Most business leaders believe that buying cyber insurance means they will be protected when a breach happens, but the truth is more complicated. The City of Hamilton learned this the hard way recently when they file a $5 million claim after a cyberattack, only to have their insurer declining pay, pointing to a failure in login security.
This case is a reminder that cyber insurance is not a magic shield. Coverage only applies if an organization can show it has met all the conditions of the policy. Even small gaps in security controls can leave a company exposed. For leaders, the message is clear: cyber insurance is but one piece of the puzzle, not the whole solution.
The False Sense of Security
Insurance has always been about sharing risk. You pay a premium, and in return, you expect help when disaster strikes. While that may works well for car accidents, property damage, or medical expenses, it can also create a false sense of security. Leaders think, “We have insurance, so we’re covered.” But in the cyber world, the rules are different. Cyber insurance policies are tied to technical requirements. When an incident occurs, businesses discover that the insurer is asking hard questions about whether security was managed “properly.” If your organization can’t prove it followed those requirements, the insurer can, and often will, deny coverage.
And here’s the problem: “properly” is not always clearly defined. What looks reasonable to your IT team may not meet the standard your insurer expects. In the City of Hamilton’s case, the disagreement centered on whether multi-factor authentication (MFA) was in place and used correctly.
The Standards That Shape Coverage
Insurers don’t usually invent their own standards. Instead, they lean on established frameworks such as:
- PCI DSS (Payment Card Industry Data Security Standard). – Required for any business that handles card payments.
- NIST Cybersecurity Framework. – Widely used by U.S. companies and government organizations.
- ISO 27001. – An international benchmark for managing information security.
The challenge is that policies often refer to these standards without spelling out exactly what counts as compliance, leaving lots of room for interpretation. And in a claim review, the interpretation that matters is the insurer’s, not the company’s.
Leaders should not assume their team’s “good enough” approach will satisfy their insurance provider. Policies are increasingly written to shift responsibility back onto the organization.
Why This Is Not Just IT’s Problem
It’s easy to treat cybersecurity as an IT issue. After all, firewalls, logins, and vulnerability scans sound like technical matters. But the Hamilton case proves that security failures lead to financial, legal, and reputational consequences, therefore every leader in the organization needs to have a stake in it:
- Finance.– Must understand the financial risk of a denied claim and ensure insurance policies are aligned with merchant agreements.
- Operations.– Needs to make sure security practices are part of daily routines, not just once-a-year checklists.
- Legal. – Must review policy language and service agreements to spot obligations that may affect coverage.
- Executive leadership. – Must ensure all departments work together, not in silos.
A breach is not only about stolen data. It can bring lawsuits, fines, loss of customer trust, and operational downtime. If security is left to IT alone, the organization is exposed from all other angles.
The Car Insurance Analogy
Think of car insurance. If you are in an accident while driving within the speed limit, your insurer pays. But if you were speeding, texting, or driving without a license, your coverage may not apply.
Cyber insurance works the same way. If your organization fails to follow required practices, whether it’s patching systems, using MFA, or keeping proper backups, the insurer may argue that you broke the “rules of the road.” And if they can prove it, they don’t have to pay.
The Shifting Landscape of Cyber Insurance
Fifteen years ago, getting a cyber policy was simple. Questionnaires were short and high-level: “Do you have backups? Do you use antivirus?” Most companies could check a few boxes and secure coverage.
Today, the process looks very different. Questionnaires are long, detailed, and technical. Insurers ask about vulnerability scanning, penetration testing, incident response, backup testing, and more. These forms often end up on a finance executive’s desk, who then forwards them to IT. But unless the organization has already built strong controls, the answers may be incomplete,—or worse, inaccurate.
Insurers are raising the bar because the cost of cyber claims is skyrocketing. They want to limit payouts by making their clients meet higher standards. If those standards aren’t met, the insurer has the right to walk away.
The Hamilton Case: A Turning Point
The Hamilton breach is more than a local story. It sets a precedent. Other insurers will look at it as proof that they can deny coverage if an organization doesn’t meet basic requirements. That means the stakes just got higher for every business that relies on cyber insurance as a safety net.
Leaders can no longer assume “close enough” will count. If your policy requires compliance with PCI DSS or another standard, you must be able to prove compliance in practice, not just on paper.
What Leaders Need to Do Now
Here are the steps leaders should take to avoid being caught off guard:
- Review your cyber policy line by line. Don’t just file it away. Know what controls are expected and what evidence may be required in a claim review.
- Compare your obligations. Look at your merchant agreements, PCI requirements, and compliance standards. Make sure they line up with the terms of your insurance coverage.
- Treat compliance as an ongoing process. Security is not a one-time project. Patch systems, update policies, test backups, and train staff throughout the year.
- Validate with independent experts. A third-party review shows your insurer you are serious and provides unbiased evidence that you met your obligations.
- Engage all departments. Finance, operations, and IT must work together. Security must be seen as a business issue, not just a technical one.
- Ask questions up front. When renewing or buying coverage, ask your insurer: “What exactly does properly implemented mean? What evidence will you require?”
Beyond Coverage: Building Resilience
At the end of the day, insurance should be a backstop, not the first line of defense. The real goal is to reduce the chance of needing to file a claim in the first place. This means:
- Expanding security controls beyond the minimum scope. For example, don’t limit PCI practices to just your payment environment. Apply them across your entire organization.
- Embedding security into daily operations. Annual tests are not enough. Ongoing vulnerability scans, patching, and training make resilience real.
- Making security culture-wide. Every employee has a role in protecting data, not just the IT team.
When organizations take these steps, insurance becomes a safety net rather than a gamble.
The Hamilton breach shows that cyber insurance is not a guarantee. It is conditional and those conditions are getting stricter. Leaders who treat insurance as a substitute for strong security controls are taking on far more risk than they realize.
Coverage depends on proof: proof that you followed the rules, proof that you maintained controls, proof that compliance was real and not just a checked box. Without that proof, insurance may not be there when you need it.
For leaders, the takeaway is simple but urgent:
- Know your obligations.
- Align policies, contracts, and practices.
- Make security part of the culture.
Insurance can soften the financial impact of a breach, but it will never replace the hard work of prevention. The safety net only works if your organization has done its part.
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