As an alternate method of payment, investment or means of raising corporate capital, cryptocurrencies like bitcoin appear here to stay.
In essence, cryptocurrencies are digital money—and they’re associated with significant risks.
A quick scan of today’s headlines reveals that cryptocurrency owners have already lost significant amounts of their assets as a result of cyberattacks, negligence and outright fraud. This means insurance coverage for exposures associated with cryptocurrencies should be high on your list of discussion topics with commercial clients.
Here are six practical tips for insuring cryptocurrency:
1) Understand underwriting considerations. As a condition of securing insurance coverage for their cryptocurrency exposures, your clients should be prepared to undergo a thorough underwriting process. Expect insurers to ask about security protocols, internal financial controls, use of banks and third-party service providers, the experience of the management team, and the overall financial health of the insured. As a result, the underwriting process can take much longer than for more traditional coverages.
The insured should also expect to answer whether it holds its digital currencies in “warm storage”—connected to the internet—or “cold storage”—not internet-connected. Cryptocurrencies held in cold storage are generally considered easier to insure because they are better protected from theft.
2) Assess crime coverage options. Like any asset, cryptocurrencies are at risk of theft—specifically, the theft of “keys” which unlock the digital “wallets” that hold the currency. Theft of these assets can occur in a number of ways, including through scams such as social engineering or “phishing” emails, employee theft, and wallet hacking.
Given the unique nature of cryptocurrencies, typical crime policies may not specifically cover their loss, as these coverages are primarily intended to provide protection for a tangible physical property like cash and securities. But insurance markets are increasingly addressing this potential gap in coverage: At least one U.S. insurer now extends crime coverage to cover bitcoin accepted by insureds as a means of payment. But note that insurers may limit coverage in some cases by only agreeing to insure internal threats, such as theft by an employee, and not theft by outside parties.
Valuation of loss can be another challenging issue. Given the volatility in the value of these digital assets, determining fair market value can be more complicated than with the theft of a more traditional asset.
3) Consider D&O insurance for initial coin offerings. Some companies are issuing cryptocurrencies as an alternative to a public offering of equity, commonly referred to as an initial coin offering.
But directors & officers insurance coverage for initial coin offering issuers is perhaps the most challenging type of coverage to obtain in the cryptocurrency space. In the current environment, insurers are concerned that disgruntled coin purchasers, the Securities and Exchange Commission or other regulators may scrutinize an initial coin offering as an unregistered offering of securities, which may expose the issuer to federal, state or foreign securities law liability.
4) Partner with the right insurer. This step is key to establishing a strong insurance program. Currently, the insurance market for cryptocurrency and initial coin offering-related coverage is limited. When considering potential insurers, premiums are an important factor, but you and your client should also be comfortable with the insurer’s specific experience with cryptocurrencies and its claims-handling reputation.
If limited market offerings necessitate placing insurance with an insurer that does not have a demonstrated track record, let your client know that up front. Don’t wait until the time of loss.
5) Reassess coverages. As with other types of coverages, you should reassess your clients’ coverages with respect to cryptocurrency exposures on an ongoing basis to make sure those coverages and limits continue to be appropriate. Coverage options in the cryptocurrency space will likely improve over time, so it pays to stay current on what coverage options become available.
6) Consider retaining an experienced intermediary. Insuring cryptocurrency exposures is not an area to just dabble in. Until you develop an expertise and understanding in this rapidly evolving area of technology and risk, consider using an intermediary with a deep bench of experience, expertise and focus on cryptocurrency exposures.
Brian H. Mukherjee is counsel for Goodwin Procter’s financial industry and business litigation practices. He concentrates on insurance and risk management matters for financial institutions, technology companies, private equity firms and other business clients.
