The OT Cyber Insurance Gap: Why Traditional Policies Often Miss Cyber-Physical Loss

This post is part three of a 4-part series for infrastructure fund professionals (GPs, portfolio operations, and risk leaders) focused on Operational Technology (OT) cyber risk and cyber-physical loss. Missed part one? Or part two? Read them there.

In diligence and portfolio reviews, a frequent reassurance is, "We have cyber insurance." Insurance can be an important component of the risk financing strategy, but it is often not designed to fully absorb OT cyber-physical loss.

Traditional cyber policies evolved to address IT-centric outcomes: privacy liability, network security liability, and business interruption in an IT context. OT losses can involve property damage, safety-related shutdowns, complex causation, and extended restoration periods - areas where coverage can be excluded, capped, or disputed.

Infrastructure investors should assume that a meaningful portion of OT tail risk is retained unless proven otherwise by policy language and scenario-based analysis.

Where the coverage mismatch starts

OT incidents can produce losses that do not fit neatly into standard cyber policy definitions. Even when a policy responds, sublimits, waiting periods, and definitions of interruption and restoration can reduce practical recovery relative to infrastructure-scale scenarios.

The result is not that insurance is useless. The result is that insurance must be aligned to quantified scenarios, and the fund must understand what remains retained.

• Cyber-physical loss often intersects with property and casualty concepts (damage, repair, replacement).
• Safety and regulatory constraints can extend outage windows beyond typical cyber restoration assumptions.
• Causation and attribution can be contested, especially in blended IT/OT environments.
• Property damage and bodily injury exclusions or limitations (where the largest tail losses may sit). If cyber-triggered property damage, it may sit in the exclusion zone between cyber and property insurance policies.
• Business interruption limits that are misaligned with prolonged OT recovery timelines.
• Sublimits or exclusions for critical infrastructure, utilities, or systemic events.
• Ambiguity around contingent business interruption and downstream dependency losses.
• Operational technology not explicitly included in definitions of covered systems.
• Financially quantify loss scenarios first, then map them to coverage terms and limits.
• Use mitigation plans tied to quantified risk reduction to support underwriting.
• Identify where residual risk remains and decide whether to retain, mitigate, or transfer via specific structures.

Common ways OT cyber-physical loss can be under-covered

Specific policy terms vary, but the coverage challenges tend to cluster into a few recurring themes. Funds should validate these issues during placement and renewal using scenario-based evidence rather than generic questionnaires.

What to do instead: treat insurance as a decision supported by financial quantification

The most effective insurance conversations start with quantified exposure: what is the plausible financial loss range for defined OT scenarios, what is the likely retained loss after policy terms, and which mitigations reduce both expected loss and insurer concerns.

This approach improves placement outcomes because it replaces vague assertions with a credible narrative: the asset's OT pathways are understood, controls are prioritized by impact, and residual risk is explicitly managed.

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Why this matters for fund governance

From a fund perspective, the insurance gap is a governance problem: if the fund believes the risk is transferred when it is not, the portfolio is exposed to unplanned volatility.

Making the retained portion explicit enables better capital planning, better stakeholder communication, and better diligence discipline.

Next step

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