For emerging digital asset treasury companies, risk & insurance strategy is key

To mitigate these risks, it’s important that companies investing in digital assets ensure they and any providers they work with have the right insurance coverage — and are working with the right insurance broker.

One type of policy that could be triggered by crypto investment risks is directors and officers liability (D&O), which protects board members and other senior leaders from risks associated with management decisions. D&O insurance can provide protection for both companies’ balance sheets and directors’ and officers’ personal assets and often responds in the event of securities litigation, investigations and enforcement actions by the SEC and other regulators, and in other circumstances.

While uncommon in many markets, insurers in some jurisdictions may seek to impose absolute exclusions for cryptocurrency-related activities in D&O policies, add broad exclusions for cybersecurity risks or theft of assets, or limit coverage for regulatory matters. Companies should work with their insurance brokers to prevent such exclusions from being added to policies or to limit their scope.

Companies investing in cryptocurrency assets and their brokers should also be mindful of D&O limits. Companies’ balance sheets may grow significantly when implementing these strategies, which may require higher limits. Companies should work with their brokers to benchmark their D&O programs against those of their peers and evaluate past loss data to ensure they have adequate protection.

Custody insurance, meanwhile, provides coverage for the loss of private keys that unlock digital assets as a result of natural perils, deliberate and dishonest acts, and third-party theft at the site of storage. This coverage, previously known as “cold storage insurance,” is often purchased from the London specie insurance market in conjunction with fidelity/crime insurance. Fidelity/crime policies are designed to protect, on a broader basis, against financial losses as a result of the theft, disappearance, or destruction of property, including digital assets and private keys, or computer fraud leading to lost assets.

In addition to purchasing these forms of coverage themselves, companies that are using third-party custodians must have a clear understanding of those custodians’ insurance purchases. It’s especially important to scrutinize custodians’ crime/custody policies as well as their errors and omissions (E&O) insurance programs, both of which are important in the event that digital assets or private keys are stolen.

Before engaging a custodian, any company investing in digital assets should have a clear sense of what is and is not insured under a custodian’s insurance policies, who can access those policies, and what those policies’ limits are. Having this information can help inform communications with shareholders and potentially prevent or limit allegations of incomplete or inaccurate disclosures and misrepresentations to investors.

As crypto investment strategies become more commonplace, underwriters are being inundated with submissions. Carriers that have historically avoided exposure to the digital asset space now recognize that they have indirectly taken on this risk across their books and are scrutinizing all related submissions as a result.

For insurance buyers, the response to this scrutiny should be planning and preparation with the support of insurance brokers that understand the digital asset space, have strong relationships with leading carriers, and can help them differentiate themselves in a crowded marketplace. In discussions with underwriters, any company investing in cryptocurrency assets should be prepared to clearly articulate:

• Its plans for the acquired digital assets (holding or frequent trading) and its hedging strategy.
• Any custody arrangements and any insurance in place at the custodian level.
• Details about board members and their experience with digital assets.
• Any plans it has for its legacy business, such as whether the legacy business will continue to operate or whether it will be dissolved or divested.
• Its use of leverage and any plans to create financial instruments related to digital asset holdings.
• Its public disclosure history related to digital asset transactions.
• Its long-term strategy, to the extent this is possible.

While there is still appetite in the insurance market for this risk, insurers’ quotes are increasingly reliant on strong underwriting relationships, which experienced digital asset brokers can help their clients build. In a crowded marketplace, differentiation is also crucial: The better prepared a prospective insured is, the more responsive an underwriter tends to be.