Filed Under:Markets, E&S/Specialty

An Underrated Supply-Chain Concern: Cyber Events

Two-thirds of cyber events are the fault of third-party businesses that outsource services for the victim, showing that business interruption (BI) no longer solely concerns physical assets susceptible to natural catastrophes and other disasters. 

“Physical damage to buildings, machinery and transportation infrastructure is not the only potential cause of supply-chain disruption,” said Rebecca Bole, Advisen’s editor and director of Strategic Development in the Research and Editorial division, during the company’s supply-chain cyber risk webinar. 

“Large-scale cyber events hold the potential to be as damaging as a natural catastrophes. From organized crime gangs who use malware to extort money, to politically-motivated hacktivists, all the way through to the amateur teenager in his bedroom and the simple act of an employee leaving a laptop on the train -- all these are potential cyber threats, and should be considered so by risk managers,” she said. 

Cyber is the supply chain’s catalyst for efficiency. Whereas small shops used to house information in internally held files, many now delegate website hosting, credit card processing, and other tech processes to other vendors- many of which are located internationally.  

Unfortunately, said John Mullen, partner at the law offices of Nelson Levine de Luca & Hamilton, a third of the breach cases that come across his desk have to do with those suppliers losing data. 

“On supply side, we’ve seen [cases] as simple as data being shipped from one client to another processor that is going to have some work done to the data, where it was lost by the big mailing company,” he said. 

In the usual cases, the experts pointed out, a small-to-midsized company loses customer or medical records due to human error, leading to court entanglements, loss of business partnerships or customer trust, and ends up with a whopping debt. For example, one healthcare practitioner had to pay $1.5 million for 4,000 lost records, which are relatively few in the hacking world. 

However, an Advisen whitepaper pictures other probable scenarios such as a virus that infects a key supplier’s order processes, shutting down a commerce hub for days. This may be a transportation company suffering a breach on its logistics or dispatch systems, muddling shipments for its many clients, or even an attack on a large commodities exchange, interrupting the sale of essential parts and causing a ripple of market price spikes. 

According to the webinar, controls are key to avoiding costly cyber-related headaches, starting with internal guidelines by the company and employee training on data handling. One simple step to avoid handing off data to burglars, besides encrypting information, is not leaving passcodes and usernames written on sticky notes around the office. 

Having a good insurance net is also imperative, says Mullen. 

“Don’t waive your right to subrogation; make sure the indemnity clauses that are in the contracts are fair at some level to you,” he advised. “The larger the vendor, the harder it is to get the right indemnity wording. Require that the appropriate insurance is in place and certified directly from the carrier.” 

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