May 19, 2020 Articles

Analyzing Non-Cyber Coverage for Claims Involving (Not So) Smart Contracts

What traditional policies might provide coverage for blockchain enterprise companies with claims deriving from one of the most vulnerable aspects of a blockchain transaction: the smart contract?

By Renier P. Pierantoni

Successful companies looking to capitalize on burgeoning blockchain technology in the digital age might find themselves asking some questions: “How can we use today’s technology to our competitive advantage?” “What are the risks associated with embracing that technology?” “What measures should we implement to best minimize that risk?” In exploring answers to these queries, companies will undoubtedly revisit the scope of their risk management program—specifically, their insurance coverage lines—to minimize exposure to liabilities related to blockchain (read: cyber-related liabilities). For that reason, one question any risk manager should ask is this: “What traditional insurance lines within our coverage portfolio are in place for cyber-related risks, while we work with brokers on obtaining appropriate cyber policies for such risks?” Put more simply, short of cyber coverage (which should not be assumed to cover blockchain-related claims), what traditional policies might provide coverage for blockchain enterprise companies with claims deriving from one of the most vulnerable aspects of a blockchain transaction, the smart contract?

The answer, as the devil would suggest, is in the details—of coverage grants and (creatively argued) exclusions, such as the “act of war” exclusion currently the subject of well-publicized and much anticipated coverage litigation in Illinois and New Jersey. [1] This article focuses on examining traditional coverage for first- and third-party property losses resulting from a cyber event through what is arguably its weakest link, the smart contract, and what is likely to be argued by coverage counsel as an exclusion to coverage for such claims: breach of contract.

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