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Monthly Archives: December 2019

Small Retailer Loses Business-Critical Data after Cyber Attack

Over the past two decades, technology has transformed the way businesses operate, and most depend on their computer systems in one way or another. Even traditional businesses, such as retail stores and wholesale distributors, utilize computer systems and the data held on those systems to ensure the day-to-day running of their operations. If those systems become unavailable or cease to function properly as a result of a cyber attack, it can have a detrimental impact on the business in question and result in substantial financial harm.

One of CFC policyholders affected in such a way was a home improvement store, which operated from a single store. The store sells a wide range of domestic goods, including outdoor furniture and sheds, garden equipment, kitchen utensils, bathroom fixtures and fittings and DIY tools and equipment. Customers can buy in-store or have larger items delivered to their houses upon request. The business has a large warehouse connected to the retail store which is used to store stock that can then be used to replenish stock on the shelves, or in the case of larger items, brought out for customers to collect or have delivered.

Employee falls hook, line, and sinker

The incident began when an employee fell for a phishing email. The email stated that there was a financial statement attached that needed to be verified. Even though the email was not directly addressed to the employee, had numerous grammatical errors and appeared to come from a suspicious email address, curiosity got the better of the employee and he clicked on the attachment. Upon clicking on the attachment, a ransomware variant was downloaded onto the business’s server and began encrypting files and programs across the network, including the insured’s back-ups, which had not been stored externally.

With the server encrypted, the business wasn’t able to access any of the systems that it used every day, including the point-of-sales system and information relating to sales, deliveries and stock management.

Urgently needing to regain access to these systems and databases, the policyholder reported the matter to CFC’s cyber claims and incident response team. With the insured’s back-ups having been encrypted by the ransomware, our claims and incident response team considered the other options available. The first step was to establish which ransomware strain had been used in the attack by looking at the ransom note and a sample of encrypted files. In this case, the ransomware used was a well-known and well-established strain and the team was able to find a freely available decryption key online. Using the decryption key, the team began the process of decrypting the business’s programs and files.

In most cases involving ransomware, once a business’s data and programs have been decrypted and the ransomware has been removed, the business can continue to use its computer systems as normal.

However, things aren’t always as straightforward as this. Unfortunately, cybercriminals don’t have the same approach to product due diligence that law-abiding businesses do, and those who create ransomware won’t have gone to the effort of testing how compatible their ransomware strains are with every conceivable type of file or program. As a result, ransomware can lead to unintentional and sometimes irreparable damage to electronic files and computer programs.

In this case, although the majority of the business’s data was accessible following the decryption process, a database containing six months’ worth of information relating to stock levels and delivery statuses was corrupted. In spite of numerous attempts to reconfigure and restore the database, the files were deemed to be beyond repair, rendering them inaccessible to the business.

Corrupted database causes long delays

Without access to the database, the business faced numerous difficulties. Staff on the shop floor were unable to check the most up-to-date database to see if a particular item was in stock. So in the event that a customer asked if an item was available, the only option was for a member of staff to contact a member of the warehouse team and ask them to trawl through the warehouse to see if the item was there, leading to significant delays to the service. The lack of information on stock levels also meant that the business didn’t have an accurate overview of which items were low in stock and needed to be re-ordered from suppliers, resulting in a shortage of popular items. In addition, without access to delivery information, the business lost track of the delivery status of certain items, which resulted in items either not being delivered to the customer on time or in some cases being delivered twice.

The only way to tackle this issue was to manually re-create the current stock inventory. In order to do this, employees had to go through each item in stock, both in the warehouse and on the shop floor, create an identification number for each item and then scan it back onto the database. The business also needed to gain a better understanding of the delivery status of all items. To avoid delays and duplication, staff were required to go through all open sales and see how these corresponded with hard copies of delivery receipts to establish which items had been delivered and which items were still awaiting delivery.

Given the size of the store and the amount of stock and sales data this involved, this was a significant undertaking and staff were required to work overtime, but this alone wasn’t sufficient. The business also had to bring in contractors to assist with the task. In total, it took two weeks for the business to fully rebuild this database. This came at a cost of $20,858 made up of employee overtime and contract staff costs.

Although the store remained open during the entirety of the recovery period, disruptions to the service did result in a reduction in sales. For the month in question, the business had forecasted sales of $460,031, but the actual sales for the month only came to $353,611, a shortfall of $106,420. Applying a rate of gross profit of 20% to the shortfall, the insured’s business interruption loss was calculated at $21,284.

The role of human error and other lessons

This claim highlights a few key points. Firstly, it illustrates how human error plays a key role in many cyber incidents. Lots of businesses refuse to buy cyber policies on the basis that they have good IT security in place. But this reasoning doesn’t take into account the fact that the majority of cyber incidents are the result of human error. In this case, the incident was triggered by an employee clicking on a malicious attachment. Businesses should look to ensure that employees are educated about the risks posed by phishing emails and are made aware of how to spot them.

Secondly, it highlights how dealing with a ransomware incident is not always a straightforward matter of carrying out the decryption process and the business in question automatically regaining access to their systems and data. In reality, there can be all sorts of unforeseen complications. In this instance, even though the data and applications were decrypted using a freely available decryption key, the ransomware itself had corrupted one of the business’s key databases, which had a detrimental impact on the insured’s operations.

Thirdly, it demonstrates the importance of having data re-creation cover on a cyber policy. Many cyber policies only provide cover for the costs to recover or restore from back-ups, but not the costs to re-create or re-enter lost data from scratch. A sizable portion of the insured’s claim came about from the labour costs associated with staff and contract workers having to manually scan and re-enter data to ensure that the stock inventory was correct and up-to-date, and brokers should be sure to check that their clients have this important cover in place on their policies.

Finally, it reveals how almost all modern business have some form of cyber exposure. Even though the business in question was a household goods store that did not solely rely on its systems for the business to operate, the business still relied on its computer systems and data to manage the store effectively and to provide efficient customer service. When some of the business’s data was corrupted, it had a negative impact on overall operations and having a cyber policy in place provided a valuable safety net for the company.

Source: www.cfcunderwriting.com


Third-party Downtime Leads to First-party Business Interruption Loss

An HR service provider lost contracts due to a cyber attack suffered by one of its supply chain partners.

Over the past two decades, technology has transformed the way businesses operate, and most now depend on their computer systems in one way or another. Rather than having to deal with everything in-house, many businesses choose to outsource elements of their IT infrastructure to third party providers, whether that be in the form of website hosting, data storage or application level services.

In many cases, outsourcing IT can prove to be a more efficient and cost-effective way of doing things, with businesses benefiting from the expertise of their third-party providers. However, outsourcing is not without risks. In a cyber insurance context, dependent business interruption describes a situation in which a third-party organization that supplies a policyholder with goods or services is affected by unexpected downtime as a result of a cyber event or system failure. Even though the policyholder’s computer systems may not be directly affected by the incident, the loss of the goods or services provided by the third-party can still have a major impact on the insured business’s ability to operate effectively. This means that a business can still suffer a business interruption loss even when its computer systems are unaffected.

One of our policyholders affected by this type of loss was a small company providing outsourced human resources services to a variety of different businesses. The organization provides a range of services to its customers, including payroll processing, employee benefits and health insurance and assistance with compliance and regulatory issues.

Third-party downtime, first-party problems

The business provides its payroll processing services through an online application, which in turn is owned and hosted by a third-party provider. Their customers gain access to the payroll application through a link on their website, which then takes them through to a landing page hosted by the third-party where they can then log in to the application. Once these customers log in to the application, they are effectively operating on the third party’s computer systems, even though their contracts are with our policyholder.

The issue began when the third party responsible for providing the payroll processing application was hit by a ransomware attack. This ransomware attack managed to encrypt the servers hosting the application, which meant that neither our policyholder nor its customers could gain access to the application. As the application was hosted by this third-party, however, our policyholder was powerless to control the situation and had to rely on the application provider to respond to the incident. The only thing they could do was to explain to its customers that the application was unavailable due to a cyber attack affecting the application provider and that regular status updates would be provided.

In the meantime, the third-party provider went about trying to deal with the issue by decrypting the affected servers, removing the ransomware and returning the application to its normal functionality. After three days of downtime, it looked as though the issue had been resolved and the insured and its customers were able to login to the application once again. However, this breakthrough proved to be short-lived. During the encryption process, the ransomware had damaged the application and impaired its underlying functionality. This meant that while customers were able to log into the application and view employee data, they were unable to update the data or process any payments.

To remedy the problems caused by the ransomware, the application was taken down once more and it was only after a further five days of downtime that the application was fully restored. To make matters worse, the downtime occurred at the end of the calendar month, a time during which most of our policyholder’s customers would ordinarily pay their employees.

Frustrated customers lead to lost contracts

With the payroll processing application rendered inaccessible as a result of the ransomware attack, some of their customers were unable to pay their employees on time. Although they were able to pay their employees once the application was up and running again, the delay in payment was a source of great frustration for both the businesses and employees affected. As the customers that were impacted only had contracts with the insured rather than the application provider, it was the insured that bore the brunt of this anger.

Indeed, eight customers chose to cancel their contracts and take their business elsewhere. All of these customers sent individual letters or emails to our policyholder, explaining their reasons for cancelling. In each case, these cancellations came down to a combination of two factors: firstly, the delay in paying employees as a result of the ransomware attack and, secondly, a concern that the ransomware attack meant that sensitive data stored on the payroll application might not be secure. This served as confirmation that these customers were lost as a result of the cyber attack as opposed to regular customer churn.

The total value of these annual contracts came to $72,554 and despite the insured’s attempts to placate these clients and win them back, unfortunately none of these customers decided to reinstate their contracts, meaning that over the course of the 12-month indemnity period, the insured suffered a business interruption loss of $72,554.

While these losses are potentially recoverable from the application provider, this can be a costly and lengthy process and in the meantime the insured would suffer from cashflow issues due to the drop-off in income. Fortunately, however, the income loss from these cancelled contracts was covered under the dependent business interruption section of the company’s cyber policy with CFC, which covers business interruption losses arising as a result of a cyber event or system failure at a policyholder’s supply chain partner.

Dependent BI and other takeaways

This claim highlights a few key points. Firstly, it underscores the importance of having dependent business interruption cover in a cyber insurance policy. Some cyber insurers will only provide cover for business interruption losses as a result of cyber events that directly affect an insured’s computer systems. However, in this instance, at no point was the insured’s computer systems directly impacted by the ransomware – it was the application provider’s computer systems that were affected – and yet it still resulted in a sizable business interruption loss. By having dependent business interruption cover in place, the business was able to fully recover its financial loss.

Secondly, it illustrates the value of longer indemnity periods. Many cyber insurers only offer 3-6-month indemnity periods as standard. However, this ignores the fact that the financial impact of a cyber event can be felt for much longer than a 3-6-month indemnity period would allow for. In this case, the cancellation of annual contracts meant that for each cancelled contract, the insured lost 12 months’ worth of income. By having a 12-month indemnity period in place, they were able to reclaim quadruple the amount that they would have been able to claim on a policy with a 3-month indemnity period and double the amount they would have been able to claim under a policy with a 6- month indemnity period.

Finally, it highlights that businesses that receive their income on a contractual basis could be more exposed to business interruption losses, as the cancellation of monthly or annual contracts could very quickly result in sizable financial losses being incurred. Accordingly, businesses that receive their revenue in this way should consider factoring this in when selecting an appropriate limit for their cyber policy.

Source: www.cfcunderwriting.com

 


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