Head of Digital Assets
As a web3 company, on the cutting edge of innovation, it can be important to ensure you have the right insurance to cover the potential risks you could face. In this quick guide, we’ll break down the three main ways you can purchase the cover you may need to keep your business running.
1. Through brokers
Insurance brokers – like Superscript – mainly cater to companies that have raised a Series A or beyond and are looking for, or needing, advice. They’re also a good option if you’re seeking larger or international markets, and for those wanting an outsourced risk manager or alternative risk transfer methods.
Brokers are experts in looking at risks your business faces and finding the right ways to transfer that risk so you have more money on your balance sheet to spend on expansion or building out your team. Rather than holding a correlated amount on your balance sheet to offset the risk (self-insurance), insurance frees this capital up and allows you to do what you do best: build your business.
When working with a broker, you will be given advice on where your biggest risks are and the tailored cover that may help to cover those risks. They’ll also provide you with access to a wide insurance market and to other service providers – like lawyers, accountants and venture capital investors – to support your business as it grows. Finally, they should also support in handling any claims you might have to make, advocating on your behalf to ensure you get reimbursed should the worst happen.
Brokers can, however, be slow moving, requiring a lead time to get you up and running with your cover. They can also favour some insurers over others and may not have access to the wider insurance market. Finally, using a broker can sometimes be more expensive – this isn’t always the case – but because brokers need to be paid, this can bump up the premium.
When working with a broker, it’s important to ensure they understand your business. Web3 technology is obviously your forte, but there is no doubt that it is a complex space. So when you’re choosing a broker to work with, it’s important to ensure they know your business and industry inside and out.
On-chain platform “insurance” is not legally insurance. It’s predominantly for those who need very niche cover for their internal risk management. It’s normally used for smart contract or slashing risk as these types of cover aren’t normally required under a third-party contract. Some companies can even use on-chain in conjunction with traditional insurance as a deductible infill, which means that a company can buy a higher self-insured retention (typically $1m+) and then buy on-chain cover for $1m. This means if there is a claim, the company can use the on-chain cover for the first $1m and then use insurance for anything over and above.
On-chain is incredibly quick to set up – you can get covered in minutes. It’s also a very cost-effective option, and if you don’t claim, you’ll get a return on your investment. It’s a crypto-native option, meaning you don’t need to complete application forms or deal with anything off-chain. The yield you earn correlates to the risk of your stake being slashed: the more risky the underlying contract, the more you stand to earn.
On the other hand, as it’s not regulated, if you need to make a claim there is little recourse if you’re unhappy with the outcome. On-chain is limited to staked capital, meaning you can’t use fiat currency, instead it’s normally denominated in the native token of the marketplace you’re using. Finally, on-chain is currently unrecognised by contractual requirements, meaning that if you wanted to enter into a contractual agreement with an off-chain company, you would still have to get regulated insurance from a TradFi insurer.
This type of insurance is mainly for smaller firms below Series A that need insurance quickly. If you’re going for an on-platform option, you need to be comfortable understanding your own risk and happy managing it yourself. It takes minutes to purchase insurance this way and is done through easy access, self-serve sites. When complete, often all your documents will be stored online, enabling you to be able to see and access them as and when you need.
The issue, however, is that there is no advice at any stage, so you have to be comfortable understanding and managing your own business risks; you’ll have to be certain that you’re covered for the things you want and need to be covered for. Also, you’ll typically only be quoted by one insurer, rather than having many to choose from when it comes to price or types of cover; this means it may not be entirely fit for purpose.
Getting the right insurance can be complex. Insurance documentation contains a lot of legalese and jargon, and as a web3 company, you have a wide array of risk to consider – as I discussed in an earlier blog – so ensuring you have the right cover is paramount.
It’s important to note that in the UK, only one type of insurance is usually required by law if you have employees: employers’ liability insurance. You’re only likely to need this cover if anyone works for you, and if you don’t get the right cover, you can be fined £2,500 every day you’re not properly insured. Although other types of insurance aren’t required by law, it’s still a good idea to consider getting covered.
If you’re interested in learning more about the off-chain risks that web3 companies can face, and how insurance can support your business, get your eyes on my most recent webinar, where I chat with Jennifer Stivrins and Meredith Challender, Partners at law firm Kissel Straton & Wilmer on this very topic. Alternatively, reach out to any of the Superscript web3 team.
This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
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