Explaining Specialized Insurance Coverage for Digital Assets

Digital asset insurance protects your business from financial losses linked to the theft or loss of crypto assets and other digital tokens. However, it’s important to note that not all policies are equal — many clients can think they’re covered because they’ve purchased a digital asset insurance policy, but traditional insurance policies often don’t account for modern and emerging risks.

Digital asset policies are built for blockchain risks — vulnerabilities in wallets, mistakes in custody processes, smart contract failures, infrastructure risks, regulatory actions, and constantly changing cyber threats. They address these exposures head-on, protecting company value.

Exchanges, NFT marketplaces, fintech companies, and other companies dealing with blockchain and crypto can benefit.

These can include:

1. Custodians and wallet providers.
2. DeFi Protocols and DAOs.
3. Blockchain infrastructure providers.
4. Crypto payment processors and merchants accepting crypto.
5. Token issuers (e.g., stablecoins or security tokens).
6. Web3 startups and DAOs with treasuries.
7. Mining and staking operations.
8. Venture capital and investment firms with digital holdings.

Depending on client exposure, there are a couple of options. If the business holds the assets themselves, digital asset insurance can protects against financial loss due to theft, destruction or loss. Digital asset custodian insurance covers businesses that hold assets such as crypto on behalf of clients, protecting against theft, fraud and operational mistakes.

Coverage types can include:

1. Crime insurance: for theft, social engineering, scams.
2. Cyber liability: for breaches, hacks, and regulatory response.
3. Errors and omissions (E&O) insurance: for software bugs, smart contract failures.
4. Directors and officers (D&O) insurance: for lawsuits targeting leadership.
5. Technology liability: for infrastructure providers.

If keys are lost or stolen, financial downside can be mitigated, and, in many cases, completely offset. Policies also cover legal fees and other expenses involved with a loss. It’s important for brokers to understand all possible loss drivers to minimize their clients’ coverage gaps.

Some common exclusions are value fluctuations, fraudulent acts by the policyholder, unsecured or negligent key management, and sometimes, currencies that aren’t recognized by major trading platforms.

Security issues arising from the software may be covered. But other software issues will require an errors and omissions policy.

Direct web3 or blockchain insurance coverage is rare, but that doesn’t mean these assets need to be at risk — other policies can step in to cover the risk vectors involved.

Crime and cyber liability options protect against theft, scams, and fraud, while errors and omissions liability addresses software issues. If you’re thinking about insuring digital assets, an advisor can provide solutions tailored to your portfolio.

Beyond insuring crypto holdings, digital asset companies should also think about:

• Smart contract failure coverage: If an issue in a smart contract causes financial losses or operational failures, dedicated insurance safeguards companies from the consequences.
• Cyber liability Insurance: Shields companies from financial losses linked to cyberattacks, covering legal defense, breach response and reputational repair costs.
• Directors and officers insurance: Protects leadership teams from personal financial exposure linked to lawsuits over company decisions.