As more businesses, governments and individuals adopt and invest in cryptocurrency, instances of hacking, theft and loss of these virtual currencies are also increasing. When property is lost or stolen, businesses typically look to insurance to cover the loss. When it comes to the loss of cryptocurrencies due to theft or hacking, however, there are unique challenges.
One such issue is that the insurance market’s offerings to cover cryptocurrency have not been fully established. Some insurers are beginning to market policies specifically designed to cover certain cryptocurrency losses, however. For example, Lloyd’s recently announced a new policy to insure against losses stored on certain cryptocurrency wallets. Until the broader insurance market catches up with the rise of cryptocurrency and such insurance becomes more commonly used, most policyholders will need to look to more traditional forms of insurance, including commercial property, commercial crime and cyber liability.
Some cryptocurrency exchanges may provide their own insurance for customers in the event the exchange is hacked, but to be best positioned in the event of a loss, corporate policyholders should understand how more commonly held policies work with respect to cryptocurrency.
Commercial Property Policies
Most businesses carry commercial property insurance. Generally, these policies provide coverage for “direct physical loss of or damage to covered property at the premises,” where the loss or damage is “caused by or resulting from any covered cause of loss.” In other words, commercial property insurance is intended to protect against damage to the physical space in which a company operates, as well as the company’s physical property.
“Covered property” is typically categorized as buildings, business property, and property of others in the custody of or being cared for by the insured. When a business loses cryptocurrency, such as through a hacking incident or theft of a physical cold-storage wallet, insureds may look to their property coverage. Similarly, an individual incurring such losses may look to the property coverage provided by their homeowners policy. At least one court has ruled that bitcoin constitutes “property” under a homeowners policy, but this was in the context of federal tax purposes, in which the court looked to an IRS policy regarding virtual currencies.
There are additional considerations for policyholders when it comes to the physical loss or damage usually required by commercial property insurance policies. For example, several courts have held that the loss of an investment does not constitute damage to tangible property. In those cases, the policyholders argued for coverage for economic losses suffered from fraudulent check usage by third parties. However, because the funds did not have a physical existence, there was no physical loss or physical damage.
Specie insurance is a lesser-known niche type of policy covering high-value portable assets, such as gold, fine art or diamonds. Most insurance buyers are unlikely to maintain this insurance, but it may cover cryptocurrency, and thus may be another coverage possibility.
Commercial Crime Policies
Commercial crime policies are another place to look for cryptocurrency-related loss coverage. These policies typically provide first-party coverage for property losses resulting from employee theft or computer fraud.
At the outset, there may be endorsements or other provisions that specifically address cryptocurrency losses within certain policies. For example, some policies expressly exclude losses involving virtual currency of any kind, including digital currency or cryptocurrency.
For the commercial crime policies not containing such an exclusion, the “covered property” is typically categorized as money, securities and “other property.” Assuming one of these definitions can be met, the next step in finding coverage under these policies is likely examining whether the losses qualify as computer fraud. This provision typically provides coverage for “loss of or damage to money, securities and other property resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the premises.” Insurers have argued against coverage because the cryptocurrency was not physically located within the policyholder’s offices.
Cyber insurance Policies
Cyber policies may also present a source of coverage for cryptocurrency losses. Rather than just providing first-party coverage, cyber insurance policies also provide third-party coverage for claims made against the insured arising from unauthorized use, access to, or loss of electronic data from the insured’s network. Some policies are starting to expressly include coverage for the theft or hacking of cryptocurrencies. If cryptocurrency issues are a substantial concern, this is worth discussing with an insurance broker. Theft coverage provided by these policies may insure against the loss of money or other assets, potentially including cryptocurrencies.
It remains uncertain whether traditional insurance policies will provide coverage for cryptocurrency losses. Specific policy language and circumstances are important, and policyholders may need to be creative when looking for coverage.