Cryptocurrency Insurance: What It Covers and How to Get It

With global crypto ownership exceeding 560 million people and the total cryptocurrency market capitalization hovering near $3.3 trillion, a staggering 89% of digital asset holders remain completely uninsured. This coverage gap represents one of the most significant—but least discussed—risks in the cryptocurrency ecosystem. When hacks, theft, or operational failures occur, most victims have no recourse for recovering their losses.

Cryptocurrency insurance has emerged as a specialized sector within the broader insurance industry, designed to address the unique risks associated with digital assets. However, navigating this complex landscape requires understanding what policies actually cover, which providers offer legitimate protection, and why traditional insurance falls short for crypto holders. This comprehensive guide examines the current state of crypto insurance, major providers, coverage options, and practical steps for securing your digital wealth.

The Insurance Gap: Why Your Homeowners Policy Won't Help

Most cryptocurrency holders assume their digital assets receive some protection under existing insurance policies. This assumption proves catastrophically wrong when losses occur. Traditional homeowners insurance policies contain specific language requiring "direct physical loss" to trigger coverage—a requirement that courts have consistently held does not apply to virtual currency.

The Legal Precedent: Sedaghatpour v. Lemonade Insurance

In 2023, the U.S. Court of Appeals for the Fourth Circuit issued a landmark ruling in Ali Sedaghatpour v. Lemonade Insurance Company that definitively settled the question of cryptocurrency coverage under standard homeowners policies. Sedaghatpour had stored approximately $170,000 in cryptocurrency in a "hot wallet" (online storage) and sought coverage after theft occurred.

The court ruled unequivocally that cryptocurrency's "wholly virtual existence" precludes classification as tangible property under policies requiring "direct physical loss." Citing dictionary definitions and IRS guidance characterizing cryptocurrency as purely digital with no physical existence, the court affirmed Lemonade's denial of coverage beyond the $500 electronic funds transfer limitation.

This ruling built upon the earlier Burt v. Travelers Commercial Insurance Company decision from the Northern District of California (2022), which reached identical conclusions. Together, these cases establish binding precedent that:

• Cryptocurrency is not "property" as defined by traditional insurance policies
• Virtual assets do not suffer "direct physical loss" even when stolen
• Policyholders cannot rely on homeowners insurance for crypto theft recovery
• Even policies covering "money" typically exclude virtual currency through sub-limits or specific exclusions

What Cryptocurrency Insurance Actually Covers

Specialized cryptocurrency insurance policies address specific risks that traditional insurance cannot cover. Understanding these coverage categories helps determine whether insurance is appropriate for your situation and what gaps may remain.

Covered Perils: Theft and Hacking

The primary coverage provided by crypto insurance protects against unauthorized access resulting in asset theft. This includes:

• External Hacking: Cyberattacks targeting exchange systems, hot wallets, or security infrastructure
• Social Engineering: Sophisticated phishing attacks and manipulation of personnel (coverage varies by policy)
• Insider Theft: Malicious actions by employees with access to private keys or custody systems
• Physical Theft: Robbery of hardware devices, paper wallets, or cold storage media containing private keys

Coverage typically applies to the fiat-equivalent value at the time of discovery or settlement, though policy language varies significantly regarding valuation methodology. Some policies use spot prices at loss discovery; others may average prices over specific timeframes.

Key Person and Operational Risks

Beyond theft, specialized policies address operational failures:

• Loss of Private Keys: Coverage when private keys are lost, damaged, or destroyed without possibility of recovery
• Multi-Signature Failure: Protection against operational breakdowns in multi-signature security protocols
• Death or Incapacity: Coverage for losses resulting from key personnel becoming unable to access critical systems
• Business Interruption: Revenue loss protection for businesses unable to operate due to security incidents

Third-Party and Custodial Coverage

For exchanges, custodians, and service providers, liability coverage protects against claims from customers:

• Custodial Liability: Coverage when customer assets are lost while under professional custody
• Cyber Liability: Protection against lawsuits resulting from data breaches or security failures
• Errors and Omissions: Coverage for mistakes in professional services involving digital assets
• Regulatory Actions: Legal expense coverage for regulatory investigations or enforcement actions

Types of Cryptocurrency Insurance Policies

The crypto insurance market offers several distinct policy types, each designed for specific risk profiles and storage methods.

Crime Insurance

Crime policies cover financial losses resulting from criminal acts including theft, fraud, and employee dishonesty. For cryptocurrency, these policies specifically address:

• Theft from hot wallets and online storage
• Employee theft or collusion
• Computer fraud and funds transfer fraud
• Forgery and alteration of financial instruments

Coverage Limits: Crime policies typically offer substantial limits—Coinbase maintains a $320 million crime policy covering hot, warm, and cold storage systems, while Evertas offers policies up to $420 million per incident.

Specie Insurance

Originally developed for precious metals and high-value assets stored in vaults, specie insurance has adapted to cover "cold storage" cryptocurrency—assets held offline in hardware wallets or air-gapped systems.

Specie coverage specifically protects against:

• Physical theft of storage devices
• Damage or destruction of hardware wallets
• Loss during transportation
• Insider theft from vault facilities

BitGo, for example, maintains $250 million in specie coverage for assets held in their qualified cold storage, backed by Lloyd's of London syndicates.

Cyber Insurance

While standard cyber policies historically excluded cryptocurrency, specialized versions now address digital asset risks. These policies focus on:

• First-party losses from security breaches
• Third-party liability for data breaches
• Ransomware payments (increasingly including crypto)
• Incident response and forensic investigation costs

However, most standalone cyber policies still exclude "voluntary" parting with cryptocurrency—meaning scams where users are tricked into sending funds often remain uncovered.

Custodial Insurance

This specialized category protects professional custodians holding client assets. Unlike crime policies covering the institution's own assets, custodial insurance protects against liability for client losses. These policies require:

• Segregated client accounts
• Regular attestation and auditing
• Specific security protocols
• Qualified custodian status under relevant regulations

Major Cryptocurrency Insurance Providers

Evertas: The Crypto-Native Specialist

Coinbase: Integrated Exchange Protection

BitGo: Institutional Custody Insurance

Munich Re: Comprehensive Crime Coverage

Coincover + Lloyd's of London: Consumer Protection

How to Obtain Cryptocurrency Insurance

Securing crypto insurance requires navigating a complex application process with stringent requirements. Understanding these steps helps prepare for successful underwriting.

Step 1: Risk Assessment and Documentation

Before approaching insurers, conduct a thorough internal risk assessment including:

• Asset Valuation: Document total value of digital assets requiring coverage, including historical acquisition prices and current valuations
• Storage Analysis: Detail percentage of assets in hot vs. cold storage, with specific descriptions of cold storage methods
• SecurityInfrastructure: Document multi-signature implementations, hardware security modules (HSMs), and key management protocols
• Operational Procedures: Describe access controls, employee vetting processes, and internal controls
• Transaction Volume: Provide historical data on transaction frequency and values

Step 2: Select Appropriate Provider Type

For Institutions: Contact specialized brokers with crypto expertise or approach Lloyd's coverholders like Evertas directly. Traditional brokers often lack the technical knowledge to properly place crypto risks.

For Individuals: Options remain limited. Consider:

• Custody solutions with integrated insurance (Coinbase Custody, BitGo)
• Specie insurance through high-value asset specialists
• Excess and surplus (E&S) lines markets for custom policies
• Coincover's consumer products for hot wallet protection

Step 3: Underwriting Due Diligence

Insurers will conduct extensive due diligence including:

• KYC/AML Compliance: Proof of Know-Your-Customer and Anti-Money-Laundering procedures
• Security Audits: Independent penetration testing and security assessments
• Financial Review: Balance sheet analysis, funding sources, and financial stability
• Regulatory Compliance: Licenses (BitLicense, CASP authorization), regulatory filings, and compliance history
• Claims History: Prior security incidents, losses, or insurance claims
• Governance Structure: Board composition, risk management committees, and oversight procedures

Step 4: Policy Structuring and Negotiation

Work with underwriters to structure appropriate coverage:

• Coverage Limits: Determine appropriate limits based on asset values and risk tolerance (considering premiums increase substantially with higher limits)
• Deductibles: Negotiate self-insured retentions based on financial capacity
• Sub-limits: Address specific caps for hot wallets, social engineering, or specific perils
• Exclusions: Understand what is explicitly excluded (typically market loss, user error, unclaimed forks)
• Valuation Method: Agree on pricing methodology (spot price at discovery, average over time, specific exchange rates)

Step 5: Premium Calculation and Binding

Premiums are calculated based on:

Factor	Impact on Premium
Asset Value	Higher values increase premiums (typically 1-5% of coverage limit annually)
Storage Method	Cold storage significantly lower rates than hot wallet coverage
Security Controls	Multi-sig, HSMs, and audits reduce premiums
Claims History	Prior losses increase premiums or result in declination
Regulatory Status	Licensed entities receive better rates than unregulated operations
Business Model	Exchanges pay more than buy-and-hold funds due to transaction risk

Typical annual premiums range from 1% to 5% of coverage limits for institutional policies, with retail coverage often commanding higher percentages due to fixed administrative costs.

What Is NOT Covered: Critical Exclusions

Understanding policy exclusions proves as important as understanding coverage. Common exclusions include:

Market and Price Risk

No crypto insurance policy covers losses due to market price declines. If Bitcoin drops 50% in value, that loss is not insurable. Policies cover theft and operational failures, not investment performance.

User Error and Voluntary Transfers

Policies consistently exclude:

• Sending cryptocurrency to incorrect addresses
• Falling for scams that trick users into voluntarily transferring funds
• Lost passwords or seed phrases without proper backup procedures
• Accidental deletion of wallet files (unless covered by specific key loss provisions)

Regulatory and Legal Actions

Most policies exclude losses from:

• Government seizure or asset freezing
• Cryptocurrency being declared illegal in relevant jurisdictions
• Sanctions violations (OFAC)
• Regulatory actions rendering assets inaccessible

War and Catastrophic Events

Standard war exclusions apply, along with specific crypto-related catastrophic exclusions:

• Blockchain protocol failures (51% attacks on major chains)
• Consensus mechanism failures
• Smart contract vulnerabilities (for DeFi positions)
• Acts by terrorist organizations or state actors

Unreported Wallets and Undisclosed Assets

Policies require full disclosure of all wallets and assets. Undisclosed wallets receive no coverage, and failure to report new wallets or significant balance changes can void coverage.

NFT and DeFi Insurance: The Frontier

Non-fungible tokens (NFTs) and decentralized finance (DeFi) protocols present unique insurance challenges that remain largely unsolved.

NFT Insurance Challenges

Standard property insurance cannot cover NFTs because:

• NFTs cannot be "damaged" in the traditional sense (they exist on blockchain)
• Valuation is extremely volatile and subjective
• Art insurance requires established markets for valuation, which NFT markets lack
• Cyber insurance covers the platform's liability, not individual NFT owner losses

Some platforms like Coinbase explicitly exclude NFTs from their crime policies. Specialized NFT insurance remains largely unavailable except through specific custody arrangements where the custodian maintains general coverage that incidentally protects held NFTs.

DeFi and Smart Contract Coverage

DeFi insurance exists primarily through decentralized, on-chain protocols rather than traditional insurers:

• Nexus Mutual: Decentralized alternative to insurance covering smart contract failures, exchange hacks, and custody risks
• InsurAce: Multi-chain protocol offering portfolio-based coverage
• Bridge Mutual: Coverage for stablecoin de-pegs, exchange hacks, and smart contract exploits

These "decentralized insurance" protocols operate through smart contracts where members pool funds and vote on claims. However, they lack the regulatory backing and financial strength ratings of traditional insurers like Lloyd's or Munich Re.

Traditional insurers are beginning to offer specialized DeFi coverage for institutional investors, but this remains extremely limited and expensive.

Making a Claim: The Process

When losses occur, navigating the claims process requires prompt action and detailed documentation.

Immediate Notification

Most policies require notification within 24-72 hours of discovery. Failure to promptly notify can result in claim denial. Contact your broker or insurer immediately upon discovering any potential loss.

Required Documentation

Prepare comprehensive documentation including:

• Blockchain Forensics: Transaction hashes, wallet addresses, and on-chain evidence of unauthorized transfers
• Incident Reports: Detailed timeline of events, how the loss was discovered, and immediate response actions
• Security Audit Reports: Post-incident forensic analysis identifying attack vectors and security failures
• Proof of Ownership: Documentation establishing your control over the affected wallets prior to loss
• Compliance Records: Evidence that security protocols and policy conditions were maintained
• Police Reports: Many insurers require filing police reports for theft claims

Claims Investigation

The insurer will conduct investigations potentially including:

• Blockchain analysis to trace stolen funds
• Review of security protocols and compliance with policy conditions
• Interviews with key personnel
• Examination of system logs and access records
• Assessment of whether loss falls within covered perils or exclusions

Settlement

For approved claims, settlement typically occurs within 48 hours to several weeks depending on complexity. Payment is usually made in fiat currency equivalent to the asset value at loss discovery, though some policies (notably Evertas through Nayms) offer crypto-denominated settlements.

The Future of Crypto Insurance

The cryptocurrency insurance market is evolving rapidly, with several trends shaping future development:

Market Maturation

According to GlobalData's 2024 Emerging Trends Insurance Consumer Survey, while only 11% of crypto holders currently have insurance, 42% of the uninsured express readiness to purchase coverage, and another 26% are open to considering it. This suggests a massive addressable market if providers can develop accessible products.

Regulatory Clarity

The EU's Markets in Crypto Assets (MiCA) regulation and similar frameworks worldwide are expected to standardize custody and operational requirements, making underwriting easier and potentially reducing premiums as risks become more predictable.

Product Innovation

On-chain insurance protocols are converging with traditional insurance through partnerships like Evertas-Nayms, enabling programmable coverage, automated claims processing through oracles, and crypto-native payment methods.

Capacity Expansion

As major reinsurers like Munich Re, Lloyd's syndicates, and traditional carriers gain comfort with crypto risks, overall market capacity is increasing—though it remains far below demand levels.

Frequently Asked Questions

Conclusion: Protecting Your Digital Wealth

The cryptocurrency insurance landscape reveals a stark reality: while 89% of crypto holders remain uninsured, viable coverage options exist primarily for sophisticated institutions and high-net-worth individuals willing to navigate complex underwriting processes. Standard insurance fails completely for digital assets, and the legal precedent established by federal courts confirms that homeowners policies offer no protection.

For most individual investors, the practical path forward involves:

• Using Reputable Custodians: Store assets with regulated custodians like Coinbase Custody or BitGo that maintain substantial crime insurance—but understand that this protects against their system failures, not your account compromises
• Cold Storage: Maintain the majority of long-term holdings in hardware wallets or other cold storage, reducing exposure to online theft (though this transfers risk to physical security and key management)
• Security Hygiene: Implement multi-signature wallets, hardware security keys, and rigorous access controls to reduce the likelihood of losses that insurance wouldn't cover anyway
• Limited Hot Wallet Exposure: Keep only small amounts needed for active trading in hot wallets or exchange accounts
• Monitoring Market Development: As the insurance market matures and regulatory frameworks like MiCA standardize requirements, individual insurance products may become more accessible and affordable

Institutional investors and businesses handling significant crypto assets should engage specialized brokers with crypto expertise—traditional insurance brokers often lack the technical knowledge to properly structure coverage. Consider working directly with Lloyd's coverholders like Evertas or specialized divisions of major carriers like Munich Re.

The 42% of uninsured crypto holders expressing interest in coverage represents a market opportunity that insurers are gradually addressing. However, until standard products emerge for retail consumers, cryptocurrency remains primarily a self-insured asset class requiring rigorous security practices and realistic expectations about risk transfer limitations.

At HiiCrypto, we emphasize that insurance complements but never replaces proper security protocols. The exclusions for user error, market loss, and voluntary transfers mean that even comprehensive coverage leaves significant exposures. In the digital asset space, prevention through security best practices remains far more valuable than post-loss insurance recovery.