In the modern era rife with cyber risk, organizations are increasingly electing to transfer their digital risk through cyber insurance, while some are choosing to purchase non-insurance products or cybersecurity services that offer a warranty.

Although cyber warranties and cyber insurance have similarities—both can help organizations recoup losses after a cyberattack or technology malfunction—they are not the same and agents should warn businesses not to mistake the two.

Here are the differences between cyber warranties and cyber insurance, some of the issues with cyber warranties, and why cyber insurance is the only comprehensive risk transfer solution for businesses that really works.

Cyber Warranties Vs. Cyber Insurance

A cyber warranty is a promise or guarantee made by a cybersecurity company about the condition, performance or quality of a cyber product or service. Some vendors that provide cyber warranties also offer to pay customers' limited costs, provided certain criteria are met.

The first noteworthy cyber warranty was announced at Black Hat 2014, when Jeremiah Grossman, founder and CEO of WhiteHat Security, said his company would refund the money a customer paid for his services and reimburse it for the first $250,000 of any breach-related costs if a customer was hacked. According to Grossman, information security vendors offering warranties would satisfy the demand for cyber risk transfer solutions and eliminate the need for cyber insurance.

Grossman's promise never actually materialized. Cyber warranties aren't a risk transfer mechanism; they merely intend to instill confidence that if a product or service fails somehow, they will pay the repercussions. On the other hand, cyber insurance is a true, comprehensive risk transfer mechanism that covers the entire business instead of just a specific technology and can mitigate a business's financial losses in the event of a digital disruption—whether caused by a non-functioning product or criminal breach.

Cyber Warranty Issues: Longevity and Variety

The longevity of a cyber warranty is important for businesses to consider, as they need confidence that they'll be covered for losses that occur long after the cybersecurity services are complete.

Cyber warranties attached to software-as-a-service (SaaS) solutions, for example, are typically only valid for the duration of the subscription and can be removed at renewal. This means a business can become trapped by a SaaS product, because the minute they stop using the services, they may not be able to make a claim for costs incurred during an attack.

Several cyber warranties introduced before 2020 are no longer available. For example, WhiteHat Security's warranty disappeared after its acquisition by Byju in 2020.

Warranty longevity is critical because of how often businesses experience cyber events. In 2023, 6.6% of large businesses experienced a cyber insurance claim, according to Coalition's “2024 Cyber Claims Report." The average large business should expect to file a claim roughly every 15 years, and smaller businesses even less often.

Extrapolating from this trend, if these businesses relied upon cybersecurity services to mitigate risk—and given the fact that most of these warranty buyers didn't make a claim in the first five years—they, in effect, paid extra for a premium feature that disappeared before they truly needed it.

Even if a cyber warranty still exists when a customer makes a claim, whether the claim will be paid or not is the real question. Cyber warranties are not designed to prevent or reimburse a customer for all issues and costs arising from a cyber incident.

For example, in 2022, CrowdStrike CEO George Kurtz announced that the company hadn't paid out a single claim in the four years since announcing its endpoint security breach prevention warranty. While that sounds like a testament to CrowdStrike's security product, the warranty is narrow in scope and not designed to prevent social engineering. This means it likely doesn't provide coverage for social engineering, which is the cause of the majority of events that drive losses behind cyber insurance claims, such as business email compromises and funds transfer fraud.

The terms and conditions of cyber warranties can also vary. For example, a warranty attached to a backup solution will differ from one attached to cybersecurity training because the products promise different functionality. This lack of standardization makes it difficult for risk managers to evaluate coverage.

Furthermore, cyber warranties often require customers to follow extensive cybersecurity procedures. Rubrik's ransomware warranty requires customers to grant the company access to perform monthly “health checks," in addition to maintaining hardening guidelines that span encryption, user access, backups and more.

For small and midsize businesses with limited resources, upholding these stringent security standards outlined by vendors can be next to impossible.

Insurance: The Only Comprehensive Cyber Risk Transfer Solution

The insurance business model is based on longevity, and insurers rarely go out of business due to industry regulations. When a business buys a policy, the insurer can invest the premium before claims are paid. Over time, this helps insurers make long-term investments to improve and develop new offerings that benefit consumers.

Cyber insurance is also designed to cover a wide range of cyber risks. Ransomware, data breaches, email compromise and even non-security risks are all typically covered under a single policy. Cyber insurers paid out more than $4.5 billion in cyber claims in 2023 alone, according to the National Association of Insurance Commissioners.

Beyond covering claim costs, cyber insurance also provides policyholders with peace of mind and a place to turn to for help. Warranties, on the other hand, are limited to guaranteeing how a product or service will work and often have a time limit attached. Ultimately, cyber insurance and cyber warranties, while similar, are not the same and are designed to react differently. Cyber insurance is the only comprehensive risk transfer solution.

John Roberts is general manager of security at Coalition.