Digital Asset Insurance Coverage Series Part 7: Insurance for NFTs

As we discussed in earlier parts of this series, the insurance industry has developed a range of policies specifically designed to cover cryptocurrency claims, and some of these policies may also cover certain NFT claims. Apart from these bespoke policies, policyholders with NFT claims can also turn to traditional forms of insurance.

NFTs are collectible and one of a kind, but digital. The most common NFT is a type of visual art image such as a digital painting, photograph, or generative designs (created by artificial intelligence). However, this high-level definition does not do justice to their ubiquity. In addition to traditional works of art, there are:

  • Sports, movies, or other collectible NFTs are coin-operated collectibles. Sports collectibles include trading cards, jerseys, and photos containing digitized images/videos of players. As an example, LeBron James’ NFTs sold for $230,000.[1] Movie collectibles include digitized versions of movie scripts and posters, such as when DC recently released an NFT Batman Collection featuring imagery drawing inspiration from the 83-year history of Batman comics.[2]
  • Music NFTs are tokenized albums, songs, and/or music videos. Music NFTs can provide easy access to streaming (and a higher royalty opportunity for the artist than typical streaming) or even access to a concert. The 3LAU Artist Has Auctioned 33 NFT Collectible Versions Of His Album Ultravioletfor a total of $11.7 million.[3]
  • Gamified NFTs are assets that can be collected for use in a gaming experience or to access 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 scanned images of tweets like the high-profile first tweet from Twitter chairman Jack Dorsey.[5]

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

Like undigitized art, NFTs are prone to theft. Hackers target logins of digital wallets or market 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 were stolen from various OpenSea users. In some cases, the marketplace, like OpenSea, reacts by removing the second sale (by the pirate) but generally does not reverse the sales or recover the stolen assets for the original owner.

The most prevalent problem among NFTs is the prevalence of unauthorized copyrighted works. For example, artist Aja Trier’s viral “Vincent Van Gogh style paintings” have been turned into 86,000 different NFTs by an unauthorized third party.[6] Importantly, artists report that filing takedown requests to remove infringements from NFT markets has been, for the most part, ineffective. As a result, most artists will have to turn to litigation to enforce their rights.

Unlike traditional high-value art, where provenance can usually be traced back to the original artist, an NFT creator often has anonymity, making it difficult to confirm that the NFT is the product of an original creation. or an unauthorized replica of someone else’s work. So ledger-based code that transparently authenticates sales transactions may not help ensure the authenticity of the art itself. This poses a risk that the NFT will be essentially worthless after a purchase (because it cannot be resold if it is a counterfeit).[7]

In a traditional context of non-digitized art, these assets would be covered by different types of insurance (art, for example, would be programmed and covered by cash insurance as part of a crime policy). Infringement-related claims brought against an NFT creator and/or the NFT marketplace may be covered by traditional coverages such as errors and omissions or third-party insurance, as well as others.

However, the insurance industry has been slow to develop and issue policies specifically designed to encompass digitized products. In fact, as of the publication of this article, only one insurance product has generally been made available, through CoinCover.[8] While YAS Digital Limited announced a microinsurance product specifically covering fine art NFTs in April 2021, and followed it up over the following month with announcements that it would issue cover for fine art NFTs further, his website is silent on the subject, there has been no subsequent media attention regarding his participation in NFT coverage, and further scrutiny 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 artworks can be easily authenticated and blockchain ledgers by design can be established. Although there may be ways to authenticate the NFT, insurers are not yet satisfied with these solutions because it may be difficult to authenticate the ownership of the creator of the NFT over the rights underlying the name or the NFT image.

Second, there can be considerable uncertainty when evaluating digital ownership, particularly when there are few or no comparable sales. This is perhaps best illustrated by the Jack Dorsey tweet referenced above which originally sold for $2.9 million in 2021 and, at an auction a year later on April 22, 2022, sold for just $6,800.[10]

Given the growing value of the NFT market, the insurance industry is undoubtedly considering ways to provide a tailor-made insurance product. Until they do, NFT holders are left with arguments that their NFTs are covered by existing coverages for crime, cash, professional liability, errors and omissions, third parties, directors and officers and others and would be well advised to provide their insurer with a schedule at least as detailed as that provided for non-digitized works of art.

As we have discussed in this series, businesses and individuals who have suffered (and are suffering) losses associated with cryptocurrency and NFTs can access insurance, either through bespoke policies or fonts specific to digital assets. They would be well advised to evaluate all available products and discuss them with their brokers and lawyers who specialize in the field.

Going forward, those with exposure to the digital asset sector should pay attention to the emerging market for insurance products. While the field of NFT-specific insurance is in its infancy, the growing prevalence of cryptocurrency has created a substantial market for crypto-specific insurance. As insurers are increasingly able to model and assess risk, they are offering more and more insurance products. Coverages are far from unique, and it’s important for digital asset holders to understand the types of products available and determine which ones meet their particular needs. This will allow the holder of digital assets to better respond to the insurer in the event of a claim.

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

This article 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), p. 255 – 276 (a full list of all references is provided in the published version of the review).

Michael J. Birnbaum