Our expert, George Frith, Senior Underwriter at Relm Insurance, has deep experience in underwriting crypto mining risks. He played a key role in establishing the first Lloyd’s lineslip dedicated to crypto miners and has worked closely with top publicly traded mining operators. Below, he shares insights to help you navigate the challenges and optimize your mining operations.
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1. Rig Valuations
Mining rigs are volatile assets, often labeled as EDP or electronic data processing equipment in insurance terms. Insurers worry about items that can spike in value. Underinsurance happens when an item is insured for less than its actual replacement cost.
To protect themselves, insurers use margin or coinsurance clauses. For example, a 110% margin clause means the insurer will cover up to a 10% variance if the replacement cost exceeds the stated value.
Given the recent downward trend in rig prices, this might not be a big issue now. But keep an eye on it as we move through 2024 and into 2025 when rig prices might surge.
Keeping detailed and accurate records of your mining equipment’s value is crucial not just for your peace of mind, but for a faster and smoother claims process. If an unexpected event occurs and you need to file a claim, having up-to-date valuations can significantly expedite the settlement, ensuring you get back to business without unnecessary delays.
2. Check Your BOV (Basis of Valuation)
What’s BOV, you ask? It’s short for Basis of Valuation, not a cartoon character. This determines how your property policy responds in the event of a loss. For ASICs, the three most common types are:
- Replacement Cost (RCV): This policy replaces old equipment with new. If your property is damaged beyond repair, the policy substitutes it with similar or the same property as before the loss. This type of coverage is particularly advantageous if you want to ensure continuity in your operations without the hassle of calculating depreciation.
- Actual Cash Value (ACV): ACV policies replace property at the cost required to restore to its pre-loss condition, factoring in depreciation. For example, if your ASIC is two years old, the claims adjuster will account for wear and tear, depreciating the replacement cost accordingly. This type of coverage is often more cost-effective, making it a preferred choice for many miners who want to balance premium costs with adequate protection.
- Agreed Value (AV): Mostly used in fine art and jewelry insurance, AV policies fix the value of an item at the policy’s outset. This can be beneficial as you might get back more than the current value, but it’s pricier and can backfire if the property value spikes. Annual valuations are common, ensuring the agreed value reflects any changes in market conditions.
The best option depends on your specific circumstances, insurance availability, and timing. ACV is likely the most cost-effective for miners, but RCV and AV have their own advantages that might suit different scenarios better.
3. Miner Diversification
There’s a growing trend of miners pivoting into AI compute. It makes sense—miners run data centers, and AI needs them. However, this introduces third-party equipment, contracts, and customers, changing the operation dynamics.
Miners moving into AI hosting should consider technology errors and omissions insurance to protect against client lawsuits for errors or omissions in service delivery.
Few miners are currently purchasing E&O insurance, creating a coverage gap that might expose businesses to significant risks. With the AI sector rapidly expanding, any misstep could lead to costly legal battles and damage to your reputation. Therefore, it’s essential to assess these risks and ensure you have the right coverage to protect your new ventures.
4. Share Price Volatility & At-The-Market Offerings
The period around the Bitcoin halving usually leads to significant share price volatility for publicly traded Bitcoin miners. In this cycle, miners are choosing ATM offerings instead of debt financing to drive growth and acquire new mining rigs—let’s just say ASIC-backed loans from the last cycle are best left unmentioned! However, this dilutes shares, likely dropping share prices.
Share price volatility often leads to shareholder lawsuits from unhappy investors. Public Bitcoin miners should be aware of these dynamics and inform current and potential shareholders accordingly. Transparency, record-keeping, and good governance are key to mitigating potential shareholder suits. Ensuring that all stakeholders are aware of your growth plans and financial strategies can help manage expectations and reduce the likelihood of legal challenges.
5. Communicate With Your Broker
Sounds obvious, right? But amidst scaling a business, collecting block rewards, building infrastructure, fighting FUD, and pivoting into AI, chatting with your broker can slip through the cracks.
Make time to update them on business changes. For instance, buying a new site and filling it with miners could increase your total insured values by 50% or more. If you don’t inform your broker and insurer, the new site might not be covered.
Most policies have an additions and alterations clause or errors & omissions clause covering a certain percentage of TIV, usually around a 10% margin. Regular communication ensures that your coverage keeps pace with your business growth and changes, preventing any gaps that could leave you vulnerable in the event of a claim.
6. Provide Detailed Information
When purchasing or renewing a policy, give as much detail as possible. Underwriters are risk-averse and need comprehensive information to offer better deals. Highlight key points in a good insurance submission, such as:
- Growth Plans: Outline your future plans to show insurers that you’re a proactive and forward-thinking business.
- Risk Mitigation: Detail both physical measures (like fire suppression systems) and process-driven strategies (like regular security audits) you’ve implemented to minimize risks.
- Preventative Maintenance Programs: Describe your regular maintenance schedules to demonstrate your commitment to keeping equipment in top condition.
- Staff Training: Provide information on training programs for your staff to showcase their readiness and competence in handling various scenarios.
- Management Team Experience: Highlight the expertise and track records of your management team to build confidence in your leadership and operational strategy
The more information you provide, the more justification underwriters have to offer you a better deal. Comprehensive submissions reflect your professionalism and thoroughness, making you a more attractive risk for insurers to cover.
7. Relationship Building
Build long-term relationships with your broker and insurance provider. The insurance industry is relatively small, and companies develop reputations over time. Underwriters have long memories—if you burn them once, they’re unlikely to support your business again. Get to know your underwriting panel. If you’re large enough and have the budget, try to meet them when you travel. Insurance is a relationship business, and building personal connections can ensure better support. A good relationship with your broker and insurer can lead to more favorable terms and quicker resolutions when issues arise.
Choose a broker and insurance provider who understands the Bitcoin mining space. Believe it or not, there are experts in the insurance world who have spent significant time in this field. Leveraging their expertise can help you navigate the complexities of insurance for your unique needs. An informed broker can also advocate on your behalf, ensuring that your coverage aligns with your operational risks and growth trajectory.
Building these relationships fosters trust and credibility with insurers. This can be invaluable when negotiating terms, seeking coverage enhancements, or handling claims. A well-established rapport with your insurance partners ensures that they understand your business deeply and can provide tailored solutions that support your long-term success.
