack affected more than 90% of U.S. pharmacies, with total costs estimated at $2.87 billion. Coalition policyholders who submitted claims related to third-party breaches averaged $22,000 in losses. Some insurers deny claims when breaches originate from third-party contractors, making vendor oversight and security assessments critical components of insurability.

Making the Investment Decision

The question facing business leaders isn't whether to invest in cybersecurity, it's how to prioritize investments to simultaneously reduce risk and ensure insurance eligibility. This requires understanding both the threat landscape and insurer expectations.

Start with critical systems first. Implement MFA on email, financial systems, and customer databases before expanding to other applications. Deploy endpoint detection and response tools on all devices accessing company data. Establish offline backup procedures with regular testing and documentation.

Create an incident response plan detailing roles, responsibilities, communication protocols, and documentation requirements. This plan should specify how quickly incidents must be reported to insurers and what evidence needs preservation.

Conduct regular security awareness training and maintain attendance records. Implement vulnerability scanning and patch management processes with documented remediation timelines. Establish third-party risk management programs requiring security assessments of all vendors handling sensitive data.

Compliance Connection

For defense contractors and businesses handling controlled unclassified information, CMMC requirements create additional complexity. MFA is a critical component of CMMC compliance, helping contractors meet access control requirements while protecting government information. Companies working toward CMMC certification often find that security controls required for compliance align closely with cyber insurance requirements.

This alignment creates opportunities for efficiency. Investments in GRC frameworks that address compliance requirements simultaneously strengthen insurance applications. Documented security policies, regular audits, and continuous monitoring serve dual purposes: demonstrating regulatory compliance and proving insurability.

Vendor Panel Trap

While some insurers promote bundled security services and incident response partnerships, businesses must understand the limitations and conflicts inherent in these arrangements. Most cyber insurance carriers maintain panels of pre-approved incident response vendors, typically limiting options to 10 or fewer firms. If your trusted security partner isn't on that panel, you face a difficult choice: use an unfamiliar vendor or risk claim denial.

The vendor panel structure creates multiple points of friction during the worst possible moment. When a breach occurs, the breach coach hired by the insurer becomes the primary decision-maker rather than your internal team. These coaches, often law firms with their own practices to protect, may prioritize mitigating litigation risk over addressing technical vulnerabilities. The panel vendor assigned to your case likely has no prior knowledge of your systems, people, or operational practices, adding delays to an already time-sensitive situation.

Financial incentives further complicate the relationship. Insurers negotiate discounted rates with panel vendors, which reduces costs but raises questions about service quality and independence. The panel selection process itself remains largely opaque, preventing open competition and concentrating work among a small group of firms. Panel vendors face an inherent conflict: they must serve you as their client while maintaining relationships with insurers who control their future business opportunities.

Some policies include financial penalties for using providers outside the approved network, similar to out-of-network charges in health insurance. You might pay significantly more for using the incident response team that knows your environment, understands your business processes, and has established trust with your staff. The alternative is accepting an unknown vendor working under the direction of the insurer's breach coach.

Building Independent Security First

These structural issues underscore why businesses should invest in independent cybersecurity capabilities before relying on insurer-provided services. Establishing relationships with trusted security partners, implementing comprehensive monitoring and response capabilities, and developing tested incident response plans creates organizational resilience that transcends insurance policy limitations.

When businesses build strong security programs independently, they maintain control during incidents. They can negotiate with insurers from a position of strength, potentially getting trusted vendors added to approved panels before policies are finalized. They understand their own environments well enough to evaluate whether panel vendors possess the necessary expertise.

The most effective approach treats cyber insurance as one component of a comprehensive risk management strategy rather than the foundation. Security tools, trained personnel, documented procedures, and established vendor relationships should exist independent of insurance requirements. Insurance then provides financial protection and additional resources, not the primary security infrastructure.

Looking Beyond the Premium

While cyber insurance premiums have increased significantly, with some businesses seeing 40% to 60% rate hikes, focusing solely on cost misses the strategic value of comprehensive coverage. The global average claim amount sits at $115,000, but major data breaches including regulatory fines and legal fees can reach $4.88 million.

Businesses operating without cyber insurance face devastating consequences that extend far beyond immediate financial losses. When systems go offline due to security incidents, revenue stops flowing. Small businesses typically lose thousands of dollars for every hour of downtime. Data recovery expenses, forensic investigations, legal consultations, and system rebuilding quickly reach tens of thousands of dollars.

The reputational damage and client loss following breaches can be difficult to quantify and equally difficult to insure against. Ransomware attacks in particular inflict considerable damage to business relationships and market position, making prevention far more cost-effective than response.

Path to Insurability

Businesses don't need to transform into cybersecurity fortresses overnight. The path to insurability follows a logical progression: assess current security posture against insurer requirements, prioritize gaps based on risk and insurance impact, implement controls with proper documentation, and maintain ongoing compliance through regular audits and updates.

Understanding policy inclusions, exclusions, and mandates before signing prevents costly surprises later. Read the fine print thoroughly with the help of cybersecurity advisers like STACK Cybersecurity. Know what's in scope, what's not covered, and what legal requirements apply to your specific industry.

Pay attention to coverage timeframes, as they determine whether all losses are covered or just a percentage. Review deductibles, sub-limits, and time-based restrictions carefully. Some policies set individual limits per insuring clause and further sub-limit specific elements, making policy navigation complex.

Taking Action

The convergence of rising cyber threats and stricter insurance requirements creates pressure on businesses to invest in comprehensive security programs. However, this pressure also creates opportunity. Companies that treat cybersecurity as a strategic investment rather than a compliance burden position themselves for both operational resilience and favorable insurance terms.

The most successful approaches integrate security investments with business objectives. Rather than implementing controls solely to satisfy insurer questionnaires, forward-thinking firms build security programs that protect operations, enable growth, satisfy regulatory requirements, and demonstrate insurability.

This integrated approach requires expertise across cybersecurity, risk management, and compliance. Businesses need partners who understand both the technical requirements of security controls and the business implications of insurance policy terms. The investment in getting this right pays dividends through reduced premiums, comprehensive coverage, faster claim resolution, and most importantly, fewer incidents requiring claims in the first place.

For manufacturers, health care providers, financial services firms, law practices, and defense contractors, cybersecurity investments serve multiple purposes simultaneously. They protect operations, satisfy regulatory requirements, enable client relationships, and ensure insurability. The question isn't whether to invest in cybersecurity, it's how to invest strategically to maximize value across all these dimensions.

STACK Cybersecurity helps businesses navigate the complex intersection of cybersecurity requirements, compliance frameworks, and insurance eligibility. Our GRC consulting services address the full spectrum of security needs, from implementing MFA and EDR tools to developing comprehensive incident response plans and documentation procedures. We work with businesses to build security programs that simultaneously reduce risk, satisfy compliance requirements, and position them for favorable insurance terms.

Whether you're seeking your first cyber insurance policy or facing renewal challenges due to security gaps, investing in the right cybersecurity measures today determines your insurability tomorrow. The cost of prevention remains far lower than the cost of inadequate coverage when you need it most.

For more information about getting your company ready for cybersecurity insurance, contact STACK Cybersecurity for an assessment. We're SOC 2 Type 2 compliance and a Registered Practitioner Organization (RPO) for Cybersecurity Maturity Model Certification (CMMC).

Call us at +1 (734) 744-5300 or Contact Us to schedule a cyber security insurance consultation.