With NFTs now tipped to be the next big thing in the fine art world, insurers are scrambling to figure out how to provide coverage for those selling, buying, or trading the non-tangible assets. The trouble is, the risks associated with digital art NFTs do not fall naturally into any existing insurance policies.
“NFTs really came on to our radar with the huge Christie’s sale,” said Mary Pontillo, SVP and national fine arts practice leader for Risk Strategies. “The first immediate issue for us was that the fine art policies that we sell provide coverage for physical loss or damage. But how do you cover physical loss or damage for NFTs?”
That ties into the challenge of how to value digital pieces of art and NFTs. Pontillo commented: “In a regular fine art insurance policy, you can use the sales figure or purchase price as an option for how to value the work. But with NFTs and cryptocurrencies, that value is always fluctuating, sometimes quite dramatically. That’s one piece of the puzzle that I just don’t think fine art underwriters have quite wrapped their heads around.”
To tackle those questions, plus countless others related to digital and crypto assets, Pontillo put her head together with Rob Rosenzweig, SVP and national cyber risk practice leader at Risk Strategies.
“As would be the case with any sale of fine art and insuring it, digital or otherwise, as far as the gallery and auction house are concerned, you’ve got both a potential first-party exposure and a third-party exposure,” said Rosenzweig. “If there is loss, theft or damage [of an NFT] while it’s in the care, custody or control of the art dealer, that’s one scenario. Obviously, we need to figure out a solution to address that and allow for the gallery to be made whole and reimburse the consignor if that happens. And then there’s also the potential that they would get hit with a liability claim if there was any negligence on their behalf in securing the NFT.”
In the commercial insurance marketplace as it currently stands, the liability risk is potentially “easier to solve,” according to Rosenzweig. He explained that most well-structured cyber policies, if they’re maintained by a gallery or an auction house, don’t have any exclusionary language that would limit coverage if the unauthorized access and cybercrime that is perpetrated involves exfiltrating, damaging or altering an NFT.
“The first-party piece of it – how you deal with the value of the artwork itself – is more of a challenge,” he added. “If you think about commercial crime policies, or elements of crime coverage that have been included under cyber policies for digital crime, while they do insure against the theft of value, the way we would value money, securities or other tangible property is very different than one would think about valuation for a collectable. So, that’s one challenge.
“Another challenge – and we’ve seen this this in the marketplace with other crypto risks outside of the world of fine art, whether it be with exchanges or businesses that are serving as digital banks custodying other digital currencies – the marketplace is still wrapping its arms around how to underwrite that risk depending on how the digital currencies are custodied. Is it cold storage or hot storage, and so on?”
Some specialty insurance markets have come up with crime, fidelity and species products that can address the loss or theft of digital currencies, but, according to Rosenzweig, underwriters still need more understanding as to where collectors, galleries and auction houses are actually custodying their NFTs, and they want some familiarity with the vendors that are being utilized.
“People selling, buying, or trading NFTs need to make sure they’re using a well-known and established custodian,” said Pontillo. “They could even ask if that custodian actually has their own insurance, because, if they do, that means they’ve been vetted by underwriters from a crypto perspective and they meet certain standards. Insurers will likely only be comfortable providing coverage if galleries and auction houses are partnering with a custodian that’s known in the market and is already purchasing their own insurance program. So, I’d advise being very cautious in vetting that aspect of the transaction.”
As things stand, the insurance options for fine art NFTs are very limited. The coverage available in the cyber market today is primarily third-party, Rosenzweig explained, and would be triggered by somebody making a demand against the gallery or auction house alleging that they were negligent in maintaining an adequate level of network security to secure an NFT.
“I think with respect to the first-party coverage, where someone’s seeking direct reimbursement [for] a digital asset, it’s to be determined, but that’s probably more appropriately underwritten under a fine art policy, because of the valuation piece of it,” Rosenzweig added. “Even though an NFT, at it’s more most basic level, is a digital currency, the valuation of it is not like we would think about with traditional currency valuation, which is going to be the main basis for adjustment of these losses. So how these works are valued, I think they’re probably more appropriately understood and responded to by fine art adjusters that know that marketplace intimately.”