Insurance

Why Your MSP’s Insurance Matters

Outsourcing IT doesn’t automatically transfer liability. It’s one of the most common misunderstandings in the MSP-client relationship. When something goes wrong, whether it’s a breach, a ransomware attack, or a system outage, who carries the burden depends not only on contracts, but also on how well both parties are insured.

Many organizations assume that if they’re paying a managed service provider, the provider’s insurance will automatically protect them. That’s not always the case. If the MSP lacks proper coverage, or if the coverage is structured narrowly around internal operations, your business could be left exposed, despite doing everything right on your end.

Exposure can also arise when an incident stems from a system or responsibility area not covered under the MSP’s scope, such as a new service that hasn’t been added to the contract, a tool outsourced to a different vendor, or a gap in the Shared Responsibility Matrix. Regularly reviewing contracts and keeping an up-to-date responsibility matrix is essential for aligning coverage to actual operations.

The most security-conscious MSPs recognize that their insurance posture directly affects their clients’ ability to recover from potential incidents, qualify for cyber insurance, and satisfy compliance obligations, especially in regulated industries. However, despite its significance, insurance is one of the least-discussed aspects of MSP evaluation.

Why Your MSP’s Insurance Is Part of Your Risk Profile

MSPs operate at the convergence of digital risk. They manage your systems, access your data, and often serve as your first line of defense and recovery. If an MSP is underinsured or carrying policies with significant exclusions, potential insurance gaps loom large, such as:

• Multi-tenant environments where one breach can impact multiple clients
• Remote access tools that link directly into sensitive systems
• Cloud misconfigurations that may be managed by third-party providers
• Delays or errors in response during an active incident

A well-insured MSP doesn’t just protect its own bottom line. It becomes part of your organization’s resilience strategy.

What Coverage Should Your MSP Have?

An MSP’s insurance portfolio should reflect the complexity of the services they provide and the risk they inherit by operating within your environment. Below are the core policy types. Each plays a distinct role in managing liability and supporting continuity when things go wrong.

Technology Errors and Omissions (Tech E&O)

This is the foundational policy for any IT service provider. Tech E&O covers financial losses stemming from mistakes, failures, or negligence in service delivery. If the MSP misconfigures a system, misses a critical patch, or causes downtime due to an oversight, this is the policy that responds. An established MSP should carry sufficient E&O coverage to protect both its own business and its clients from the ripple effects of service disruption.

Importantly, tech E&O should account for both first-party (the MSP’s own costs) and third-party (client-related) damages. That distinction becomes critical when the issue impacts your ability to operate, comply with regulations, or meet your own customer obligations.

Cyber Liability Insurance

Cyber insurance fills in the gaps that traditional E&O policies often exclude, especially when it comes to digital threats and data breaches. Strong cyber coverage for an MSP encompasses:

• Third-party coverage for client damages resulting from a breach or failure in the MSP’s systems
• First-party response costs, including breach notification, legal support, forensics, public relations, and ransomware remediation
• Cybercrime-specific protections, such as social engineering, spoofing, MFA fatigue exploits, and dual extortion

The most forward-looking MSPs also maintain a cyber policy that includes forensic coordination, incident response vendors, and pre-negotiated ransomware settlements, because speed and experience are everything during a breach.

General Liability, Property, and Business Interruption

These are more conventional commercial policies, but they’re still necessary, particularly for MSPs that manage physical infrastructure or perform onsite work. General liability covers bodily injury and property damage, while property insurance protects the MSP’s assets (including client-owned hardware housed in MSP facilities). Business interruption coverage can also be relevant if the provider experiences a facility-wide outage that delays service delivery.

Clients often overlook these lines of coverage because they seem unrelated to IT. But in environments where physical security, uptime, or hosted systems are involved, they can become just as relevant as cyber protections.

Retroactive Coverage and Contractual Liabilities

Two often-misunderstood areas can lead to significant exposure if they’re not addressed:

Retroactive coverage: Many MSP policies only cover incidents that occur after the policy is in force. But if a vulnerability existed months earlier, or if the MSP had been serving you under a prior policy without adequate coverage, you may not be protected. Strong policies should include retroactive dates that go back to the start of the relationship, or even earlier.

Contractual coverage alignment: If your MSP contract includes indemnification clauses, minimum insurance requirements, or service level guarantees, those obligations should be backed by actual policies. A gap between what’s promised in the contract and what’s covered in insurance creates unnecessary risk.

The Value of a Truly Tailored Policy

The cyber insurance market is one of the fastest-moving and least-understood sectors in risk management. Many MSPs rely on automated platforms to purchase generic, low-cost policies, only to discover at claim time that the coverage doesn’t hold up. Exclusions, low sub-limits, and narrow definitions of covered events can turn a six-figure recovery process into a legal fight.

Established MSPs usually work with insurance brokers who specialize in technology and cyber risk. A broker helps:

• Evaluate the MSP’s business model, sector exposure, and system access
• Design layered coverage to match those realities rather than generic risks
• Identify ambiguous policy language and close gaps proactively
• Recommend appropriate limits based on client size, industry, and data sensitivity

More importantly, insurance brokers help MSPs explain their insurance posture to you as a client. That transparency helps you understand what protections are already in place, what risks remain shared, and what your own insurer may expect from third-party vendors.

What to Look For in a Well-Insured MSP

You don’t need to be an insurance expert to assess whether your MSP is putting you at risk. But you do need to ask the right questions and treat their coverage as a piece of your broader security posture.

A well-insured MSP will:

• Carry policies that name you as a third party or cover third-party damages related to their services
• Understand your own cyber insurance requirements and help you meet them
• Support annual risk assessments, incident response planning, and documentation required for your own policy renewal
• Maintain policy limits that reflect the real-world consequences of failure

That last point can’t be overstated. A $1 million cyber policy may have been sufficient a decade ago, but today’s ransomware events regularly exceed that number, especially for municipalities, healthcare providers, and education systems with widespread IT dependencies. Your MSP should be prepared to absorb risk at the scale of the environments they serve.

Questions to Ask Your MSP About Insurance

• What insurance policies do you carry, and how are they structured for your services?
• Do your policies include third-party coverage that protects us as a client?
• What are your current coverage limits, and how often are they evaluated?
• Who is your broker, and are they experienced in tech and cyber risk?
• Can you share a certificate of insurance or summary that confirms these details?

How Your MSP Can Support Your Own Cyber Insurance Application

The cyber insurance market has become significantly more selective. Underwriters now ask detailed questions not only about your internal controls, but also about your vendors. That means your MSP plays a direct role in how insurable you are and what rates or exclusions you may face.

A credible MSP can help you navigate the cyber insurance process in several ways:

Providing Documentation for Underwriters: Cyber insurance applications often require proof of security policies, network diagrams, response plans, and access controls. Your MSP may maintain or manage many of these elements. A responsive provider should be able to supply relevant documentation or attestations that show how systems are secured and monitored.

Aligning Practices to Meet Insurability Standards: Whether MFA enforcement, privileged access management, backup encryption, or incident response protocols, insurers look for evidence of specific safeguards. Your MSP should not only implement these, but also explain how they function in your environment, particularly when they manage those controls on your behalf.

Supporting Pre-Binding Risk Assessments: Some carriers conduct technical scans or require third-party assessments before binding coverage. Your MSP may need to participate in these evaluations, whether to remediate vulnerabilities, clarify system architecture, or demonstrate that high-risk areas are under active management.

Advising on Shared Risk Posture: An MSP familiar with cyber underwriting standards can help you understand which controls are your responsibility versus theirs. This clarity reduces finger-pointing, improves application accuracy, and may help prevent policy disputes during a claim.

Participating in Post-Breach Claims Support: If an incident does occur, your MSP may be required to provide logs, timelines, and technical forensics to support your claim. An experienced provider will understand how to package that information in a way that aligns with what insurers need, minimizing delays and increasing the likelihood of a smooth payout.

Including Insurance in Your Incident Response Plan

One of the most overlooked but critical connections is between insurance and incident response planning. Reviewing your incident response plan with your MSP before an event occurs helps clarify when and how insurance should be activated. That conversation should include who contacts the insurer, when legal counsel gets involved, and what documentation needs to be preserved. The best time to map this out isn’t during a breach; it’s in a tabletop exercise with all the key players in the room.

The Bottom Line

Ultimately, a well-insured and cyber-savvy MSP can help you secure cyber coverage for your organization and stay insurable over time. Their insurance isn’t just about protecting their business, it’s about protecting yours. By asking the right questions and understanding what coverage your MSP carries, you’re not just doing due diligence. You’re building a more resilient organization that’s prepared for whatever challenges lie ahead.