System Failure Coverage is a valuable component of cyber insurance policies, designed to protect businesses from financial losses caused by non-malicious technology-related disruptions. Unlike coverage for cyberattacks, which addresses incidents stemming from external threats like hackers or malware, System Failure Coverage focuses on internal, accidental, or technical failures that can unexpectedly halt business operations.
This coverage typically applies when a business experiences downtime due to system misconfigurations, software glitches, accidental human errors, or equipment malfunctions. These events, while not the result of a cyberattack, can have significant operational and financial consequences—especially for organizations that rely heavily on digital platforms, cloud-based services, or automated systems to conduct day-to-day activities.
System Failure Coverage can reimburse businesses for lost income, extra expenses incurred to restore operations, and costs associated with data recovery or customer service disruptions. It may also include coverage for failures of third-party technology providers that directly impact the insured business.
As companies become increasingly dependent on digital infrastructure, the risk of internal technical failures becomes more pronounced. System Failure Coverage offers peace of mind by bridging a critical gap in traditional cyber insurance policies, ensuring businesses are protected not just from external threats but also from unintentional internal disruptions.
Example: Manufacturer System Failure
Scenario:
A mid-sized manufacturing company relies on an automated production system to fulfill orders for automotive parts. One morning, an internal software update causes a critical error in the production management system, rendering it unable to coordinate machinery and track inventory. As a result, operations come to a halt for three full days.
Although there was no cyberattack or external breach, the error disrupts the company’s ability to meet production deadlines, delaying shipments and impacting relationships with key customers. The company also incurs overtime costs to catch up once systems are restored and experiences revenue loss due to missed delivery windows.
Response and Coverage:
The manufacturer files a claim under its cyber insurance policy, which includes System Failure Coverage. After confirming the incident stemmed from a non-malicious internal error, the insurer reimburses the company for $95,000 in lost income, $20,000 in overtime wages, and $15,000 in IT troubleshooting and recovery expenses.
Outcome:
System Failure Coverage helps the company recover from the unexpected downtime, limit its financial losses, and maintain customer trust. The incident also leads to more robust internal software testing protocols, reducing the risk of future disruptions caused by accidental system failures.ucing future exposure to intellectual property disputes.
