Blockchain startups are intent on pushing the boundaries of technology further than we’ve ever witnessed before. Unfortunately, the insurance industry doesn’t move at the speed of technology and is having a difficult time differentiating between cryptocurrencies and the underlying blockchain technology, making it difficult for startups to purchase the appropriate coverage.
However, just because blockchain technology is set to disrupt multiple industries doesn’t mean traditional business protection should fall by the wayside. In fact, blockchain startups still need comprehensive insurance packages to protect themselves from claims that could arise as they continue to innovate.
As CEO of an independent insurance brokerage in Manhattan, I’ve spoken with several founders of blockchain startups in an effort to better gauge the risks their businesses are facing and determine the best insurance tools available for them to protect themselves. Below, I outline the three types of insurance that blockchain startups should consider for comprehensive coverage.
(Full disclosure: My company sells E&O, cyber and D&O insurance policies.)
1. E&O Insurance
Otherwise known as professional liability insurance, errors and omissions (E&O) insurance will protect your blockchain startup in case you’re accused of making an error and sued. Errors could include a multitude of allegations, including flawed code or hardware, a missed deadline, overall project mismanagement or professional negligence such as incomplete or poor work.
For example, if a piece of code results in a network crash or security breach, or if a client perceives that you haven’t held up your end of a contract, they can sue you. Consider that 28% of IT projects are deemed outright failures, according to a 2017 report by PMI. To protect your reputation and your finances, professional liability insurance helps pay for court costs, defense fees and any settlements owed.
2. Cyber Liability
This insurance is something every blockchain startup should investigate, especially if they collect, store or process the personally identifiable information (PII) of customers and employees. Blockchain technology encompasses login information and other personal data that falls under the purview of privacy laws, such as the General Data Protection Regulation recently implemented in the EU. This insurance will protect companies in the event of data breaches and fines or penalties from regulators.
Policies can also help with the costs of crisis management, data restoration and monitoring, and investigation into the costs of a breach. When you keep in mind that the average cost of a data breach in 2018 is $3.86 million, the need for cyber liability insurance becomes clear.
3. D&O Insurance
Originally thought to be only for larger corporations, blockchain startups should consider directors and officers (D&O) liability insurance, especially when they’re just starting out. In fact, investing in D&O may be a requirement by contract to enter into partnerships with other parties or to gain investment backing.
For example, if you’re inviting a director to a position on your board, they will likely want assurance that they won’t risk their finances if they make a faulty business decision while in a management role. If a startup has D&O insurance, then the company can protect the assets of its directors and board members and, by extension, the organization itself from accusations of wrongdoing, as well as defense costs, damages and settlements.
With blockchain startups disrupting a record number of industries, startup founders need to find every opportunity to protect their investors, employees and intellectual property.