CFC warns of 'grey areas' in fintech exposures

Cyber specialist CFC warns fintechs are unlikely to find all of their exposures covered in a single policy as traditional cover often does not address failure of technology, sub-contractor liability or intellectual property infringement.

Traditional exposures of professional liability, management liability and crime are still present, while the integration of technology creates emerging threats and heightened privacy concerns.

This is leading to “grey areas” within insurance placements.

“There will be finger-pointing between insurers over proximate cause of loss – was it arising out of financial or technology services?” a new guide compiled by CFC said, adding insureds may be required to pay multiple deductibles and run the “risk of having no coverage”.

CFC says fintechs often rely on third-party contractors which creates an extra liability risk related to negligent advice and failings in client service. High transaction volumes and use of innovative new technology also leave fintechs vulnerable.

Theft of funds, cyber event and professional liability are key exposures.

“Fintech businesses have a unique combination of exposures that don’t fit the typical financial institution,” CFC Financial Institutions Practice Leader Neil Beaton said.

CFC says many insurers have “chosen to avoid this new area of the market all together,” and tech Errors & Emissions (E&O) insurers aren’t likely to cover exposures from the provision of financial services products, advice or provide comprehensive regulatory investigations coverage.

Here are the key fintech liability threats listed by CFC:

Theft of funds

High volumes of payments, transactions and customer accounts, as well as the growth and implementation of new technology leaves fintechs vulnerable to theft committed by an employee or external party.

Cyber event

Network security, data breaches or a denial-of-service attack, as well as the damage and rectification costs following these incidents are major concerns.

Professional liability

Negligent advice and failings in client services especially a risk as fintechs make use of innovative product distribution models and/or rely on third-party contractors, adding additional extra liability risk due to third-party negligence.

Regulatory environment

Fintechs must implement suitable and satisfactory risk management systems and consider regulations in multiple territories if they operate internationally.

Technology failure

Technology failure can lead to loss of income or inability to access services.

IP infringement

In a sector with IP at the core of its value, litigation will be commonplace. Most traditional FI policies will exclude cover for IP infringement – a key fintech coverage.

Sub-contractor vicarious liability

Fintechs can be liable for any errors or omissions caused by suppliers.

Download the guide here.