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