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How cryptocurrencies are viewed by courts can be determinative when seeking coverage for a cryptocurrency-related loss, and whether cryptocurrency is “money,” “securities,” or “property” has been the subject of heavy debate.
In our previous blog post, we explored how your current D&O and/or cyber insurance policies may provide coverage for crypto-related losses. In this article, we discuss whether and how coverage may also exist for certain losses under typical property and/or specie insurance policies.
Is cryptocurrency “property”?
When determining whether your loss of or inability to access your cryptocurrency is covered under your property and/or specie policy, the first question to ask is whether cryptocurrency constitutes covered “property.”
The Internal Revenue Service (“IRS”) has provided some guidance. In March 2014, the IRS declared that “virtual currency”, such as Bitcoin and other cryptocurrency, will be taxed as “property” and not currency. See IRS Notice 2014-21, Guidance on Virtual Currency (March 25, 2014); see also IRS Has Begun Sending Letters to Virtual Currency, Internal Revenue Serv. (July 26, 2019), (“IRS Notice 2014-21 … states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions.”). Continue Reading Can property or specie insurance provide coverage for crypto losses?
Evidenced by its $1.29 trillion market cap, (CoinMarketCap, May 17, 2022) interest in cryptocurrency has skyrocketed in recent years (Haar, 2022). Indeed, as of April 2, 2022, the cryptocurrency market was larger than Italy’s GDP, the eighth largest in the world (Adams and Walker, 2022).
Of course, with more interest and value comes more risk, such as theft of digital assets, cyber security concerns, and regulatory impacts. With respect to the evolving crypto markets, this increase in risk is widespread and readily apparent. Indeed, President Biden signed an executive order on March 9, 2022 requiring the government to assess the risks and benefits of creating a central bank digital dollar, as well as other cryptocurrency issues (Johnson and Shalal, 2022; White House, 2022).
Who is at risk?
If you or your company trade cryptocurrencies on your own behalf or on behalf of clients, make or receive payments in cryptocurrency, store the keys and digital wallets that secure cryptocurrencies and other digital assets like NFTs, develop blockchain technologies, or advise whether cryptocurrencies are a sound investment, then you or your company may be exposed to crypto-related losses.
As an example, companies and their directors and officers could face shareholder or derivative actions alleging gross negligence or breach of fiduciary duties based on allegedly unsound advice relating to the investment in, use of, or management of cryptocurrencies or other digital assets. Public companies may also be subject to regulatory investigations involving cryptocurrencies.
Cryptocurrency is also a popular target for ransomware hackers. Since the first bitcoin block was mined in 2009, more than $1.3 billion has been stolen from cryptocurrency exchanges (Kenneth, 2021).
Will insurance cover crypto-related losses?
Given that cryptocurrency is in its infancy, most insurance policy forms do not expressly address crypto-related losses or risks. That said, specific coverage for such losses may be available, particularly under D&O (directors’ and officers’ liability or management liability) coverage or cyber (network security/privacy liability) coverage. Depending on the text of the policy and the nature of the loss at issue, coverage may lie under existing E&O, crime, and property policies as well.
D&O insurance
D&O insurance protects the personal assets of and provides armor for a company’s board and management. More specifically, it insures (1) claims made against the directors and officers when the company cannot indemnify them (“Side A” coverage); (2) the company itself when the company is required to indemnify its insured directors and officers for claims made against them (“Side B” coverage); and (3) the company against its own liability in a securities claim or (in the case of private companies) any non-excluded claim made against the company as an insured entity (“Side C” coverage).
The policy’s definitions of “Claim” and “Loss” are a good place to start to determine whether D&O coverage may be triggered for crypto-related losses. The term “Claim” should be broad enough to include civil lawsuits, criminal proceedings, administrative proceedings, and investigations against directors and officers, and sometimes include demands to enter into a tolling agreement or requests for interviews or to produce documents made to directors and officers. The term “Loss” should include defense costs, damages, settlements, judgments, and pre- and post-judgment interest, and also should include certain fines and penalties, punitive, exemplary, and multiplied damages (when insurable under applicable law), and awards of plaintiff’s attorney’s fees, among other items.Continue Reading Are your crypto risks insured? Look at D&O and cyber policies first
Most residential property policies provide for an “appraisal” as an alternative dispute resolution mechanism when the insurer concedes coverage for a loss in whole or part, but the amount of the loss is disputed. The resulting appraisal award is binding on the parties absent certain limited grounds for challenging the award or the insurer’s obligation to pay it in full. Once issued, absent any cognizable challenge, an insurer must timely pay the award—often within 30 days by contract—subject to any applicable sub-limits, deductibles, or other policy limitations. Florida law has long held that where an insured is forced to file suit to compel appraisal or recover policy benefits and an appraisal later ensues, an insurer’s payment of the resulting appraisal award operates as a “confession of judgment”—the functional equivalent of a judgment in the insured’s favor sufficient to trigger the insured’s entitlement to attorneys’ fees and costs as the prevailing party under Sections 627.428 (for admitted insurers) or 626.9373 (for surplus lines insurers) of the Florida Statutes. Bryant v. GeoVera Specialty Ins. Co., 271 So. 3d 1013, 1019-20 (Fla. 4th DCA 2019); Jerkins v. USF & G Specialty Ins. Co., 982 So. 2d 15, 17-18 (Fla. 5th DCA 2008); Goff v. State Farm Florida Ins. Co., 999 So. 2d 684, 688 (Fla. 2d DCA 2008); Velez v. Scottsdale Ins. Co., No. 9:17-CV-81310, 2019 WL 7837204, at *2 (S.D. Fla. Aug. 2, 2019).
Historical lack of clarity and the source of confusion
Until recently, however, insureds had little guidance from Florida courts as to whether an insurer’s payment of an appraisal award also triggered Florida Rule of Civil Procedure 1.525’s thirty-day deadline to file a motion for fees and costs, or whether the insured was first required to move for and await the entry of an actual final judgment. The lack of clarity stems from Rule 1.525’s triggering mechanism: resembling Section 627.428 in requiring the “filing of [a] judgment, including a judgment of dismissal, or the service of a notice of voluntary dismissal” but with the additional requirement that such judgment or notice “conclude[] the action as to that party.”Continue Reading Florida: the time to move for attorney’s fees post-appraisal
Putting an end to a 12-year-old dispute between J.P. Morgan Securities’ predecessor, Bear Stearns & Co., and several of its insurers, on November 23, 2021, New York’s high court held that J.P. Morgan’s $140 million payment to the Securities and Exchange Commission (SEC) did not constitute an uninsurable “penalty” under J.P. Morgan’s excess directors & officers (D&O) liability policies. This is welcome news for policyholders faced with coverage denials from their insurers based on “public policy,” “fines or penalty,” “disgorgement” or other grounds of alleged uninsurability.
In J.P. Morgan, J.P. Morgan’s $140 million “disgorgement” payment was part of a larger $250 million settlement between J.P. Morgan and the SEC. $90 million of the settlement was specifically allocated to “civil money penalties.” The settlement resolved allegations that Bear Stearns & Co. and other securities broker-dealers facilitated late trading and deceptive market timing practices by their customers in connection with the purchase and sale of mutual funds.
J.P. Morgan’s excess policies covered “loss” that the insured entities became liable to pay as the result of any civil proceeding or governmental investigation alleging wrongful acts constituting violations of laws or regulations. The policies defined “loss” to include various types of compensatory and punitive damages where “insurable by law,” but specifically excluded matters uninsurable as a matter of public policy and “fines or penalties imposed by law.” The insurers argued that the disgorgement payment was uninsurable as a matter of New York law both as form of restitution of ill-gotten gains and as a penalty imposed by law.Continue Reading End to long-running dispute over uninsurability under D&O insurance