As we have discussed in previous parts of this series, the insurance industry has developed a number of policies specifically tailored to cover cryptocurrency claims, and some of these policies may also cover certain NFT claims. Separately and apart from these tailored policies, policyholders with NFT claims can also look to traditional forms of insurance.
NFTs are collectible and unique, yet digital. The most common NFT is a type of visual art image such as a digital painting, a photograph or generative design (created by artificial intelligence). However, this high-level definition does not do justice to how pervasive these have become. In addition to traditional works of art, there are:
- Sports, movies or other collectibles are tokenized collectibles. Sports collectibles include trading cards, jerseys and photos that contain digitized photos/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 featuring images that draw on the 83-year history of Batman comics.[2]
- Music NFTs are tokenized albums, songs and/or music videos. Music NFTs can provide easy streaming access (and a higher royalty opportunity for the artist than regular streaming) or even concert access. Artist 3LAU, auctioned off 33 NFT collector’s editions of his album Ultravioletfor a total of 11.7 million dollars.[3]
- Gamified NFTs are assets that can be collected to spend in a gaming experience or to access a specific 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 recent market crash, the media feverishly reported the rise of the NFT economy over the past two years. In particular, they have focused on high-value art auction sales (although most sales are through peer-to-peer marketplaces such as OpenSea). For example, artist Mike Winkelman’s (aka “Beeple”) collection of 5,000 images in a single NFT sold for $69.3 million at a Christie’s auction in March 2021. The entrance to Christie’s, Sotheby’s and other auction powerhouses has legitimized for some NFT transactions that correspond to other art sales.
Like non-digitized art, NFTs are susceptible to theft. Hackers target the login 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 a person’s wallet. In another reported hack, $1.7 million in NFTs were stolen from various OpenSea users. In some cases, the marketplace, such as OpenSea, responds by removing the second sale (by the hacker), but usually does not reverse the sale or retrieve the stolen assets for the original owner.
The most pervasive problem among NFTs is the proliferation of unauthorized copyrighted 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 submitting takedown requests to remove violations on NFT marketplaces has been mostly ineffective. As a result, most artists will be required to resort to litigation to enforce their rights.
Unlike high-value traditional art, where provenance can typically be authenticated back to the original artist, an NFT creator often has anonymity which complicates confirmation that the NFT is the product of an original creation or an unauthorized copy of someone else’s work. Thus, the 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 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 (for example, art would be scheduled and covered by species 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 omissions or third-party insurance, as well as others.
However, the insurance industry has been slow to develop and issue policies specifically tailored to cover digitized products. In fact, as of the date this article was 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 art field in April 2021, and followed this over the next month with announcements that it would issue cover for additional NFTs, the website is silent on the subject, it has There has been no subsequent media attention regarding its participation in NFT coverage, and further monitoring is warranted.[9]
There are several reasons why the insurance market has been so reluctant to enter the NFT area.
First, as mentioned above, non-digitized artworks can be easily authenticated and blockchain ledgers can be created. Although there may be ways to authenticate NFTs, insurers have not yet been satisfied with these solutions because there may be challenges in authenticating the NFT creator’s ownership of the underlying rights to the name or image of the NFT.
Second, there can be significant uncertainty in the valuation of digital property, particularly where there are few, if any, comparable sales. This is perhaps best illustrated by the Jack Dorsey tweet referenced above, which originally sold for $2.9 million in 2021 and, in an auction a year later on April 22, 2022, sold for just $6,800.[10]
Given the increasing value of the NFT market, the insurance industry is undoubtedly considering ways to offer a tailored insurance product. Until they do, NFT holders are left with arguments that their NFTs are covered by existing crime, nature, professional liability, errors and omissions, third party, directors and officers and other coverages, and would be well advised to give the insurer a schedule of at least as much detail as that provided for non-digitized works of art.
As we’ve discussed in this series, companies and individuals who have incurred (and are suffering) losses related to cryptocurrency and NFTs may have access to insurance, either under tailored policies or under specific digital asset policies. They will be well advised to consider all available products and discuss with their brokers and lawyers who specialize in the field.
On a future basis, those with exposure to the digital asset sector should be aligned with the emerging marketplace for insurance products. While the field of insurance specific to NFTs is in its infancy, the growing adoption of cryptocurrency has created a significant marketplace for crypto-specific insurance. As insurance companies 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 holders of digital assets to understand the types of products available and determine which ones suit their particular needs. By doing so, the holder of digital assets will be better able 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), p. 255–276 (a comprehensive list of all references is provided in the published journal version).
