By Noor Zainab Hussain and Carolyn Cohn
(Reuters) – Insurers are denying or limiting coverage to clients with exposure to bankrupt crypto exchange FTX, leaving digital currency traders and exchanges uninsured for any losses from hacks, theft or lawsuits, several market participants said.
Insurers were already reluctant to underwrite asset and directors and officers (D&O) protection policies for crypto firms due to scant market regulation and the volatile prices of Bitcoin and other cryptocurrencies.
Now, the collapse of FTX last month has amplified concerns.
Specialists within the Lloyd’s of London and Bermuda insurance markets are requiring more transparency from crypto firms about their exposure to FTX. The insurers are also proposing broad policy exclusions for any claims arising from the corporate’s collapse.
Kyle Nichols, president of broker Hugh Wood Canada Ltd, said insurers were requiring clients to fill out a questionnaire asking whether or not they invested in FTX, or had assets on the exchange.
Lloyd’s of London broker Superscript is giving clients that handled FTX a compulsory questionnaire to stipulate the share of their exposure, said Ben Davis, lead for digital assets at Superscript.
“For instance the client has 40% of their total assets at FTX that they can not access, that’s either going to be a decline or we will placed on an exclusion that limits cover for any claims arising out of their funds held on FTX,” he said.
The exclusions denying payout for any claims arising out of the FTX bankruptcy are present in insurance policies that cover the protection of digital assets and for private liabilities of directors and officers of firms that deal in crypto, five insurance sources told Reuters. A few insurers have been pushing for a broad exclusion to policies for anything related to FTX, a broker said.
Exclusions may act as a failsafe for insurers, and can make it even tougher for firms which might be searching for coverage, insurers and brokers said.
Bermuda-based crypto insurer Relm, which previously has provided coverage to entities linked to FTX, takes a good stricter approach.
“If we now have to incorporate a crypto exclusion or a regulatory exclusion, we’re just not going to supply the coverage,” said Relm co-founder Joe Ziolkowski.
Now, one of the vital pressing questions is whether or not insurers will cover D&O policies at other firms that had dealings with FTX, given the issues facing exchange’s leadership, Ziolkowski said.
U.S. prosecutors say former FTX Chief Executive Officer Sam Bankman-Fried engaged in a scheme to defraud FTX’s customers by misappropriating their deposits to pay for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research LLC.
A lawyer for Bankman-Fried said on Tuesday his client is considering all of his legal options.
D&O policies, that are used to pay legal costs, don’t all the time pay out in cases of fraud.
Insurance sources wouldn’t name their clients or potential clients that may very well be affected by policy changes, citing confidentiality. Crypto firms with financial exposure to FTX include Binance, a crypto exchange, and Genesis, a crypto lender, neither of which responded to e-mails searching for comment.
While the least dangerous parts of the crypto market, corresponding to firms that own cold wallets storing assets on platforms not connected to the web, may get cover for as much as $1 billion, a D&O insurance policyholder’s cover may now be limited to tens of tens of millions of dollars for the remainder of the market, Ziolkowski said.
The FTX collapse will even likely result in an increase in insurance rates, especially within the U.S. D&O market, insurers said. The rates are already high due to the perceived risks and lack of historical data on cryptocurrency insurance losses.
A typical crime bond — used to guard against losses resulting from a criminal act — would cost $30,000 to $40,000 per $1 million of coverage for a digital assets trader. That compares with a price of about $5,000 per $1 million for a conventional securities trader, Hugh Wood Canada’s Nichols said.
(Reporting by Noor Zainab Hussain in Bengaluru and Carolyn Cohn in London; Editing by Lananh Nguyen and Anna Driver)
Copyright 2022 Thomson Reuters.