It’s not unexpected that more distributors are offering their customers a new type of warranty, a cybersecurity warranty. Security breaches affecting data will affect a business every two seconds and will cost businesses $265 billion by 2031. These warranties minimize the economic security risks posed by cyberattacks and shift the risk to the company providing the service. These warranties are often used in conjunction with cybersecurity insurance to fill in the gaps left by insurance.
Warranties can be a great instrument for transferring financial risk, but they’re not an alternative to a complete risk management solution. A cybersecurity warranty can substitute for cyberinsurance. However, both should be used together to lower the risk.
When negotiating a guarantee in an M&A transaction, it’s important to understand and limit liabilities that aren’t covered under the warrant. For instance, regulatory offence proceedings typically have lengthy limitation periods that can exclude the right to indemnification under a warranty.
Manufacturers should also make sure that their warranties cover how the products are actually designed to be used. Machine learning tools that analyze the patterns of walking could be warrantied to help people find the right shoes or diagnose chronic pain. But if the tool is used to monitor and intercept communications the warranty disclaimer could keep the manufacturer from recognizing any liability.
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