Digital Asset Insurance Coverage Series, Part 7: Insurance for NFTs – Lexology

As we have discussed in prior parts of this series, the insurance industry has developed an array of policies specifically tailored to cover cryptocurrency claims, and some of these policies may also cover certain NFT claims. Separate and apart from these tailored policies, policyholders with NFT claims also may look to traditional forms of insurance.

NFTs are collectible and one of a kind, yet digital. The most common NFT is a type of visual art image like a digital painting, a photograph or generative designs (created by artificial intelligence). However, this high-level definition doesn’t do justice to just how pervasive these have become. In addition to traditional artwork, there are:

• Sports, movie or other collectible NFTs are tokenized collectibles. Sports collectibles include trading cards, jerseys and photos containing digitized images/videos of players. As an example, LeBron James NFTs have sold for $230,000.^[1] Movie collectibles include digitized versions of scripts and movie posters, such as when DC recently released a Batman collection of NFTs with images drawing on the 83-year history of Batman comics.^[2]
• Music NFTs are tokenized albums, songs and/or music videos. Music NFTs may provide simple streaming access (and a higher royalty opportunity for the artist than typical streaming) or even concert access. Artist 3LAU, auctioned 33 NFT collectible versions of his album Ultraviolet, for a total of $11.7 million.^[3]
• Gamified NFTs are assets that can be collected to use within a game experience or to gain access to a particular video game. For example, ZED RUN is a digital horse racing game with NFTs available in a variety of unique breeds and themed skins.^[4]

There are even digitized images of tweets like the highly publicized first tweet from Twitter President Jack Dorsey.^[5]

Before the most recent market crash, the media feverishly reported on the rise of the NFT economy over the last two years. In particular, they have focused on high value art auction sales (even though most sales occur through peer-to-peer marketplaces like OpenSea). For example, artist Mike Winkelman’s (aka “Beeple”) compilation of 5,000 images into a singular NFT was sold for $69.3 million at a Christie’s auction in March 2021. The entrance of Christie’s, Sotheby’s and other auction powerhouses has, for some, legitimized NFT transactions as equivalent to other art sales.

Like non-digitized art, NFTs are subject to theft. Hackers are targeting the log-ins of digital wallets or marketplace user accounts to move NFTs and sell them as their own. Some of these hacks have caused NFT investors to lose millions in assets. For example, one account reports that thieves stole $2.2 million worth of NFTs from an individual’s wallet. In another reported hack, $1.7 million in NFTs was stolen from various OpenSea users. In some instances, the marketplace, such as OpenSea, reacts by delisting the second sale (by the hacker) but typically does not reverse sales or retrieve the stolen assets for the original owner.

The most pervasive issue among NFTs is the prevalence of unauthorized copyright-protected works. For example, artist Aja Trier’s viral “Vincent Van Gogh-style paintings” were turned into 86,000 different NFTs by an unauthorized third party.^[6] Importantly, artists report that filing takedown requests to remove infringements on NFT marketplaces has been, for the most part, inefficient. As a result, most artists will be required to turn to litigation to enforce their rights.

Unlike traditional high-value art, where the provenance can typically be authenticated back to the original artist, an NFT creator often has anonymity which complicates confirming that the NFT is the product of an original creation or an unauthorized replica of someone else’s work. Thus, the ledger-based code that authenticates sale transactions in a transparent way may not assist in ensuring authenticity of the art itself. This poses a risk that the NFT may be essentially worthless after a purchase (as it cannot be resold if it is a counterfeit).^[7]

In a traditional context of non-digitized art, these assets would be covered by various types of insurance (art, for example, would be scheduled and covered by specie insurance under a crime policy). Infringement related claims asserted against an NFT creator and/or the NFT marketplace may be covered by traditional coverages such as, errors and omission or third party insurance, as well as others.

However, the insurance industry has been slow to develop and issue policies specifically tailored to encompass digitized products. In fact, as of the date this article is published, only one insurance product has generally been made available, through CoinCover.^[8] While YAS Digital Limited announced a micro insurance product specifically covering NFTs in the fine arts field in April 2021, and followed this during the next month with announcements that it would issue coverage for additional NFTs, its website is silent on the subject, there has been no subsequent media attention concerning its participation in NFT coverage, and further monitoring is warranted.^[9]

There are several reasons why the insurance market has been so tepid to enter the NFT space.

First, as mentioned above, non-digitized artwork can be readily authenticated and blockchain ledgers by design can be established. While there may be ways to authenticate the NFT, insurers have yet to be satisfied with these solutions because there may be challenges to authenticating the NFT creator’s ownership of the underlying rights to the name or image of the NFT.

Second, there may be considerable uncertainty when valuing digital property, especially where there are few, if any, comparable sales. This is perhaps best illustrated by the Jack Dorsey tweet referenced above which initially sold for $2.9 million in 2021 and, in an auction one year later on April 22, 2022, sold for only $6,800.^[10]

Given the expanding value of the NFT marketplace, the insurance industry doubtless is considering ways to provide a tailored insurance product. Until they do, NFT holders are left with arguments that their NFTs are covered under existing crime, specie, professional liability, errors and omissions, third party, directors and officers and other coverages and would be well advised to provide their insurer with a schedule at least as detailed as that which is provided for non-digitized artwork.

As we have discussed in this series, companies and individuals that have sustained (and are sustaining) losses associated with cryptocurrency and NFTs may have access to insurance, whether under tailored policies or under digital asset specific policies. They would be well advised to assess all available products and discuss with their brokers and lawyers specializing in the field.

On a forward going basis, those with exposure to the digital asset sector should be attuned to the emerging marketplace for insurance products. While the field of insurance specific to NFTs is in the nascent stage, the increasing prevalence of cryptocurrency has created a substantial marketplace for crypto-specific insurance. As insurers become increasingly able to model and assess risk, they are making more insurance products available. The coverages are far from unique, and it is important for digital asset holders to understand the types of products available and determine which ones fit its particular needs. Doing so will better enable the digital asset holder to respond to the insurer if and when a claim arises.

This is the seventh and final post in the Blog’s Digital Asset Insurance Coverage series.

This post is an excerpt from an article written by Scott DeVries, Jessica Cohen-Nowak and Adriana Perez that originally appeared in the Journal on Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Number 4 (Fall 2022), pp. 255 – 276 (a comprehensive list of all references is provided in the published journal version).