Since the crypto industry is new and has faced many regulation issues before being fully embraced, many of its executives have suffered since they are not able to access the appropriate insurance cover for their business.
Despite the wide crypto adoption, there are still some banks and financial institutions that are not open to crypto entrepreneurs. In many places, it has been almost impossible for crypto executives to get directors and officers liability insurance. The main elephant in the room is crypto regulatory issues which is still a challenge in most places. There is also a big misconception of crypto. Many believe that it is being used for money laundering. That has made it a hard tackle for crypto entrepreneurs.
In many places in the world, a fiduciary duty is imposed on directors and executive officers that are shareholders of the cooperation. That means that the concerned parties hold a high legal standard of care such that if there is a breach. It means that serious penalties are imposed on the directors, which may lead to a jail sentence.
There is every reason why directors or executives should have liability protection. It is only fair that they should be free to handle the business operations with freedom rather than living in fear of what their actions could lead them to. Limitation of liability is also important in promoting healthy risk-taking, which is healthy for the organization.
There should be a clear line between the legal entity of cooperation and stakeholder, which is the case in other industries. With other industries, the directors and officers are protected from liability by the corporate by-laws. With this, the corporation stands for the costs in case the directors or officers get sued or face charges. It is unfair for the directors or officers to get sued for doing their jobs and face charges.
In normal cases, a corporation should have an indemnification agreement with the director or officer, as part of the corporate by-laws. This is different from an in-house indemnification agreement. As for the in-house, the relevant parties have to agree before the agreement is terminated. This is entirely different from the by-law’s indemnification. As for the corporate by-laws, the agreement can be terminated at any point so long as the appropriate director or shareholder approves.
Is D&O insurance necessary?
Just like in other industries, insurance is important in mitigating risk and costs. When the directors or officers face legal charges, it means that the corporation is also facing a legal charge, which is costly. When the corporation is sued, it means that it will have to defend itself in court and pay the legal charges, which cuts back on the profits of the company.
When there is no insurance, there may be a conflict of interest between the officer and the corporation. It is not obvious that the officer will have the same interests as that of the corporation. This may make the officer seek their own legal counsel. As much as the case may end up well, it will affect the relations of the corporation and the officer, which may impact the company.
Crypto companies, therefore, need D&O insurance. This is especially based on the fact that crypto companies face many security risks such as cybersecurity.
Why is it hard to get insurance?
Since the crypto industry is booming in the current times, it is expected that insurance companies would jump on board, but why don’t they?
With COVID-19, some insurance companies are not willing to risk by providing D&O insurance. They believe that it is a very volatile period with so much uncertainty in the market.
There are also gaps in regulation when it comes to cryptocurrencies. There are still no clear laws concerning cryptocurrencies in many areas, and that puts off many potential insurers.
There are also still many people in the insurance industry that do not really understand crypto. Hence, it will be hard for them to insure something they cannot comprehend.
With the hope that crypto is moving mainstream, there is hope that the vital industries such as insurance will jump onboard.