SaaS/Cloud Company (Industry Example): Cloud Vendor Failure, Third-Party Risk & Coverage Denial
Background:
While not always a fully litigated public court case, there are well-documented examples of SaaS/tech companies suffering major service interruptions or data breaches caused by third-party cloud vendor failures or mis-configuration, and then discovering their cyber or business-interruption claims were denied because their policy excluded third-party service-provider failures. (cybertzar.com)
Coverage Issue:
In one scenario (described in insurance-industry write-ups), a SaaS startup experienced a major downtime when their cloud-provider’s mis-configuration triggered a breach. The insured submitted the claim under cyber/business interruption coverage, but the insurer denied or limited payment because the policy excluded losses caused by a third-party provider’s failure or only covered losses resulting from “direct attack on insured’s systems” (not via vendor). cybertzar.com)
Another common denial theme: the insurer found that the employee/vulnerability or remote endpoint mis-configuration was excluded (e.g., “Insider element” or “employee mis-configuration” exclusions) or that business interruption required an actual “direct physical damage” or “systems failure” rather than a remote vendor incident. (Miles Mediation)
Why the Standard Program Fell Short:
Standard cyber/business-interruption policies may assume the insured controls the full stack; they may not account for vendor cloud dependencies or multi-tenant cloud-provider failures
Many startups believe their cloud-provider’s SLA or their own SIEM/back-up practices are enough; insurers may still deny claims citing lack of control over the vendor or exclusion of “acts by third-party providers”
The cause of interruption (vendor failure, mis-configuration, supply-chain attack) often falls into a “gray zone” not clearly defined in the policy
Business interruption coverage often has stringent triggers (e.g., direct physical damage, property loss, systems failure, or ransomware) which may not map to the incident type
What a Custom Program Would Have Improved:
Explicit endorsement for vendor/cloud-provider risk (vendor interruption, cloud mis-configuration, API failure) in the cyber/business-interruption policy
Coverage for losses from cloud third-party dependencies, including “insured’s access to cloud platform” and “vendor service failure” events
Review and alignment of contract terms with cloud-provider SLAs, indemnities, and how they tie into the insured’s risk management and coverage
Ensure internal controls, vendor risk assessment, vendor contractual liability coverage and vendor-related contingency planning are included in underwriting submission
Clarify business interruption triggers in the policy (e.g., “loss of access” vs “physical damage”) so that remote/cloud vendor failures are not automatically excluded
Key Take-away for Tech/Startup Founders:
In a SaaS or cloud-based business, your risk exposures often stem from vendors, cloud providers, or third-party systems you don’t fully control. If your insurance doesn’t explicitly cover those vendor/cloud risks, you may face a large loss with no coverage. Always ask: “Does our policy cover vendor/cloud failures that impact our service delivery?”
NOTE: This case study is for informational purposes only. Execurisk was in no way involved in the brokering or advising of insurance in the case described above.
