FinTech Flash January 16, 2018

Insurance for Cryptocurrencies: Tips for Maximizing Coverage

Summary

There is general consensus that 2017 was a banner year for cryptocurrencies. According to CNBC, initial coin offerings (ICOs) in 2017 raised approximately $3.7 billion for issuing companies. And despite some recent weakness in high-profile cryptocurrencies like bitcoin, we expect an increasing number of ICOs from an ever-expanding scope of industries. With opportunity invariably comes risk, however, and we are spending significant time counseling clients on how best to mitigate risk associated with cryptocurrencies, including lawsuits, regulatory scrutiny and cyberattacks. In fact, there already have been significant enforcement actions and public investigations initiated by federal and state regulators regarding ICOs, as well as private class action litigation filed. Not surprisingly, insurance coverage for these types of exposures is high on the list for discussion.

We share some practical tips and key considerations for cryptocurrency-related insurance issues below.

Retain a Good Broker

An obvious starting point is choosing a well-regarded insurance broker with a deep bench of experience, expertise and focus on cryptocurrency exposures. Given the relative newness of cryptocurrencies, however, we find that only a small number of brokers have the requisite skill and experience to evaluate the evolving risks posed by the use of these currencies. Make sure the broker you select meets these criteria.

Picking the Right Insurer

As with brokers, partnering with the right insurer is key to establishing a strong insurance program. Currently, the insurance market for cryptocurrency and ICO-related coverage is limited, although we are cautiously optimistic that options will increase as more insurers enter the market. When considering potential insurers, premiums are of course an important factor, but you should also ask your broker and counsel about the insurer’s specific experience with cryptocurrencies and its claims-handling reputation. In our experience, insurance responds best when it comes from well-rated and experienced insurers knowledgeable about the relevant industry and who are willing to partner with the insured in the event of a claim.

Crime Coverage

Cryptocurrencies, like any asset (albeit a potentially very expensive one), can be at risk of theft, including by scams such as social engineering or “phishing” emails, employee theft and hacking of digital wallets. Given the unique nature of cryptocurrencies, however, typical crime policies may not specifically cover their loss, or not cover loss up to their true market value. It is important that your crime policy is appropriately negotiated to cover these exposures.

D&O Insurance

Perhaps the most challenging type of coverage to obtain in the cryptocurrency space is directors and officers (D&O) insurance. Generally speaking, this insurance is intended to protect directors and officers from claims arising from their service to the company, and many directors require it as prerequisite to accepting a board seat. 

In the current environment, insurers are concerned that an ICO may be scrutinized by disgruntled coin purchasers or the Securities and Exchange Commission or other regulators as an unregistered offering of securities, which may expose the issuing company (and its personnel and agents) to federal, state or foreign securities law liability. Given those types of concerns, securing D&O insurance can be a challenge. If your company already has D&O insurance and is considering doing an ICO, you should consult with your broker and counsel to determine whether any policy terms require modification. For example, most private company D&O insurance policies contain a “securities offering” exclusion, which can be problematic for the reason we have described above.

Other Key Coverages

While crime and D&O insurance coverages are important for companies with cryptocurrency exposure, you should make sure your company has other key coverages in place, including general liability, cyber-liability and information security, employment practices liability and fiduciary liability policies. These coverages are intended to protect against more traditional exposures associated with running a business, from slip and falls to workplace harassment claims.

Reassess Your Coverages

If you already have appropriate insurance for your company’s cryptocurrency risk, congratulations – you are ahead of the curve! You should reassess that insurance on a periodic basis, however, to make sure those coverages continue to be appropriate. In particular, we expect insurance coverage in the cryptocurrency space to improve over time, so it pays to stay current on what coverage options become available.