Protecting Your Bitcoin Mining Operations: Insurance 101
September 23, 2022
As the Bitcoin mining industry grows and matures, savvy investors will use insurance and risk management techniques to protect their assets. Insurance is based on legal contracts and can be challenging to interpret, but these five tips will help you get started.
Tip 1: Understand who has the risk of loss or obligation to insure.
Review your loans, leases and contracts to determine if you are obliged to insure anything other than your own application-specific integrated circuits (ASICs). The most common business models are either an owner/operator (a firm that owns its physical location and miners and mines for its own account) or a space renter (firms that rent space from a landlord).
If you own your location, whether a warehouse or a mobile location/box/trailer, you should insure against property damage to the building or box and the contents, miners and ASICs. If you rent space, be aware that each lease is different and that you may be obliged to insure the landlord’s building or boxes, which would be more common if you were the sole tenant. If this is the case, your landlord will likely ask you to add them as an additional insured and/or loss payee to the policy and may require you to purchase replacement cost valuation rather than actual cash value. In addition to property insurance, you might need liability, directors and officers, crime or transportation insurance.
Tip 2: Consider insurance values and limits.
Most property damage policies provide replacement cost new (RC). This means that the insurer will repair or replace your equipment with like kind and quality at the time of loss without deduction for depreciation. It is also possible to obtain the agreed or actual cash value (ACV).
To purchase property damage coverage, you will need to know the replacement cost of all your ASICs, peripheral equipment and any buildings and structures you need to insure. This is not book value or accounting value trended. It is important to provide the most accurate values when purchasing a policy because many policies have a “coinsurance clause” that will penalize you if you underreport values by reducing the claim amount paid out at the time of loss.
Once you provide your values, the insurer will apply a rate against this value to determine the premium to charge for taking on the risk. Certain policies will also include an increased value clause that allows your reported values to move upwards (typically 5-10%) and still have full coverage at the time of loss. If you find that your values have increased or decreased during the life of the annual policy, you should alert your broker.
The insurance limit selected is often set by the total values at risk at your largest location. If you have multiple locations nearby, known as an aggregation, you may need to consider a higher limit. The premium rate insurers charge tends to decrease with the purchase of higher limits. Often there is a minimum premium for a policy, which is like a deposit.
Tip 3. Manage risks and choose deductibles thoughtfully.
Insurers determine premiums based on several factors, including the following:
- Perils that your location is exposed to (earthquakes, hail, hurricanes, fire)
- Your COPE underwriting factors (construction, occupancy, protection and exposure)
- Your risk management and mitigation efforts
- Your deductible
- Your prior loss history
The more you can do to mitigate risks, the lower the premium is likely to be. For example, a firm might install 24/7 monitoring to ensure that buildings and their contents are protected, add fencing or entry systems to restrict access, purchase backup generators to avoid power loss or upgrade sprinkler systems to reduce fire-related damage.
If your facility is in an area prone to perils such as hurricanes, freezing or earthquakes, your rate may be higher than it is for insureds in other regions because of these additional risks. However, you can still differentiate your firm and obtain a lower premium by taking preventive risk measures noted above, having a tested and trained business continuity plan and then making pooling arrangements.
In addition to managing risks well, consider the deductible you are willing to pay. Property damage deductibles, the amount you pay for a loss before your insurer begins to pay, can range from thousands to millions of dollars. Often by taking a larger deductible, you signal to the insurer that you believe your location is well protected and managed. As a result, sometimes an insurer will decrease the rate it charges you. Work with your broker to complete the insurance application and evaluate the limits and deductible options to obtain the best results.
Tip 4. Read the policy carefully.
Not all policies are created equal. An “all risk” policy form should provide coverage for fire, hail, earthquake, flood, named windstorms, freeze and any other cause not expressly excluded within the policy form.
Work with your agent or broker to ensure that your policy does not exclude items you expect to be insured. Some Bitcoin mining property damage policies have excluded natural catastrophe perils like earthquakes, floods and named windstorms. This could be an unpleasant surprise for those in states like California and Texas. Most property damage policies exclude wear and tear, mysterious disappearance, property underground, cyber, terrorism, war and business interruption.
Tip 5. Ask about business interruption coverage.
Business interruption (BI) coverage can be purchased in addition to property coverage. It is designed to indemnify (make whole) a company in the event of financial hardship (loss of profit, extra expenses and continuing expenses) due to fire, natural disaster or any other covered “peril.” BI coverage in the Bitcoin mining space is being developed.
Covered BI losses depending on the policy specifics could include the following:
- Lost net income, based on financial records
- Cost of paying a mortgage, rent or lease
- Loan payments
- Tax payments
- Fixed costs that continue during a loss
- Losses related to a forced closure by civil authorities
The BI claim calculation typically begins after the waiting period (24 to 72 hours after the loss occurs) and/or after the application of the agreed deductible. Note that this coverage is not automatically included as part of a property policy and must be purchased separately.
Bonus Tip: Work with a Trusted Advisor
Discuss your policy in depth with a broker or advisor who understands the Bitcoin mining industry. Every policy has different coverage specifics, so it’s crucial to read it carefully. Make sure you know what is—and isn’t—covered before you need it.
Tanja Maffei Chan, Senior Vice President, Global Risk Management Leader
The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.
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