Skip to main content
Marsh logo

Article

The case for insuring fines and penalties: Deterrence is served only when misconduct is real

The growth of the data economy and potential fines and penalties for privacy violations has raised a key question for risk transfer: “Will my cyber insurance policy pay for fines and penalties?”

07/10/2026 · 3 minute read

Data has become the fuel of modern commerce. Retailers fine-tune inventory based on browsing behavior. Banks use transaction patterns to spot fraud. Technology companies refine products and services through user analytics. The data-centric economy has delivered innovation, but it also brought risks. The continuous collection and processing of volumes of personal data expanded privacy and cybersecurity concerns and resulted in regulations that can yield steep fines and penalties when companies fail to comply.

The growth of the data economy and potential fines and penalties for privacy violations has raised a key question for risk transfer: “Will my cyber insurance policy pay for fines and penalties?” Unfortunately, there is little clarity on the issue. Too often, commentators providing analysis on this issue default to a review of jurisdiction. Their analysis may focus on regulators’ statements expressing disfavor for allowing insurance to reimburse fines and penalties and summarily conclude against insurability. Such high-level conclusions, however, fail to account for other relevant factors, including the underlying conduct, the options available to regulators in assessing a fine, and the insured’s contractual rights.

Three insurability considerations

First, fines and penalties are often about deterrence and punishment. To that end, fines and penalties under consideration for insurability should be those intended to address intentional misconduct, blatant disregard for compliance, or continuation of illegal conduct despite a regulator’s warning.

Insurance historically served to protect against losses arising from negligence. Extending coverage to fines or penalties arising from negligence is often not seen as creating a moral hazard, because negligence is not a purposeful decision to incur liability, and insureds do not change behavior on the expectation that an inadvertent lapse may later be indemnified.

Critically, even where insurance responds, insureds do not escape significant uninsured consequences. Outcomes may include reputational damage, operational disruption, increased premiums and retentions, and ongoing regulatory scrutiny. Consequently, insureds still have strong business, legal, and regulatory reasons to prevent negligent conduct, and insurers can underwrite that risk based on the strength of those controls and practices.

By contrast, the goal of deterrence is not the priority where the conduct is “negligent” — for example, an organization sought consent or implemented safeguards, but a regulator or court found the effort insufficient — so indemnity is appropriate. Deterrence is even less applicable where the underlying matter involves novel interpretations of fact or law, or instances where the company moved to comply with regulator recommendations from the outset of an investigation.

These latter instances, where the insured’s lack of purposeful conduct does not create a moral hazard, do not support findings against insurability. Moreover, this approach aligns with the broader legal framing in data-protection liability, where the insured’s degree of responsibility will vary between intentional or negligent conduct.

Second, insurers consider whether a regulator, a statute, or a binding court decision refrained from expressly declaring a fine or penalty uninsurable. Legislatures and regulators have powerful tools to block indemnification if that is the policy choice. They can do so explicitly by law or regulation, or implicitly through settlement terms — such as requiring a company to certify it will not seek insurance reimbursement. In such cases, insurers and insureds should defer to clear guidance.

In the absence of any clear pronouncement, an equally strong inference can be drawn. Where a regulator does not preclude indemnity, insurers should not assume otherwise. When a fine or penalty is resolved through settlement, and there is no statutory or regulatory bar, the better approach assumes the payment as insurable unless compelling reasons suggest otherwise.

Third, to preserve the benefit of the bargain for insureds, insurers should have a presumption in favor of coverage that applies unless and until there is a clear, express finding that it does not. Where policy language is uncertain, or facts remain unresolved, the default reading should support the insured, not defeat protection through implication. That equally applies to defaulting to “no” based on extrapolated public policy arguments about deterrence.

A practical framework for determining insurability

Rather than having insurers and insureds live with ambiguity, determining insurability should follow a practical framework:

  • Understand where the law creates a bright line that clearly bars insurability. In such instances, insureds are expected to implement controls to avoid falling into intentional conduct.
  • If regulators assess fines or penalties without any explicit bar on insurance, treat the payment as insurable until proven otherwise.
  • Overcoming any presumption of insurability should include a review of all relevant factors — including the jurisdiction, the underlying conduct, and the policy terms. Ultimately, rebutting the presumption of insurability should require conduct demonstrating willful failures.

Fines and penalties are not a monolith. Some are meant to punish deliberate wrongdoing; others are imposed for failures that look more like negligence, misjudgment, or gaps in controls amid complex regulation. Where an insured’s failure is not active misconduct, barring insurance may look less like principled public policy and more arbitrary.

If deterrence is the point of fines and penalties, then any decision against insurability should be reserved for those select cases where deterrence is demonstrated by a clear finding that the insured engaged in affirmative misconduct.

Following this framework serves to defer to regulatory intent, while also preserving a crucial tool of risk transfer for the insureds.

Interested in learning more? Fill out the form below to speak with a Marsh representative.

Related insights

Digital cyberspace with particles and Digital data network connections concept.

Report

Europe Cyber Claims Report 2025

06/23/2026
Cyber tech outage

Report

The quiet crisis in cyber insurance

06/04/2026
Businesswoman using smartphone and laptop, sales statistics on devices screens

Article

Navigating a new operating architecture: How financial institutions can manage interconnected risks

06/02/2026
Group of people in meeting at modern office

Podcast,Video

Using AI to enhance benefits insights: The science behind personalization

05/29/2026
View more