Ransomware, Nation-States, and Your Cyber Policy's Fine Print

In today’s complex threat landscape, ransomware attacks have become the predominant concern for organizations across all sectors. While cyber insurance once provided relatively straightforward coverage for these incidents, the evolving nature of cyber threats—particularly those with potential nation-state connections—has led insurers to introduce significant new exclusions and limitations. Understanding these nuances in your policy could mean distinguishing between a financial recovery and a devastating loss when an attack occurs.

The Expanding Web of Ransomware Coverage Exclusions

Modern cyber insurance policies contain increasingly complex ransomware coverage exclusions that weren’t present just a few years ago. These restrictions have emerged as ransomware attacks have grown in frequency and severity, with average ransom demands increasing from thousands to millions of dollars.

Key exclusions now appearing in many policies include:

• Specific ransomware variant exclusions: Some policies exclude coverage for particularly destructive or prevalent strains.
• Cryptocurrency valuation caps: Limitations on how ransoms paid in cryptocurrency are valued and reimbursed.
• Social engineering components: Exclusions for attacks that include social engineering or phishing elements.
• Ransom payment approval requirements: Mandatory insurer consultation before any payment.
• Restoration versus payment preferences: Limitations on coverage if restoration from backups was viable but not attempted.

However, the most concerning development is the growing presence of nation-state attribution exclusions, which can void coverage if an attack is linked to a foreign government.

Nation-State Cyber Attack Insurance: The Attribution Challenge

The fundamental problem with nation-state exclusions lies in attribution—determining who is truly responsible for a cyber attack. Attribution in cyberspace is notoriously tricky for several reasons:

• Technical complexity: Digital evidence can be manipulated or planted to implicate others.
• False flags: Attackers deliberately use techniques associated with known nation-state groups.
• Proxies and affiliates: Nations often work through loosely affiliated groups with plausible deniability.
• Mixed motivations: What appears financially motivated may have geopolitical objectives.
• Evolving tactics: Nation-state techniques are constantly adopted by criminal organizations.

This creates significant cyber insurance attribution challenges when applying war exclusion cyber policies. While traditional war exclusions have existed in insurance for centuries, their application to cyber incidents remains untested mainly in courts.

The landmark case of Merck v. Ace American Insurance Company (Merck & Co., Inc. v. ACE American Insurance Co., et al.) highlights these challenges. After the NotPetya attack in 2017 (widely attributed to Russia), insurers denied Merck’s $1.4 billion claim, citing war exclusions. In January 2022, the Superior Court of New Jersey ruled in Merck’s favor, finding that the traditional war exclusion language was not clearly applicable to cyber events without explicit cyber-specific terms.

Legal Frameworks for Attribution and Coverage Implications

In response to the Merck case and similar disputes, the insurance industry has developed new frameworks for addressing nation-state attribution in cyber policies:

Lloyd’s Market Association (LMA) Clauses

The London market has introduced standardized clauses (such as LMA5410) that specifically address cyber operations “by a state against another state.” These clauses create a clearer framework for when war exclusions apply to cyber events, typically requiring:

1. A formal attribution by the insured’s home government
2. A specific impact threshold
3. Connection to armed conflict or coercive action

The “Hostile or Warlike Action” Standard

Many U.S. policies now include language excluding “hostile or warlike action” rather than formal “war,” lowering the threshold for exclusion application. This broader language makes it easier for insurers to deny claims for incidents with potential nation-state connections.

Attribution Methodology Provisions

Some policies now explicitly state which entities’ attributions will be considered authoritative (e.g., specific government agencies or security firms) and what standard of evidence is required, ranging from “credible evidence” to “beyond reasonable doubt.”

Systemic Cyber Event Exclusions: Beyond Nation-States

Beyond nation-state concerns, insurers have introduced broader systemic cyber event exclusions to address catastrophic scenarios that could affect multiple policyholders simultaneously. These exclusions typically target:

• Critical infrastructure disruptions: Widespread power or telecommunications outages
• Major technology provider failures: Cloud service provider outages
• Widespread software vulnerabilities: Zero-day exploits affecting common systems
• Supply chain compromises: Attacks targeting widely used software or services

These exclusions are particularly concerning when combined with nation-state attribution issues, as attacks like SolarWinds or Microsoft Exchange compromises demonstrate how nation-state activities can create widespread, systemic impacts.

Sanctions Compliance and Cyber Payments: A Regulatory Minefield

The complexity increases further when considering sanctions compliance for cyber payments. The U.S. Treasury’s Office of Foreign Assets Control (OFAC) has issued advisories explicitly warning that:

1. Ransomware payments to sanctioned entities or jurisdictions violate sanctions regulations
2. Organizations and their insurers may face civil penalties for such payments
3. Financial institutions, cyber insurers, and incident response firms may be held liable

This creates scenarios where even if your policy covers ransomware, payment may be legally prohibited if the attacker has sanctions connections—a fact that may not be discoverable until after an incident occurs.

Recent enforcement actions suggest regulators are increasingly focused on this area. Cryptocurrency exchanges and payment facilitators are facing penalties for enabling ransomware payments to sanctioned entities.

Cyber Policy Carve-outs Explained: Finding Coverage Amid Exclusions

Despite these challenges, many policies offer carve-outs (exceptions to exclusions) that may preserve some coverage. Common examples include:

• Cyber terrorism endorsements: Coverage explicitly preserved for acts meeting terrorism definitions
• Non-physical damage exceptions: Coverage for events that don’t cause physical destruction
• Burden of proof provisions: Requirements that insurers definitively prove state involvement
• Time-limited attribution windows: Coverage preserved if attribution doesn’t occur within a specified timeframe

Understanding and negotiating these carve-outs has become essential for maintaining meaningful protection against today’s threats.

Preparing for Ransomware Response in a Restrictive Insurance Environment

Given these limitations, organizations must take proactive steps to ensure they can respond effectively to ransomware regardless of insurance coverage:

1. Develop a robust incident response plan that doesn’t assume insurance coverage or ransom payment as options
2. Implement and regularly test comprehensive backup strategies with offline, immutable copies
3. Establish relationships with Bitcoin exchanges or payment facilitators before incidents occur
4. Conduct sanctions screening procedures for use during incidents
5. Create a decision-making framework for ransomware response that considers legal, regulatory, and operational factors
6. Maintain a dedicated cyber incident fund separate from insurance

Organizations should also review their cyber insurance policies with specialized legal counsel to identify specific exclusions and requirements before an incident occurs.

The Evolving Regulatory Landscape for Cyber Payments

The regulatory environment surrounding ransomware payments continues to evolve rapidly:

• Mandatory reporting requirements are expanding in many jurisdictions
• Payment disclosure obligations are becoming more common
• Law enforcement involvement expectations are increasing
• Financial sector due diligence requirements are growing stricter
• International coordination on payment prohibition is developing

Organizations must monitor these developments closely, as policies purchased today may operate in a significantly different regulatory environment when claims arise.

Conclusion: Navigating the New Reality

The intersection of ransomware, nation-state attribution, and cyber insurance creates unprecedented complexity for organizations seeking financial protection against today’s threats. While cyber insurance remains valuable, the days of assuming comprehensive coverage for all cyber incidents are over.

Organizations must approach cyber risk with a multi-faceted strategy that includes:

1. Detailed policy review to understand specific exclusions and requirements
2. Enhanced security controls to prevent and mitigate attacks
3. Comprehensive incident response capabilities that don’t rely solely on insurance
4. Regular policy reassessment as threats and coverage terms evolve
5. Cross-functional collaboration between legal, security, and risk management teams

By understanding the fine print in your cyber policy and preparing accordingly, you can navigate this challenging landscape and ensure your organization remains resilient even when faced with sophisticated attacks that test the boundaries of traditional insurance protection.