The Cyber Insurance Trap: Why vCSOs Must Take Back Control Before It’s Too Late
The Data Breach That Should Have Been Covered—But Wasn’t
A manufacturing company thought they were covered. They had a $5 million cyber insurance policy and followed every security requirement their insurer dictated. When ransomware hit, they expected protection.
Instead, they got a denied claim and a financial disaster.
The reason? The insurer classified the attack as an “act of war,” even though there was no proof of nation-state involvement. The company was left footing the bill.
That same “act of war” loophole has been used to deny cyber insurance payouts for businesses across the world. Merck, Mondelez, and hundreds of others have fought legal battles against their insurers over policy exclusions, shifting blame, and outright refusal to pay.
This is the reality of cyber insurance today.
And now, insurers aren’t just controlling payouts, they’re trying to control cybersecurity itself.
Insurance Companies Are Quietly Becoming Your Competition
Insurance providers aren’t just selling policies anymore. They’re selling security solutions, acting as MSSPs, and compliance auditors.
They’re bundling cybersecurity tools into their policies, dictating security frameworks that serve their own financial interests, and pushing businesses toward insurer-managed security stacks that remove independent oversight.
This is not about protecting businesses. It’s about minimizing their own liability.
When insurers dictate the security stack, they control the security policies your clients must follow, the security tools your clients must use, and the incident response process when a breach happens.
And when the breach happens? They own the logs, they control the evidence, and they dictate the outcome.
When Coverage Comes with Complications
Insurance providers are not cybersecurity experts. They are risk managers who operate under one guiding principle: pay out as little as possible. Their priority isn’t protecting businesses—it’s minimizing financial exposure. This creates a dangerous misalignment between what companies need for real security and what insurers are willing to cover.
At first glance, insurers appear to be strengthening cybersecurity by requiring policyholders to meet specific security benchmarks. They mandate firewalls, endpoint detection, MFA, and regular assessments. But the reality is, these policies are often written in vague, ambiguous terms that give insurers the upper hand when a claim is filed.
Here’s where businesses run into trouble:
1. Moving the Goalposts on Security Requirements
Many businesses believe that meeting their insurer’s security checklist means they are fully protected. But what happens when those requirements change? Insurers frequently update their security expectations after issuing a policy—and if a company fails to comply with even a minor update, coverage can be denied. Worse, businesses often don’t even realize they’ve fallen out of compliance until after a breach occurs.
2. Exploiting Policy Exclusions
Cyber insurance policies are filled with exclusions that allow insurers to deny claims. Common loopholes include:
Acts of War Clauses: If an attack is attributed to a state-sponsored hacker group (which is becoming more common), insurers can classify it as an act of war and refuse coverage.
Negligence Claims: If a company fails to document their adherence to security best practices, insurers may argue that negligence voids the policy.
Unapproved Vendors or Tools: If an insured business used a security vendor not explicitly listed in the policy, claims may be rejected—regardless of whether the vendor actually contributed to the breach.
3. Controlling the Breach Response
When a company suffers an attack, they expect their insurer to step in and help. Instead, insurers often dictate the incident response process in ways that serve their own interests. They may require businesses to use insurer-approved forensic investigators or legal teams, limiting a company’s ability to challenge findings or dispute a denied claim.
Insurers also control access to security logs and forensic data, making it nearly impossible for businesses to contest claim denials. If the insurer’s team finds a “policy violation,” the claim is rejected—and the company is left with no leverage to argue their case.
4. Delaying or Underpaying Claims
Even when a claim is approved, businesses often find that insurance doesn’t cover as much as they expected. Insurers may stall the payout process for months by requesting endless documentation or conducting additional investigations. By the time the payout arrives, the business has already suffered irreparable financial and reputational damage.
Cyber insurance should be a safety net—not a trap. But the way insurers structure their policies, they are setting businesses up for failure. vCSOs must take the lead in ensuring their clients aren’t blindly trusting insurer-driven security frameworks or assuming their policies will protect them when it matters most.
ICS Cyber Insurance Denial: “You Followed the Rules—Too Bad”
Industrial Control Systems (ICS) thought they were protected. They had cyber insurance, followed all the security requirements laid out by their policy, and believed they had done everything right. Then, a cyberattack hit—crippling their business, exposing sensitive data, and triggering a costly class-action lawsuit from their own clients.
When ICS turned to their insurer, Travelers Insurance, for the financial support they were promised, they were blindsided. Instead of covering the damages, the insurer moved to void the policy entirely. Travelers claimed ICS had misrepresented its use of multi-factor authentication (MFA).
The kicker? The policy had already been active when the attack happened. That meant ICS wasn’t just denied coverage—they were also expected to reimburse the insurer for services already rendered.
A Dangerous Precedent for Businesses
This wasn’t just an ordinary claim denial. Travelers didn’t argue that ICS had failed to meet security requirements in an isolated instance. They attempted to cancel the entire policy retroactively—effectively rewriting the rules after the fact.
The case highlighted an alarming truth: Insurers hold all the leverage. They set the policy terms, dictate the security stack, and when disaster strikes, they control how those terms are interpreted. ICS had no independent documentation proving they were compliant. That meant no recourse, no way to challenge the insurer’s decision, and no financial support to recover from the attack.
Why This Matters for vCSOs
This case set a precedent that should terrify every business leader. If an insurer can retroactively nullify a policy based on vague claims of misrepresentation, what’s stopping them from doing the same to your clients?
If an insurer provides the security stack, they also control the logs. That means they can claim misconfiguration—without providing proof.
If there’s no independent cybersecurity documentation, your client is defenseless in court.
If a breach occurs, the insurer’s priority isn’t recovery—it’s minimizing their own financial exposure.
ICS isn’t the only company to face this trap. Cyber insurers are increasingly looking for ways to deny claims, often waiting until after an attack to scrutinize policyholder compliance. If vCSOs aren’t actively documenting risk decisions and maintaining independent security records, their clients could be left completely unprotected when they need help the most.
Why vCSOs Must Take Back Control
As a vCSO, your role isn’t just security oversight—it’s business risk mitigation. And right now, insurers are actively positioning themselves to take that role away.
If you don’t lead the conversation, they will.
One of the most critical steps vCSOs must take is ensuring they own the security stack. If an insurer dictates the tools, configurations, and policies, they ultimately control the security evidence. This means that when an incident occurs, you may not have access to the logs, control over forensic data, or any leverage to dispute a claim denial. Without independent documentation, your client’s cybersecurity strategy is at the mercy of a provider whose sole interest is reducing their own financial exposure.
It is also essential to separate cybersecurity from cyber insurance. Allowing an insurer to act as both the underwriter and the security provider is a direct conflict of interest. Clients must understand that compliance with an insurance policy does not equate to actual security. Insurance-driven security stacks are designed to meet policy requirements, not necessarily to protect against real-world threats. Independent security audits, risk assessments, and compliance evaluations should always be conducted separately from insurer-mandated assessments to ensure businesses are truly protected.
Beyond maintaining control over security operations, vCSOs must prepare their clients for the insurance trap. Before a company blindly adopts an insurer-managed security stack, they need to understand what they are signing up for. Insurance policies are filled with exclusions that can void coverage when it’s needed most. Clients should be educated on the potential for denied claims due to ambiguous policy wording, how insurers may shift blame in the event of a breach, and what evidence is required to challenge a payout rejection. By taking a proactive approach, vCSOs can prevent their clients from walking into a situation where they think they are covered—only to find out too late that they are not.
Bottom Line: Insurance Isn’t Security—And It Never Will Be
The cyber insurance industry has shifted. It’s no longer just about coverage, it’s about control.
If vCSOs don’t take ownership of the security stack, insurers will. If vCSOs don’t ensure independent documentation, insurers will dictate the breach response. If vCSOs don’t challenge insurer-managed security frameworks, clients will be left defenseless.
This is your wake-up call. Insurance companies are positioning themselves as the new cybersecurity authority. If you don’t act now, they will own the risk conversation, the security stack, and the future of your client’s cybersecurity.
The question is: Will you act now, or let them take control?