As the cryptocurrency market crashes, some insurance companies are stepping up their efforts to exclude coverage for crypto-related risks in a variety of insurance policies.
But because cryptocurrencies are still new, insurers have a hard time defining and pricing risk. The lack of a clear regulatory framework also makes it difficult to unequivocally exclude crypto risks from companies’ insurance policies, which could lead to losses for insurers, according to insurance lawyers, brokers and directors.
At the other end of the spectrum, insurers swim in regulations.
“In terms of cryptocurrencies and cryptocurrencies, the insurance industry is very conservative and heavily regulated,” said Mirjam Bamberger, an executive at AXA Europe.
Nicholas Pappas, a Reed Smith attorney who represents policyholders, said this year has seen cryptocurrency-related exclusions in cyber, crime, property and business general liability policies.
“Insurers are implementing a lot of cryptocurrency or digital asset exclusions, and they are quite broad,” Pappas said.
Operators want to avoid the huge losses and messy underwriting they experienced with cyber insurance when they rushed to sell policies without sufficient understanding of the new risks. Cyber insurers have seen a 300% increase in losses since 2018, according to Fitch Ratings.
Consequently, cyber insurers have little interest in covering cryptocurrencies. All cyber policy renewals this year “will have a blanket crypto exclusion across the board,” said Luke Speight, director of digital assets at insurance broker Willis Towers Watson.
Some other insurers, even acknowledging the huge demand for insurance from the lucrative cryptocurrency market, are passing up the opportunity to sell coverage.
“We’ve seen insurance companies put blanket crypto exclusions on non-crypto companies’ insurance policies,” James Knox, regional technology practice leader at the broker.
Certain insurers also get crypto exclusions in their treaties with reinsurers, which provide insurance to carriers, so there’s little they can do about it, said Jackie Quintal, managing director of insurance broker Marsh McLennan.
Unregulated risk, vague policies
Cryptocurrencies are largely unregulated in the US, and most insurance policy forms do not clearly address or exclude risks related to cryptocurrencies.
But Louisa Weix, a partner at TittmannWeix who advises insurers, said she has seen crime insurers add “virtual currency and digital asset” exclusions to avoid having to cover crypto attacks and theft.
Meanwhile, there is uncertainty over how cryptocurrency should be designated, an issue that has been the subject of some notable decisions by courts and federal agencies.
“There is a lack of understanding about what crypto is. Is it a digital asset, security, commodity, investment, property, or is it a scam?” said Edin Imsirovic, associate director of AM Best, a credit rating agency for insurance companies.
In 2014, the IRS said that “virtual currency” will be taxed as “property,” not currency. In 2018, an Ohio court ruled that $16,000 of lost bitcoins is property covered by homeowners insurance. And in 2020, courts in Singapore, the United Kingdom, and New Zealand, among others, ruled that cryptocurrency is “proprietary.”
The Securities and Exchange Commission, meanwhile, charged Ripple Labs and its executives in 2020 with allegedly raising more than $1.3 billion through an unregistered offering of digital asset securities. The lawsuit, pending in New York, centers on whether Ripple’s token XRP is a security under federal law.
Whether digital assets are securities is a key factor for companies to determine whether they can get D&O coverage, which protects against litigation and investigations involving securities, said Geoff Fehling, a partner at Hunton Andrews Kurth who represents policyholders.
Vague D&O policies covering cryptocurrencies could create huge exposure for insurers, Weix said, because ambiguities in insurance law tend to favor policyholders.
If cryptocurrency is determined to be a security covered by D&O, more carriers may begin adding cryptocurrency-specific exclusions to clarify that they only cover traditional security claims, Fehling said. Insurers could also rely on cyber exclusions to deny coverage, depending on the details of the policy language and claims, she noted.
Still, companies should not be discouraged from seeking crypto-related coverage under typical business policies, Fehling said.
“There is nothing unique about crypto that precludes traditional policy coverage,” such as D&O coverage for the SEC, the Financial Industry Regulatory Authority, or Justice Department investigations of crypto executives, he said. A subpoena to a crypto company or executive can trigger D&O coverage before they receive an indictment, complaint, or notice of an SEC investigation.
Crypto hedging issues began to surface in the last five years. But most have settled before litigation, in part because insurers want to avoid setting unfavorable legal precedent, said Orrie Levy, a partner at Cohen Ziffer who works with policyholders.
Damage by the crypto market
Sarah Downey, lead blockchain advisor at broker Lockton Companies, said few insurers write crypto exclusions across the board. Instead, most traditional carriers that hedge crypto-related risk manage exposure by writing more expensive policies with smaller coverage amounts and high deductibles, she said.
D&O policies that offer crypto coverage generally exclude regulatory claims, digital asset theft and initial coin offerings, Downey said.
Joseph Ziolkowski, chief executive of Bermuda-based Relm Insurance Ltd., said a regulatory exclusion “erodes the value of the D&O policy almost completely.” Relm’s D&O policies specify which crypto business risks are covered rather than broadly excluding all regulatory claims, he said.
At the end of the day, the demand for crypto insurance is strong, but “the supply is incredibly limited,” said Jared Gdanski of Evertas, a Chicago-based crypto insurer licensed by Lloyd’s of London.
“The lack of insurance is objectively hurting the crypto markets,” Gdanski said. “We’re aware of major deals that never happened because people weren’t able to get insurance.”
Bamberger, the AXA Europe executive, said insurers also consider whether local regulations allow crypto activity.
Still, he said, “if a bank has part of the assets in crypto, it’s nothing we insure.”