It's been an exciting couple of years for businesses developing projects on the blockchain. Cryptocurrency's, NFT's, mobile games, metaverse's, the list goes on. Businesses are building projects that (should) be part of our future and an entirely new industry is underway. In fact, the blockchain industry is expected to reach $67.4 billion by 2026, globally (source here). It's safe to say the technology will be eventually be part of our everyday lives, however, the risks are still unclear.

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Our firm has been supporting businesses in the blockchain and crypto space since its inception, and we're seeing a lot of changes happening with the key lines of insurance. From cyber insurance to technology errors & omissions and management liability, the insurance marketplace is doing their best to provide coverage. Underwriters at the top insurance providers are still learning about the technology and doing their best to design policies to protect their customers. One key policy, Directors & Officers Insurance, has been a hot topic among venture backed blockchain businesses, so this article will focus on this coverage.

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If you're considering D&O insurance for your blockchain business or currently have a policy, this should give you some insight on the common exclusions to be aware of (and a few that can be removed if you have a great insurance advisor).

Typically, if a blockchain or crypto company is raising money, the VC firm or Private Equity will require this coverage. They do this to protect the key stakeholders from personal liability due to their advice or decisions they make for the business. Regardless, if any founder, executive, or shareholder has any net worth and would like to protect, then a D&O insurance policy should be considered.

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Before investigating the common exclusions with a D&O as it relates to an operation building on the blockchain, it's best to understand its fundamentals.

At it's core, D&O insurance protects the personal assets of directors, board members, shareholders, and executives if they are sued. Let's say you are a growing start up developing software for a metaverse. You decide to bring on an experience developer and give them a board seat to help grow the business. The individual makes the decision to use a new line of code that could potential scale the business quicker. But, it fails and causes the business to lose money. Upset board members and other executives may decide to sue that individual for destroying the business. A D&O policy will provide legal defense for the business and the individual being sued, and protect their personal assets.

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A D&O policy has "3 sides" to it, which are basically the limits available based on the claim scenario.

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• Side A: covers the companies individuals that are unable to indemnify those people, perhaps due to company bylaws or due to insolvency. Usually no retention (similar to a deductible).
• Side B: on the flip side, Side B covers for the companies indemnification obligations. This will have a retention and can range from $25,000 to $500,000.
• Side C: entity coverage - covers the company itself if it's named (vs the individual).

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The 7 Most Common Directors & Officers Insurance Exclusion for Blockchain Businesses

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The most common exclusions our experts at Fullsteam Insurance see on Director and Officers policies for blockchain, crypto, or other digital asset businesses are the following.

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• ABSOLUTE BODILY INJURY EXCLUSION
• VIRTUAL CURRENCY EXCLUSION
• CONTROLLING SHAREHOLDER EXCLUSION
• CREDITOR & DEBT HOLDER EXCLUSION
• INSOLVENCY EXCLUSION
• CYBER LIABILITY EXCLUSION ENDORSEMENT
• PROFESSIONAL SERVICES EXCLUSION

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Let's dive into what each of them are, their ability to be removed, and if not, where coverage can be afforded with a different policy.

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ADVISOR TIP: All insurance policies come with their set of exclusions and can typically be resolved by a separate policy.

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^{ADVERTISING BROADCASTING INTERNET ACTIVITIES EXCLUSION}

• What is it? This exclusion is saying that any media activities are not covered by the D&O policy. Activities like advertising, telecasting, webcasting, podcasting, and publishing or producing over any media are not covered.
• Can it be added back? No.
• Where is it covered? Media Liability Policy, often included as part of a Professional Liability (E&O) and/or Cyber Liability Policy.

^{VIRTUAL CURRENCY EXCLUSION}

• What is it? The exclusion applies to the valuation of the currency and its affect on the business. Since the value(s) can fluctuate dramatically, insurers are not able to rely on its ability to provide benefit or financial stability to the policyholder. Further, the ease of manipulation today is too risky for insurers to support losses associated with the currency.
• Can it be added back? Not yet. As of June 2022 this exclusion is part of all D&O policies for blockchain and cryptocurrency businesses.
• Where is it covered? These exposures cannot be quantified by insurers today as the current valuations and future valuations of virtual currency are unknown and unpredictable. Professional Liability (E&O) insurance providers may have solutions, but it will be based on underwriting data.

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^{ABSOLUTE BODILY INJURY EXCLUSION}

• What is it? This exclusion applies to any physical and emotional bodily injury - to first party individuals (ie, employees, workers, board members), and all third party individuals (customers, vendors, partners, etc.). It’s also excluding any loss to physical property.
• Can it be added back? No.
• Where is it covered? First party bodily injury is covered under a Workers Compensation and Employers Liability policy. Third party bodily injury is covered under a General Liability and Product Liability policy. Physical property is covered under a Commercial Property policy.

^{CONTROLLING SHAREHOLDER EXCLUSION}

• What is it? This exclusion, often capable of being removed, limits coverage for individuals that own a large percent of the business (typically more than 5%). It stems from D&O loss data that shows majority shareholders often fight about personality conflicts versus managerial errors.
• Can it be added back? Yes, can be removed with confirmation of board representation.
• Where is it covered? If the insurance provider approves, this can be removed and covered under the D&O policy.

^{CREDITOR & DEBT HOLDER EXCLUSION}

• What is it? This exclusion, often capable of being removed, limits coverage due to lawsuits from creditors, debt holders, or convertible debt instrument holders. It's saying that any claim related to the policyholders inability to pay or collect any accounts, including credit or debt, is not covered. Businesses with weak financials should expect to have this exclusion.
• Can it be added back? Yes. After review of financials, primarily funds and run-rate, this can be removed.
• Where is it covered? If added back on, it is covered by the D&O policy.

^{INSOLVENCY EXCLUSION}

• What is it? This exclusion, often capable of being removed, limits coverage due to insolvency, conservatorship, receivership, bankruptcy, or liquidation of assets.
• Can it be added back? Yes. After review of financials, primarily funds and run-rate, this can be removed.
• Where is it covered? If added back on, it is covered by the D&O policy.

^{PROFESSIONAL SERVICES EXCLUSION}

• What is it? This exclusion applies to situations, either the direct or indirect result of, any professional services for others. These may be related to the performance of the business or failure to perform for another business that works with the policyholder.
• Can it be added back? No.
• Where is it covered? This is covered under a Professional Liability, or Errors and Omissions policy (E&O)

^{CYBER LIABILITY EXCLUSION ENDORSEMENT}

• What is it? This exclusion applies to cyber-attacks or data breaches that occur within the operations     or indirectly with other businesses.
• Can it be added back? No.
• Where is it covered? This is covered under a Cyber Liability and Data Breach Policy.

Management Liability Insurance is one of the most valuable policies in your risk management portfolio, so it's important you understand how it works. In addition, it's vital you work with an advisor who can negotiate the best rates and coverage. As mentioned above, there are ways to remove exclusions and broaden coverage.

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Get in touch with a Fullsteam Insurance Advisor today and learn more about D&O Insurance for your blockchain business.

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