Digital works of art create new risks

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Selling digital works of art represented by non-fungible tokens – essentially a point on a digital ledger or blockchain that confirms ownership of an original – is gaining traction in the art world, attracting regulatory attention and introducing auction houses unique risk management questions, traders and other people involved in the transactions.

In March, Christie’s auction house sold the digital artwork “Everydays: The First 5000 Days” by Mike Winkelmann, known as Beeple, for a staggering 69 million US dollars. The sale raised the profile of the emerging art format.

Other NFT art includes videos and recordings. The assets are often bought and sold using the cryptocurrency ether on the Ethereum blockchain.

Uncertainties regarding the commercial exposures generated by such digital art sales are rapidly becoming a topic of discussion in the insurance industry.

“I had a conversation with one of our clients about NFTs and their implications,” said David Ktshozyan, senior associate with Clyde & Co. law firm in Los Angeles.

“One of the things that sparked interest was the sale of $ 69 million at Christie’s in March,” said Ktshozyan, who represents the insurers.

Traditional art and auction houses are exposed to very different risks than digital art, he said.

“Typically, in a traditional art setting, one is concerned about physical damage to a physical work of art,” said Ktshozyan while passing through an auction, possibly due to ill-treatment.

With NFTs, “you don’t have the same concerns and you don’t have the same risks because everything is on the internet,” he said.

Jennifer Schipf, New York’s global chief underwriting officer for visual arts and species at Axa XL, a unit of Axa SA, said she had received “a handful” of inquiries from clients insuring digital assets, including NFTs and bitcoin collections want.

Ms. Schipf said that the species segment of the Axa XL business includes cryptocurrencies and a bit of cold storage with bitcoin, “things that are not related to art but are more like valuable goods.” The coverage for NFTs could ultimately include some sort of hybrid product with cyber, fine art, and possibly other components, she said.

Art insurance only covers physical loss or damage. If a work of art like an NFT is not in physical form, it cannot suffer such damage, said Joe Dunn, president and CEO of Huntington T. Block Insurance Agency Inc., a Washington-based arts division of Aon PLC. It could be “a bit difficult to come up with a hypothetical damage scenario that a traditional fine art insurance policy would respond to positively,” he said.

For example, if a collector loses the encryption key or password of a hard drive containing the NFT artwork, the digital file would still exist and therefore the loss would be financial, not physical, Dunn said.

However, there can be significant risk management concerns for those involved in selling NFT.

“The first place you’ll look, but not the only place, is your failure and omission insurance. From an exclusion point of view, is there anything that would preclude cover?” Paul King, Senior Vice President, Executive and Professional Advisor for National Risk Solutions at USI Insurance Services Inc., based in Dallas.

“I think there is certainly an E&O component,” but policyholders should confirm whether their existing insurance language is broad enough or does not directly or indirectly preclude advice on selling digital assets, said Jackie Quintal, who works for the United States of Marsh LLC heads the Digital Asset Group in New York.



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