The growth of the Bitcoin mining industry brings unique considerations for growing operations, particularly for adequate insurance coverage.
It is crucial for Bitcoin mining operations to have adequate insurance coverage and understand their rights to recovery should their operations suffer losses. As far as traditional property-related risks, they are similar to those of any brick-and-mortar technology company, but also have additional, unique considerations.
Who Are The Miners And Who Owns The Mines? Structure Of The Operations
Properly distinguishing between who owns the mine and who owns the ASICs (mining machines, called application-specific integrated circuits) is a critical distinction for insurance purposes. In some instances, the owner of the facility housing the ASICs does not actually own the machines and only provides power, space, support and maintenance for the miners. Other types of Bitcoin mining operations own all of the equipment and retain all of the mining rewards, or have some other types of arrangements.
It is imperative that operations protect their physical assets while maximizing their insurance assets. Doing so requires understanding the insured operation and its interplay with insurance coverage principles.
Insurance Coverage For Bitcoin Mining Operations
ASICs are vulnerable to the elements and electrical interruptions. A mining operation will likely suffer losses if a fire breaks out on the premises, a storm damages ASICs or a power outage prevents access to the internet or turns off environmental controls. While not unique loss scenarios, the nature of the Bitcoin mining business and its structure poses unique challenges when seeking insurance coverage. Bitcoin mining operations must consider who is insured, the location of the operation, valuation and business interruption or contingent business interruption losses.
Given these complexities, insurance procurement and recovery are heavily dependent on the structure of the operation and the policy language, both of which must be carefully considered in light of one another. In both the procurement and recovery stage, the insurer will likely require detailed documentation of the operation’s structure in order to adequately price the risk, determine whether there is coverage for a particular loss and pay out any benefits. Detailed documentation will also make the operation’s claim preparation process smoother than it might otherwise be.
Named Insured And Additional Insureds
A mining operation must be clear about who is getting the insurance coverage it is procuring. Having the wrongly-named insureds listed or omitting necessary parties as named insureds or additional insureds can have severe consequences for coverage. For example, a policy insuring a hosting facility may not necessarily cover ASICs owned by third parties (or have limited coverage). Depending on a hosting facility’s agreements with miners, such coverage may be necessary and a loss may leave one or the other holding the bag. Either way, the hosting facility needs to know the extent of covered parties.
Mobile Mining Operations
Many mining operations are embracing agility and loading their ASICs into highly portable shipping containers and moving them to the cheapest sources of energy. Property policies often exclude coverage for personal property in transport or mobile equipment (or limit their coverage). If the policyholder did not disclose the mobile nature of the operation during the placement of the policy, they may be left without insurance in the event of loss or damage to the mobile units.
Property Damage
A Bitcoin mining operation contains a variety of valuable assets, many of which may be insurable under a property policy. And any loss at a mining facility can create complex valuation issues due to the variety of expensive property located at such a facility.
ASICs are expensive and fragile machines that are increasingly difficult to acquire due to .
This type of loss would present the policyholder with both property loss and business interruption and extra expense loss. A property policy should reimburse the facilities for the costs to repair or replace the hardware, clean the facility and repair the building damage, as well as provide coverage for lost income and extra expense suffered while the business was recuperating. The amount of coverage provided for business interruption losses and extra expenses depends on how the facility operates and generates income, whether it incurs extra costs recovering, and whether it mitigates any of losses through other sources of income of non-continuing expenses. And, as always, any recovery is subject to a policy’s exclusions.
Contingent Business Interruption And Extra Expenses
Contingent business interruption insurance and contingent extra expense coverage is an extension to insurance that reimburses lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier. A power outage at an internet service provider is one such event that a mining operation would want covered by its property policy. Contingent coverage may be triggered by an event at an internet service provider that affects the mining operation and ceases its ability to generate profits for a period of time.
Recently, mining operations in Kazakhstan shut down when they lost connection to the internet due to the government’s decision to cut off access to the internet. The miner operations in Kazakhstan could not run at full capacity for several days and suffered slowdowns while attempting to restore their hash rates. Here, a contingent business interruption property insurance policy should have covered the income losses and extra expenses caused by the outages.
Exclusions And A Tight Insurance Market
As with any insurance policy, coverage is subject to the applicability of exclusions. Since most policyholders are not Bitcoin miners, many property policies contain exclusions for electronic data and/or bitcoin. Such exclusions may exclude Bitcoin mining operations losses in whole or in part, depending on the language of the exclusion. Further, standard property policies have language excluding losses resulting from the loss of keys, loss of bitcoin or other data-related losses. That said, Bitcoin mining insurance options are expanding.
Conclusion
In order for a Bitcoin mining operation to recover insurance proceeds under a property policy, it will have to navigate challenges presented by the structure and nature of its operation and the potential complexity of its losses, especially valuation. It is important for Bitcoin mining operations to have counsel on hand who understand their business with an expertise in the nitty-gritty of maximizing insurance recovery.
This is a guest post by Nick Pappas, Evan Zinaman and Ben Fliegel. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.