Insurance Coverage Available For Bitcoin Deposits – Devil Is In The Details

by Perkins Coie
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Elliptic, a London-based digital virtual currency services firm, announced this week that it has secured insurance coverage through Lloyd’s of London for Bitcoin deposits made into its “deep cold storage” vault.  This is an encouraging first step to address a pressing need—insurance—in the digital virtual currency space, but, as the saying goes, the devil is in the details.  For users of the vault and other digital virtual currency companies seeking similar insurance coverage, consideration should be given to several details, some known and some unknown.

What We Know:

  • Depositors seeking to have their Bitcoins insured must present photographic identification and proof of address.
  • Premiums are based on the amount of limit of liability (in British Pounds) the depositor requests.  According to at least one report, the announced premium will costs two percent a year, meaning that if one Bitcoin (BTC) is trading at 520 GBP, and you wish to deposit 1000 BTC, the annual premium would be approximately 10,400 GBP, or roughly 17,000 U.S. Dollars at current exchange rates.  Expect this premium to go up or down in the coming years based on a number of factors, including loss experience, entry of other insurers in the market (right now this policy is being underwritten by a single Lloyd’s syndicate), and changes in the number of customers willing to pay for this and similar services.  If the value of a BTC drops dramatically, a depositor maybe over-insured, yet if BTCs rise in value, a depositor not paying additional premium promptly could be woefully under-insured.
  • Bitcoins stored in the vault cannot be used until they are moved from “deep cold storage.”  In order to use the deposited Bitcoin, a depositor must request the Bitcoin be moved from storage to an accessible wallet.  Obviously, having the Bitcoins offline is the hallmark of the vault’s security and no doubt gave the insurance underwriter the comfort it needed to provide insurance coverage, but for some the extra step may be an important consideration in using this or similar vaults.

What We Do Not Know:

  • What does the Lloyd’s of London insurance policy actually cover?  The specific language of the policy matters.  Insurance policies are complex contracts laden with terms of art honed over centuries.  Further, policies routinely include exceptions layered upon exceptions.  Unfortunately, Elliptic’s Lloyd’s of London insurance policy is not publicly available and press reports indicate only that it provides protection from hackers and against accidental loss.  To someone familiar with insurance policies, this raises more questions than it answers.For example, what about the scenario where an employee steals the private keys and uses the Bitcoins?  The employee is not a hacker and the loss is not accidental.  Banks and other financial institutions routinely (and are often statutorily required to) insure against this precise risk.  Moreover, what about the situation where fraud occurs, but the fraud does not fall within the policy’s specific definition of “hacking?”  These are just a couple of examples of questions that need to be answered, but can only be answered through a thorough examination of the policy terms and conditions.
  • Who is insured?  Related to the point above is the question of who exactly is the named insured under the Lloyd’s of London policy?  Is it the individual depositor, the BTC itself, or Elliptic?  The answer will determine who has the rights under the policy to control the claim, who has access to information regarding the loss, who indemnifies the depositor for any uninsured amount, and other not insignificant questions.

There is an acute need for a number of different types of insurance coverage in the digital virtual currency space, and the entry of a syndicate from Lloyd’s of London is an important first step in meeting the insurance needs of companies and depositors.  Nevertheless, this development should be viewed with some (optimistic) caution until more details are known about the specific coverage terms.  Potential depositors and companies considering insuring Bitcoin and related services should work with a policyholder-side insurance coverage lawyer or other independent insurance professional to ensure that the insurance policy they are paying for actually protects against the most-feared sources of risk or potential liability.  Perkins Coie begins this process by coupling its deep understanding of digital virtual currency companies’ potential liability and the current regulatory environment with a questionnaire or interview that identifies each individual’s or company’s specific insurance needs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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