The below is an excerpt from the Deloitte Art & Finance Report 2021.
As high net worth collectors consider diversifying their art collections to include non-fungible tokens (NFTs) associated with digital artworks, there is little doubt that risk mitigation and potential leverage opportunities for this rapidly-expanding asset class will be top-of-mind.
To get a sense of this developing landscape, Megan Noh, Co-chair of Pryor Cashman LLP's Art Law Group and counsel to many sophisticated collectors spoke with Ankur Kacker, Senior Vice President of Specie & Digital Assets at March, the largest global insurance broker and a leader in the fine art, jewelry, and species categories; Drew Watson, Art Services Specialist at Bank of America Private Banks, which provides advisory and credit facility services to collectors; and Claudia Hess, CEO of Hess Art Advisory and a certified member of the Appraisers Association of America.
Megan Noh (MN): Established collectors are accustomed to the availability of comprehensive insurance policies which address risks associated with traditional artworks such as paintings and sculptures. What risks are insurable in the context of NFTs, and what is not covered?
Ankur Kacker (AK): Traditional fine art policies have all been for "all risks" of physical loss or damage. This is because insurers are able to determine risks which they may face in the physical art world. However, in the NFT or cryptocurrency world, it's not currently possible for insurers to do this, and therefore relevant policies provide "named peril" cover, including infidelity and third-party physical attacks on locations where the assets are stored.
In simplest terms, the product available to insure an NFT - meaning the token itself - will recognize as an insured "loss" a situation where an NFT owner has lost access to their token. A number of traditional exclusions apply, such as insurers being unable to cover "systematic" risks (in the context of NFTs, this would include risks associated with the failure of the blockchain or smart contract). Any risk which is too remote may also be excluded. For example, if a policyholder's customer is compelled under duress to send transactional instructions which the policyholder acts upon, the underwriter is unlikely to provide cover for loss resulting from the resulting diversion of the token to a bad actor's digital wallet.
MN: Some collectors have been surprised to learn that an NFT does not typically contain the digital artwork with which it's associated, but rather references that content, which is often stored in another location. Assuming that the token and referenced artwork are part of a package being acquired (which is not the case for all NFT sales), can collectors insure the digital artwork component?
AK: With respect to a digital artwork that is referenced by the token, but is separately stored, the market remains untested as to whether intellectual property insurance or cyber insurance could respond to a loss event.
MN: What criteria are underwriters taking into consideration in evaluating the availability of coverage, and how can policy-holders collaborate with the underwriter in minimizing risk?
AK: As this is a new space for the insurance market, insurers are being careful and selective both about the clients and the insured assets. Regarding the former, insurers are looking for best-in-class insureds with whom they can build relationships, establish a detailed mutual understanding of what the relevant policy covers, and from whom they can also learn about their business and/or investment in the asset class.
With respect to the latter, importantly, at the early stage in the development of NFT insurance products, insurers are unable to provide coverage unless the NFTs are stored with reputable third-party custodians. This is due to the high risk of moral hazard, and the fact that there is no global standard for NFT storage. As the industry matures, insurers are likely to be responsive to development in security and storage protocols.
Read the transcript of the full discussion on page 304 of the Deloitte Art & Finance Report 2021. The report may be accessed through the link below.
Published in the Deloitte Art & Finance Report 2021
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