Insurance companies are shunning FTX-affiliated crypto firms as contagion risk increases

Dec 19 (Reuters) – Insurers are denying or limiting coverage to clients with exposure to bankrupt cryptocurrency exchange FTX, leaving digital currency traders and exchanges uninsured for 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 companies due to limited market regulation and the volatile prices of Bitcoin and other cryptocurrencies.

Now the collapse of FTX last month has reinforced the concerns.

Specialists in the Lloyd’s of London (SOLYD.UL) and Bermuda insurance markets are demanding more transparency from crypto companies about their exposure to FTX. The insurance companies also propose broad insurance exclusions for any claims as a result of the company’s collapse.

Kyle Nichols, president of broker Hugh Wood Canada Ltd, said the insurers required clients to fill out a questionnaire asking if they invested in FTX or held assets on the exchange.

Lloyd’s of London broker Superscript gives clients who traded FTX a mandatory questionnaire to outline the percentage of their exposure, said Ben Davis, head of digital assets at Superscript.

“Let’s say the customer has 40% of their total assets on FTX that they don’t have access to, there will either be a decline or we will put in an exclusion that limits coverage for any claims arising from their funds held FTX,” he said.

The exclusions denying payment for any claims arising from the FTX bankruptcy are found in policies covering the protection of digital assets and for personal liabilities of directors and officers of companies that trade in crypto, five insurance sources told Reuters. A couple of insurers have been pushing for a broad policy exclusion for anything related to FTX, a broker said.

Exclusions could act as a failsafe for insurers and would make it even more difficult for companies seeking coverage, insurers and brokers said.

Bermuda-based crypto insurer Relm, which has previously provided cover to entities linked to FTX, is taking an even stricter approach.

“If we have to include a crypto exclusion or a regulatory exclusion, we’re just not going to offer the coverage,” said Relm founder Joe Ziolkowski.

D&O QUESTIONS

Now, one of the most pressing questions is whether insurers will cover D&O policies at other companies that did business with FTX, given the problems facing the exchange’s management, Ziolkowski said.

U.S. prosecutors say former FTX CEO Sam Bankman-Fried participated in a scheme to defraud FTX’s customers by misusing their deposits to pay for expenses and debt and to make investments on behalf of his crypto hedge fund, Alameda Research LLC .

An attorney for Bankman-Fried said Tuesday that his client is considering all of his legal options.

D&O policies, which are used to pay legal costs, do not always pay out in cases of fraud.

Insurance Sources would not name their clients or potential clients who may 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 emails seeking comment.

While the least risky parts of the crypto market, such as companies that own cold wallets that store assets on platforms not connected to the internet, can get coverage for up to $1 billion, a D&O policyholder’s coverage can now be limited to tens of millions of dollars for the rest of the market, Ziolkowski said.

The FTX collapse is also likely to lead to an increase in insurance rates, particularly in the US D&O market, insurers said. Rates are already high due to the perceived risk and lack of historical data on cryptocurrency insurance losses.

A typical crime bond — used to protect against losses resulting from a criminal act — will cost $30,000 to $40,000 per $1 million in coverage for a digital asset. That compares with a cost of about $5,000 per $1 million for a traditional securities dealer, said Hugh Wood Canada’s Nichols.

Reporting by Noor Zainab Hussain in Bengaluru and Carolyn Cohn in London; Editing by Lananh Nguyen and Anna Driver

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