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11 September What is subrogation in Cyber Security ?

Posted on 11:09:2024 in IPMC Blog by IPMC Ghana


Introduction

Cybersecurity is a key priority for any business entity in this modern, interconnected world. Most companies do indeed focus on the firewalls, encryptions, and training of staff to a high degree. There is just one important thing that they all forget: subrogation. Initially, a legal concept associated more with insurance, it finds its niche in the world of cybersecurity.
At its simplest, subrogation is the right of one party usually an insurer to sue in place of another party and to seek recovery against a third party for a loss. In terms of cybersecurity, this occurs most often when an insurer covers the losses of a company resulting from a cyberattack and then seeks recoupment of such funds from a third party who caused the breach through negligence.
This article will break down the importance of subrogation in cybersecurity, offer real-world examples, explain how subrogation works in cyber insurance, and highlight the legal considerations that come into play. We’ll explore the benefits and challenges of subrogation and why it matters for businesses striving to protect themselves from the ever-growing threat of cybercrime.


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Subrogation in Cybersecurity


Definition of Subrogation in Cybersecurity

Subrogation, in cybersecurity, means the right which is insured by law to claim an amount it paid for a claim from any third party responsible for any incident in case of any cyber incident. It refers to how the insurers may bear an incident financially while holding any third party responsible that caused a breach.

This is because most of the cases, through subrogation, will have the corporation recover its loss after a cyber-attack without necessarily having to get physical with the responsible third party. The insurer stands in to fight this legal battle on behalf of the firm, and the firm together with the insurer stands a chance of being compensated for financial damage during the cyber event.

Subrogation and the management of cyber security risk can be a great tool to bring cyber risk within manageable parameters. Through subrogation, an insurer could hold any third party responsible for a particular cybersecurity incident, thus giving better protection to businesses against breach-related financial losses. This is increasingly important in today's world because most companies depend on third-party vendors for key services that include data storage, payment processing, and IT security.

The upside is that when third-party vendors realize they may indeed be held financially liable for involvement in a cyber breach, then good security features are more likely to be implemented by those same vendors, as well as adherence to industry standards. This makes the whole landscape of security better, helping not only themselves but also the businesses relying on their services.

Besides that, subrogation offers substantial opportunities for businesses to become proactive in reducing cyber exposure. Companies can significantly reduce the risk of financial losses from cyber incidents by paying more attention to the selection of third-party vendors, negotiating favorable contract conditions, and ensuring that cyber insurance policies include subrogation clauses.



Importance of Subrogation in Cyber Security

Subrogation may sound like some kind of arid legal curiosity, but in fact, it is a very powerful tool for cybersecurity when managing risks and mitigating financial losses or impacts from data breaches and cyber incidents. Since most businesses depend on third-party vendors to store data in the cloud, process payments, and keep IT security uptight, most incidents come from third-party failures.

Examples include failure to patch a known vulnerability in security leading to data breaches by either outsourced IT security groups or third-party cloud providers. It causes a business to lose money, such as legal fees, fines, and compensation that a business may have to its customers—general costs associated with restoring systems.

While helping share the cost, it does not stop there with the involvement of cyber insurance. The insurer can recover compensation paid through subrogation and hold third-party vendors responsible for the failure. In other words, it serves a two-fold purpose. It minimizes the loss for both the insurer and the insured and holds third parties accountable for the role they played in the security failure.

Without subrogation, the company suffering the breach may have little recourse to gain restitution from the vendor actually at fault. In this case, with businesses becoming more and more dependent on outsourcing and cloud services, subrogation now becomes a very important tool to make sure a third party maintains the very best standard of cybersecurity.



Subrogation Examples in Cyber Security


Cloud Service Breach

A large retail company stores sensitive information about its customers through a third-party cloud service provider. Now, assume that such a cloud service provider neglects to take proper security measures on the server and that hackers access the servers, thereby stealing thousands of credit card numbers. While the retail company was legally responsible for the breach, all the legal expenses were covered by customer notification and credit monitoring services included in its cyber insurance.

However, since it was a case of negligent dealing on the part of the cloud provider, the insurer then filed a subrogation claim to the insured party and sought to recover back all amounts paid from the cloud provider. Thus, the insurer gets paid; simultaneously, the cloud provider pays for his misdeed of neglecting to have secured operations.

Software Vulnerability Exploitation

A healthcare provider depends on third-party software to maintain their patients' records. The exact vulnerability of that software was not patched by the vendor and was picked up by hackers to steal sensitive medical information. Now, a healthcare provider is fined by the regulator for not following rules on protection of patient data; amongst other things, fines are covered by a cyber insurance policy apart from other costs related to the notification of affected patients.

The insurer therefore gets subrogated and recovers the loss from the software vendor in case of this particular negligence causing the breach. It thus holds back the responsibility of the vendor and does not leave the whole cost of such an incident with him.

IT Security Failed Outsourcing

The third-party vendor manages the IT security management of the financial company. Due to a lack of proper monitoring of the vendor by the financial company, an attack is made by ransomware. The ransomware attacks, lock down its systems, and start demanding huge ransoms in return for critical financial data. In the above case, for instance, the company's cyber insurance would pay for negotiation costs with the hackers, apart from system restoration. However, the insurer could recoup these expenses through subrogation from the negligent IT vendor.

It is the vendor that the insurer holds liable because it ensures that the accountability falls on the perpetrator of the breach financially and, in the long run, keeps safe the financial stability of the firm.



How Subrogation Works in Cyber Insurance


Subrogation remains one of the common features in numerous cyber insurance policies and would continue to assure companies that they would not be forced to incur full costs for cyberattacks that result from third-party negligence. An organization, through the purchase of cyber insurance, basically transfers some of the associated financial risks related to cyber incidents to the insurance provider.

The insurer bears all these costs in the event an actual cyber incident occurs, including but not limited to a data breach, ransomware attack, or business email compromise due to a breach. All these varied costs could include legal fees, regulatory fines, crisis management, customer notification, or, worst of all, payment of the ransom. With it, the affected company can get back up and keep doing business way beyond the total financial cost of the breach.

However, in cases where there is a third party at fault through negligence, failure to secure systems, or mismanaging sensitive data, then an insurer can recover some of the costs through subrogation by proceeding with a lawsuit against that third party. Subrogation would normally follow this course:

  1. Cyber incident: A cybersecurity breach within the organization, such as a ransomware attack or data leak.
  2. Insurance pays out: The organization will claim its cyber insurance, with the latter taking care of such costs.
  3. Determination of Blame: The insurer would review the root cause of the incident, considering a third party such as a cloud service provider, software vendor, or outsourced IT service.
  4. Subrogation Action: Where there is a third-party liability, the insurance company has the right to apply for an allowance to proceed with subrogation and recover the amount thus far paid out from a party held liable.

The subrogation claim may be realized in two ways: either by a settlement between the insurer and the third party or in a court of law through litigation, in case the liability is denied.

This is beneficial not only to the insured company in settling the costs that might accrue from a claim but also to an insurer in seeking compensation from third parties within a cyber incident.



Challenges with Cybersecurity Subrogation


Difficulties of Proving Fault

Cyber incidents are usually complex, and it might even be difficult to establish beyond a reasonable doubt that a third party is liable for a breach. Most of the time, hackers would cover their tracks. Almost all types of cyber-attacks involve weaknesses in several parties that might have contributed to such attacks, complicating efforts of insurers in successfully pursuing subrogation claims.

Cross-Jurisdictional Issues

However, most cyber incidents are between different parties from different countries. Just think of a U.S.-based company relying on a European cloud provider— hackers can be from another part of the world. This brings about jurisdictional challenges in subrogation claims since different countries have their sets of legal rules and processes.

Unending legal tussles

Such claims of subrogation can continue for several months, if not years, before the process moves to a conclusion in case some third party contests its liability. For companies that have already been victimized by the cyber-attack, financial and reputational harm makes this dispute hard to swallow. Most of the time, however, the potential financial recovery makes it all worth the effort.

Contractual Restrictions

For instance, some vendor contracts limit the total liability, which is normally to be very small or exclude consequential damages in which most of the costs of breach are embedded. Sometimes, third-party vendors may insert contractual limits of liability in their contracts, narrowing the insurer's ability to pursue subrogation.



Conclusion

Enterprise cybersecurity remains incredibly important, yet poorly understood, in two respects: the way that they can control their risk and recover from financial damages on the back of a cyberattack. Subrogation allows the suing of third parties responsible for breaches so the company is not left holding the bag. It will be a growing part of accountability and increasingly seen as minimizing cyber incidents as the threat landscape develops and dependencies from third-party vendors grow for key operations. The organization should work actively with its insurance providers to understand how the provisions of subrogation apply within a cyber insurance policy and drive proactive cybersecurity exposure reduction. However, with the acceptance of subrogation as part of their cybersecurity umbrella approach, companies are best positioned to protect themselves from the financial fallout of cyber-attacks while further holding third parties accountable for their role in security failures.