Hunton Insurance Recovery Blog

In the early years of cryptocurrency, there were no crypto-specific insurance coverages. Instead, policyholders sustaining losses were left to try to access coverage under traditional insurance policies such as:

• Directors and officers policies (breach of duty, securities violation, regulatory investigation).
• Commercial crime policies: “[T]ypically provides several different types of crime coverage, such as: employee dishonesty coverage; forgery or alteration coverage; computer fraud coverage; funds transfer fraud coverage; kidnap, ransom, or extortion coverage; money and securities coverage; and money orders and counterfeit money coverage.”^[1]
• Specie policies (endorsement to a crime policy covering specifically scheduled high value assets like fine art and jewelry). 
• Cyber policies: While there is much variance among these policies, they typically cover ancillary costs, notification of breach, resolution of identity theft issues, recovery of lost or compromised data, network interruption, responding to cyber-extortion, repair of computer systems and sometimes, business loss. They generally do not compensate for stolen assets.^[2]
• Errors and Omissions policies: Typically “protects the insured against liability for committing an error or omission in performance of professional duties. Generally, such policies are designed to cover financial losses rather than liability for bodily injury (BI) and property damage (PD).”^[3]
• First Party policies: Insurance applying to the policyholder’s own property (e.g., home insurance).
• Third Party (otherwise referred to as CGL) policies: Insurance applying to claims made against the insured by third parties. This coverage often contains a duty to defend the policyholder from third party claims as well as a duty to indemnify the policyholder for the costs of settlement or judgment. 
• Kidnap and Ransom coverage: Often available for purchase through crime policies (though policy provisions often prevent the policyholder from disclosing their existence).^[4]

Since these policies were not designed for the unique features of cryptocurrency and digital assets such as NFTs, early commentators discussed the existence of various potential obstacles to coverage.^[5]

Frequently discussed is whether the loss involved “covered property.” Many crime policies define this to include “money, security or other property” with “money” defined as currency, coins and bank notes in current use and having a face value, or Travelers Checks. Insurers maintain that cryptocurrency does not reasonably come within the definition of “money.” Securities typically are held to be negotiable or non-negotiable instruments or contacts, a class of assets that cryptocurrency likewise may not satisfy. And insurers often maintain, on the basis of older cases, that tangible property does not include data (though, given current knowledge concerning computer data, it is difficult to envision any court reaching a similar outcome).^[6] As a counterpoint, the IRS treats cryptocurrency as property and taxable. See e.g., Kimmelman v. Wayne Insurance Group, No. 18 CV 1041, 2018 WL 11417314, at *2 (Ohio Com. Pl. Sept. 25, 2018) (Court relied on IRS federal tax valuation to hold that virtual currency is treated as property.).^[7] Insurers also may assert other issues, such as whether there was a physical loss, coverage for contract exposures or regulatory seizure as a cause of loss, and proof of ownership. And while not an exclusion, fluctuation of cryptocurrency prices may result in substantial issues regarding valuation. 

This is not to say that these defenses are viable or should be successful but rather, that they are reflective of types of arguments insurers may make in an attempt to avoid coverage under traditional policies.

On the other hand, insurers should readily acknowledge that some of these traditional insurance policies, such as errors and omissions or third party, cover litigation and liability costs for defending certain claims, such as copyright infringement, trademark infringement and false advertising.

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This is the third post in the Blog’s Digital Asset Insurance Coverage series.

This post is an excerpt from an article written by Scott DeVries, Jessica Cohen-Nowak and Adriana Perez that originally appeared in the Journal on Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Number 4 (Fall 2022), pp. 255 – 276 (a comprehensive list of all references is provided in the published journal version).  

[1] Commercial Crime Policy, Definition, International Risk Management Institute, Inc. (IRMI), (last visited July 11, 2022).

[2] Cyber and Privacy Insurance, Definition, IRMI, (last visited July 11, 2022).

[3] Errors and Omissions (E&O) Insurance, Definition, IRMI, (last visited July 11, 2022).

[4] Kidnap and Ransom Insurance, Definition, IRMI, (last visited July 11, 2022).

[5] See e.g., Abramowicz, Michael B., Blockchain-Based Insurance (2019). Blockchain-Based Insurance, in Blockchain and the Constitution of a New Financial Order: Legal and Political Challenges.

[6] See e.g., Ward Gen. Ins. Servs., Inc. v. Employers Fire Ins. Co., 114 Cal. App. 4th 548 (2003); Am. Online, Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89, 96 (4th Cir. 2003). In fact, on August 16, 2022, a federal district court in Heidi Burt v. Travelers Commercial Insurance Company, #22-cv-03157-JSC (N.D.Cal.) rejected coverage under a homeowners policy for stolen bitcoins, relying on the antiquated and misguided notions expressed in Ward, that bitcoins were not tangible property. 

[7] Similarly, the current version of the ISO form for third party liability coverage, CG 00 01 04 13, contains a provision to the effect that “electronic data is not tangible property” and also contains an exclusion for electronic data.