Courting Disaster: The Underappreciated Risk of a Cyber-Insurance Catastrophe

Connecticut Insurance Law Journal forthcoming (2021, Symposium on Cyber Insurance)

Virginia Public Law and Legal Theory Research Paper No. 2021-15

64 Pages Posted: 26 Feb 2021

See all articles by Kenneth S. Abraham

Kenneth S. Abraham

University of Virginia School of Law

Daniel Schwarcz

University of Minnesota Law School

Date Written: February 25, 2021

Abstract

Cyberattacks have the potential to cause simultaneous, very large losses to numerous firms across the globe, thus resulting in a cyber “catastrophe.” Moreover, there are plausible reasons for believing that a future cyberattack could produce world-wide losses that are larger by an order of magnitude than any past attack. This Article argues that such a cyber-catastrophe could cripple the insurance industry, for two primary reasons. First, many traditional property/casualty policies might well provide “silent-cyber” coverage of a much larger portion of these costs than is now anticipated, because a cyber catastrophe could well result in “physical damage or loss” to tangible property resulting from cyberattacks. This is especially true for auto and homeowners coverage, which generally do not expressly exclude cyber-risk due to the historic absence of cyber claims in these domains. But even general commercial property and CGL policies might cover significant elements of this loss, depending on their terms. Second, a cyber catastrophe could cripple the growing number of insurers providing "cyber insurance" coverage, which expressly cover various losses associated with cyberattacks and the compromise of electronic data. These cyber-insurers face unique difficulties in using two of the most important insurance tools for limiting their exposure to catastrophe risk: coverage exclusions and underwriting. Although cyber-insurers have historically offset these difficulties by insisting on artificially low coverage limits, competition is increasingly rendering this strategy unworkable. In short, both traditional forms of insurance and new forms of cyber insurance are courting disaster. The Article therefore closes by identifying and analyzing several alternative approaches to protecting traditional insurance from catastrophic cyber loss and encouraging new forms of cyber insurance that provide increased coverage without exposing insurers to excessive financial risk.

Keywords: cyberattack, cyber insurance, catastrophic risk

Suggested Citation

Abraham, Kenneth S. and Schwarcz, Daniel B., Courting Disaster: The Underappreciated Risk of a Cyber-Insurance Catastrophe (February 25, 2021). Connecticut Insurance Law Journal forthcoming (2021, Symposium on Cyber Insurance), Virginia Public Law and Legal Theory Research Paper No. 2021-15, Available at SSRN: https://ssrn.com/abstract=3792882

Kenneth S. Abraham (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States
434-924-3616 (Phone)
434-982-2845 (Fax)

Daniel B. Schwarcz

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.law.umn.edu/profiles/daniel-schwarcz

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
141
Abstract Views
606
rank
248,460
PlumX Metrics