Crypto Risks Prompt Uptick in Insurance Exclusions

As the crypto market crashes, some insurance companies are stepping up efforts to exclude coverage for crypto-related risks under a range of insurance policies.

But because crypto is still new, insurers are having a hard time defining and pricing the risk. The lack of a clear regulatory framework also makes it challenging to unambiguously exclude crypto risks from businesses’ insurance policies, potentially leading to losses for insurers, according to insurance lawyers, brokers, and directors.

At the other end of the spectrum, insurers are swimming in regulations.

“In terms of crypto and cryptocurrencies, the insurance industry is very conservative and heavily regulated,” said Mirjam Bamberger, an executive from AXA Europe.

Nicholas Pappas, an attorney at Reed Smith who represents policyholders, said he has seen crypto-related exclusions in businesses’ cyber, crime, property, and general liability policies this year.

“Insurers are putting in a lot of cryptocurrency or digital asset exclusions, and they’re pretty broad,” Pappas said.

Avoiding Losses

Carriers want to avoid the huge losses and messy underwriting they had with cyber insurance when they jumped in too quickly to sell policies without a sufficient understanding of new risks. Cyber insurers have experienced a 300% increase in losses since 2018, according to Fitch Ratings.

Consequently, cyber insurers have little appetite to cover crypto. 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 while recognizing the lucrative crypto market’s huge demand for insurance, are letting go of the opportunity to sell the coverage.

“We have seen insurance companies put blanket crypto exclusions on non-crypto companies’ insurance policies,“ James Knox, a regional technology practice leader at broker Aon PLC, said. ”Some insurers have a strong mandate not to touch crypto at all“ in policies covering directors and officers, errors and omissions, general liability, and property, he said.

Certain insurers, too, get crypto exclusions in their treaties with reinsurers, who provide insurance to carriers, so there is little they can do about it, said Jackie Quintal, a managing director of insurance broker Marsh McLennan.

Unregulated Risk, Vague Policies

Crypto is largely unregulated in the US, and most insurance policy forms do not clearly address or exclude crypto-related risks.

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 hacks and cryptocurrency theft.

Meanwhile, there is uncertainty about how cryptocurrency should be designated, a topic that’s been the subject of some notable decisions from courts and federal agencies.

“There’s 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 at 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 bitcoin is property covered by homeowners insurance. And in 2020, courts in Singapore, the UK, and New Zealand, among others, ruled that cryptocurrency is “property.”

The Securities and Exchange Commission, for its part, 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, focuses on whether Ripple’s token—XRP—is a security under federal law.

Whether digital assets are securities is a key factor for companies in determining 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 crypto could create huge exposure for insurers, said Weix, because ambiguities in insurance law tend to favor the insured.

If cryptocurrency is found to be a covered security under D&O, more carriers may start to add cryptocurrency-specific exclusions to clarify that they only cover traditional securities claims, Fehling said. Insurers could also rely on cyber exclusions to deny coverage, depending on the specifics of policy language and claims, he noted.

Still, companies shouldn’t feel discouraged about seeking crypto-related coverage under otherwise typical business polices, Fehling said.

“There is nothing unique in crypto that forecloses coverage under traditional policies” such as D&O coverage for SEC, Financial Industry Regulatory Authority, or Justice Department probes of crypto executives, he said. A subpoena to a crypto company or executive can trigger D&O coverage before they get an indictment, complaint, or notice of an SEC probe.

Crypto coverage matters began to emerge in the last five years. But most have resolved before getting to litigation, in part because insurers want to avoid setting unfavorable legal precedent, said Orrie Levy, a partner at Cohen Ziffer who works with policyholders.

Hurt For the Crypto Market

Sarah Downey, a blockchain advisory leader at broker Lockton Companies, said few insurers draft crypto exclusions across the board. Instead, most traditional carriers that cover crypto-related risk manage the exposure by drafting pricier policies with smaller coverage amounts and high deductibles, she said.

D&O policies that offer crypto coverage usually exclude regulatory claims, theft of digital assets, and initial coin offerings, Downey said.

Joseph Ziolkowski, CEO of Bermuda-based Relm Insurance Ltd., said a regulatory exclusion “erodes the value of the D&O policy almost entirely.” Relm’s D&O policies specify which crypto business risks are covered instead of broadly excluding all regulatory claims, he said.

At the end of the day, crypto insurance demand is strong but “supply is incredibly limited,” said Jared Gdanski from Evertas, a Chicago-based crypto underwriter authorized by Lloyd’s of London.

“The lack of insurance is objectively hurting the crypto markets,” Gdanski said. “We are aware of significant deals that never went through because people could not get insurance.”

Bamberger, the AXA Europe executive, said insurers also consider whether local regulations allow for crypto activity.

Still, she said, “if a bank has part of the assets in cyrpto, it is nothing we insure.”