Why you’ll have trouble finding D&O insurance for clients using blockchain

Brokers looking to place directors and officers (D&O) insurance coverage for clients involved with blockchain or digital assets will not have an easy time finding the coverage, since there is a limited underwriting appetite for it.

“It’s definitely feasible, and we’ve had great success in placing D&O coverage for our clients who are operating in the blockchain or digital asset world,” Sarah Downey, senior vice president of Marsh’s FINPRO (financial and professional liability) practice, said during a webinar last week. Blockchain is a record of digital events that is “distributed” or shared between many different parties; it can only be updated by consensus of a majority of the participants in the system.

Underwriting D&O coverage for clients working in this space is limited due to several factors, Downey said.

• Blockchain companies are new, meaning they have a limited financial and claims history. Consequently, there may not be enough data for underwriters to determine claim history and true risk exposure.
• A constantly evolving regulatory environment.
• Negative press about companies acting in the blockchain space in an “unsavoury” way.

“While the negative press about a handful of companies makes for some really interesting reading, it definitely doesn’t help make insurers more comfortable in this space,” Downey said. “I think it also raises concerns about an insurance company’s reputation being harmed by being tied to one of these poorer risks.”

Underwriting appetite for fidelity coverage (financial crimes) is limited for a similar reason as for D&O insurance. For brokers looking to place fidelity coverage for blockchain clients, Downey makes the following suggestions:

• Expanding the coverage to theft by third parties, as opposed to theft just by employees.
• Carefully review the definition of property to ensure digital assets are covered.
• Whether the coverage extends to hot (online) or cold (offline) storage, or both. (It’s more difficult, generally speaking, to obtain coverage for hot storage.)
• How the policy determines the evaluation of digital assets that might have been stolen.

Cyber insurance is another coverage that presents a challenge. Another webinar speaker, Christopher Liu, head of financial institutions (cyber) at AIG, noted that “the only way to steal digital assets is digitally.” While cyber coverage works for particular situations and different permutations, “to use it within the cryptocurrency space is particularly challenging,” Liu said.

But there is a way to advise clients on different policies that could apply to blockchain. Consider a situation in which a handful of keys are lost through a hacking event. Cyber insurance could be used for forensic investigation, and public relations and legal costs. Fidelity would cover the actual value of the missing property or lost assets. Then, an errors and omissions (or professional services) policy would cover liability brought by customers whose assets have been lost.

“You really can have each of these policies working in conjunction and then also providing collaborative or complementary coverage, as well as some overlapping coverage,” Liu said.