What is Cryptocurrency?
Cryptocurrency is a digital currency that operates independently of the banking system, allowing for faster transactions, fewer processing fees, and limited chargeback risks. However, as with any financial asset, it carries potential risks, including the risk of theft. In fact, according to a recent report by software company Chainalysis, $14 billion was stolen from cryptocurrency exchanges in 2021 alone. Due to the unique and evolving nature of the cryptocurrency market, businesses may experience difficulties finding sufficient coverage for losses. In this article, we will explore the challenges of insuring cryptocurrency losses and the different ways commonly held commercial policies may respond to these losses.
Challenges of Insuring Cryptocurrency Losses
One of the challenges of insuring cryptocurrency losses is that the cryptocurrency market is still a relatively new entrant to the global economy, carrying many unknowns. The market is largely unregulated, limiting the space’s legal standards and theft safeguards. These factors have made it challenging for insurers to gather enough historical data and conduct comprehensive risk analyses on the cryptocurrency market, both of which are critical activities for establishing and providing coverage. As a result, businesses could face difficulties obtaining adequate insurance for cryptocurrency losses.
Despite these challenges, the rising popularity and continued maturity of the cryptocurrency market have motivated certain parties in the insurance sector to begin expanding their coverage offerings in this space. Global insurance market Lloyd’s of London, for example, launched a handful of cryptocurrency coverage initiatives in 2021 and shared that it has written “a small number of policies in recent years for cryptocurrencies.” Moving forward, it’s possible that additional insurers could follow suit.
Ways Different Policies May Respond to Cryptocurrency Losses
In the meantime, the lack of industry-wide standards on wording for cryptocurrency coverage and designation to which segment of the insurance space such coverage should be allocated may allow businesses to use their existing commercial policies for protection from digital currency losses. Here’s an outline of ways commonly held commercial policies may respond to cryptocurrency losses:
Commercial property and specie insurance
Most commercial property policies provide financial protection for direct physical losses to specified business property caused by covered events. While these policies are intended to cover tangible property losses, such as damage to commercial buildings and their contents, cryptocurrency losses arising from hacking incidents or the theft of digital wallets stored on offline platforms—also called cold-storage wallets—may also be covered. After all, some courts have ruled that bitcoin qualifies as physical property in the scope of insurance. But, other courts have determined that investment losses, including those involving virtual currency, do not constitute tangible property and are barred from coverage. With this in mind, it’s best for businesses to review their policies’ wording to understand the extent of their coverage. Regardless, businesses can look to specie insurance—a niche type of property policy covering high-value portable assets—for further protection. Specie insurance may offer more expanded coverage for cryptocurrency losses than traditional property policies.
Standard cyber policies typically protect against various first- and third-party losses resulting from cyber incidents, including data breaches, ransomware attacks, and phishing scams. Given that bitcoin has become a preferred form of payment among ransomware attackers, it’s possible that cyber insurance policies could cover extortion-related cryptocurrency losses. Some policies even offer explicit protection for virtual currency losses, or are broadly worded enough to imply coverage for such losses. When considering cyber insurance in relation to cryptocurrency losses, businesses should pay attention to the policy’s definition of terms such as “money” and “securities,” both of which are generally deemed covered losses. However, litigation surrounding whether cryptocurrency qualifies as a security is still ongoing.
Commercial Crime Policies
Commercial crime policies, on the other hand, typically provides financial protection for first-party property losses arising from business-related crimes such as forgery, robbery, employee theft, and computer fraud. Computer fraud-based cryptocurrency losses may be covered by commercial crime policies, but coverage will depend on the policy’s definition of terms such as “money” and “securities,” as well as whether losses occur on-site. Some policies specifically exclude coverage for virtual currency losses, but businesses may be able to purchase policy endorsements for protection from cryptocurrency losses.
Finally, businesses should consider directors and officers liability (D&O) insurance, which provides coverage for losses stemming from third parties suing business leaders for wrongful acts, including those causing adverse financial outcomes. D&O policies could offer protection for losses arising from business leaders being held accountable for lackluster security and recovery protocols amid cryptocurrency theft incidents, or making poor investment decisions with digital currency. However, policy restrictions may minimize the scope of coverage for cryptocurrency losses, including electronic data and criminal conduct exclusions.
It’s essential for businesses to consult with their insurance agents to review their existing commercial policies’ wording regarding digital currency losses and discuss additional coverage options. By doing so, they can maintain sufficient financial protection against virtual currency losses and successfully navigate this emerging market. The cryptocurrency market is growing rapidly, and it’s crucial for businesses to stay informed on how to protect themselves against financial losses. Insuring cryptocurrency is a smart way to mitigate risks and ensure financial security. To get insurance guidance and solutions tailored to your specific needs, contact us today.