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April 26, 2022

Developments In NFT Insurance

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In our previous posts highlighting the use of NFT(s) as collateral, we mentioned that the lack of insurance for NFT(s) might become a factor that alters the risk allocation arrangement commonly adopted in a conventional secured financing setting. Now, IMA Financial Group (the "IMA"), an established insurance broker and wealth management firm, is launching a research facility in Decentraland to explore how and what insurance products might be suitable for the metaverse and NFT(s) (and, potentially, in DeFi lending settings).

Justin Jacobs, senior vice president at IMA and architect of Web3Labs (IMA's R&D entity in Decentraland), stated in an interview that the $40 billion asset class (i.e., NFT(s) has "no traditional insurance products" and that "[m]any NFTs I think would be considered some form of art, and today we transact a ton of business in the realm of specie insurance; fine art, collectibles, things of that nature." Web3Labs also aims to "create a location where transactions (e.g., insurance coverage negotiation) could take place", making it a virtual insurance company that carries out "real" insurance transactions in the metaverse for avatars.

While it is exciting to see how NFT insurance would pan out, a few issues are worth observing when it comes to specie insurance for NFT(s) and how the actual terms (or language) used for such insurance will be tailored in accordance with the nature of blockchain and tokens.

In general, specie insurance is a specialized form of coverage that is designed to protect portable high-value items, including precious stones (e.g., diamond), securities and (sometimes) cryptocurrencies. The coverage of specie insurance would usually cover "all risks of physical loss or damage basis" (such as loss attributable to natural disaster or theft), and the language used in the insurance policy would be specifically "tailored to unique risk requirements." Accordingly, such type of insurance would be an ideal option for insuring NFT(s) because the items insured thereunder are in nature similar to a NFT- valuable, unique and transactable.

However, despite the similarity, a specie insurance for NFT(s) would still require a precise description for the core "risks" (which are the events where the insured are entitled to receive insurance proceeds from the insurer), and such description might not be easy to draft due to the nature of blockchain and the way NFTs are transacted. For instance, when defining the loss of a NFT, the insurer will not only consider what constitutes an event of loss but whether the assumption of the occurrence of such event is justified. On the one hand, an insurer might find it reasonable to assume the risk that a NFT might be stolen by a hacker without negligence on the side of the NFT holder and/or custodian, but, on the other hand, the same insurer might not find it reasonable to assume the risk of loss that occurs as a result of the underlying blockchain's forking event, because the chance of loss from such event might be incalculable and would affect a significant amount of NFTs based on that blockchain.

Another example is that an insurer might be willing to insure a NFT holder against certain events where the NFT becomes inaccessible, such as the loss of the holder's private key or the malfunction of the holder's cold wallet, as that risk and the likelihood of such events are more manageable and determinable. However, the same insurer might not be willing to assume the risk of such inaccessibility when a NFT is held by a DAO that lacks comprehensive rules and/or voting mechanisms governing the access to or transfer of the NFT. In short, an insurer's ability and willingness to provide insurance coverage might vary even if the outcome of the risk is the same, and it thus becomes important to keep an eye on how an insurer would phrase certain risks in its NFT insurance policy in response to the nature and the unique elements of blockchain and tokens.

 Now, IMA Financial Group (the "IMA"), an established insurance broker and wealth management firm, is launching a research facility in Decentraland to explore how and what insurance products might be suitable for the metaverse and NFT(s) (and, potentially, in DeFi lending settings).

Justin Jacobs, senior vice president at IMA and architect of Web3Labs (IMA's R&D entity in Decentraland), stated in an interview that the $40 billion asset class (i.e., NFT(s) has "no traditional insurance products" and that "[m]any NFTs I think would be considered some form of art, and today we transact a ton of business in the realm of specie insurance; fine art, collectibles, things of that nature." Web3Labs also aims to "create a location where transactions (e.g., insurance coverage negotiation) could take place", making it a virtual insurance company that carries out "real" insurance transactions in the metaverse for avatars.

While it is exciting to see how NFT insurance would pan out, a few issues are worth observing when it comes to specie insurance for NFT(s) and how the actual terms (or language) used for such insurance will be tailored in accordance with the nature of blockchain and tokens.

In general, specie insurance is a specialized form of coverage that is designed to protect portable high-value items, including precious stones (e.g., diamond), securities and (sometimes) cryptocurrencies. The coverage of specie insurance would usually cover "all risks of physical loss or damage basis" (such as loss attributable to natural disaster or theft), and the language used in the insurance policy would be specifically "tailored to unique risk requirements." Accordingly, such type of insurance would be an ideal option for insuring NFT(s) because the items insured thereunder are in nature similar to a NFT- valuable, unique and transactable.

However, despite the similarity, a specie insurance for NFT(s) would still require a precise description for the core "risks" (which are the events where the insured are entitled to receive insurance proceeds from the insurer), and such description might not be easy to draft due to the nature of blockchain and the way NFTs are transacted. For instance, when defining the loss of a NFT, the insurer will not only consider what constitutes an event of loss but whether the assumption of the occurrence of such event is justified. On the one hand, an insurer might find it reasonable to assume the risk that a NFT might be stolen by a hacker without negligence on the side of the NFT holder and/or custodian, but, on the other hand, the same insurer might not find it reasonable to assume the risk of loss that occurs as a result of the underlying blockchain's forking event, because the chance of loss from such event might be incalculable and would affect a significant amount of NFTs based on that blockchain.

Another example is that an insurer might be willing to insure a NFT holder against certain events where the NFT becomes inaccessible, such as the loss of the holder's private key or the malfunction of the holder's cold wallet, as that risk and the likelihood of such events are more manageable and determinable. However, the same insurer might not be willing to assume the risk of such inaccessibility when a NFT is held by a DAO that lacks comprehensive rules and/or voting mechanisms governing the access to or transfer of the NFT. In short, an insurer's ability and willingness to provide insurance coverage might vary even if the outcome of the risk is the same, and it thus becomes important to keep an eye on how an insurer would phrase certain risks in its NFT insurance policy in response to the nature and the unique elements of blockchain and tokens.

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