No Result
View All Result
SUBSCRIBE | NO FEES, NO PAYWALLS
MANAGE MY SUBSCRIPTION
NEWSLETTER
Corporate Compliance Insights
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
No Result
View All Result
Corporate Compliance Insights
Home Risk

Blockchain: Why You Need to Evaluate Your Insurance Coverage

by Erin Illman
December 16, 2016
in Risk
Protecting against cyber liability risks

with co-author Brendan Hogan

Blockchain, or distributed ledger technology (DLT), is widely heralded as the next cornerstone technological advancement of the digital age.  Financial institutions are partnering with technology companies and startups to explore potential applications of this technology in all aspects of their business.  The rush to implement DLT in the financial services sector is in full swing and institutions have been testing applications of DLT in equity swaps processing, the syndicated loans market, payment messaging, regulatory reporting, contracts and transaction management.  Early adopters of this technology hope to achieve a competitive advantage by efficiently managing data, quickly processing transactions and increasing overall transaction security.

As with any new technology, DLT applications create new and different risks, particularly in the earliest stages of development and application.  Despite the increased security touted by innovators and early adopters, once any system accumulates enough value, hackers will find new ways to exploit vulnerabilities in that system – and DLT is no different.  In addition to the specter of black-hat actors and insider threats, DLT adoption, by an institution or its third-party vendors, potentially exposes institutions to new regulatory compliance risks.  Finally, though DLT itself is autonomous in many ways, the intersection of DLT, customers and business operations creates opportunities for human error.

These risks pose potential liabilities that can and must be managed by effective compliance and security programs.  Even the most robust systems, however, fail some percentage of the time, and in these instances, it is imperative that the proper insurance policies are already be in place to mitigate the impact of the resulting liabilities.

Insurance Coverage For DLT Risks

Due to the potentially transformative implications of DLT, multiple types of insurance coverage could be implicated by a DLT-based liability.

  • Cyber liability insurance potentially provides coverage for external attacks on a DLT system and, in some cases, may provide coverage for regulatory actions by government entities.
  • Commercial crime or fidelity insurance potentially provides coverage for breaches of a DLT system via employee dishonesty or computer fraud.
  • Professional services (also known as errors and omissions) insurance potentially covers losses resulting from improper implementation or use of a DLT system.
  • Directors and officers insurance potentially covers claims asserting misconduct or negligence at the board-level with respect to the implementation of DLT.
  • Business interruption insurance could cover lost profits due to an unexpected shutdown of a DLT system.

While there may be the availability of coverage, because these policies were likely procured prior to the adoption of DLT, there are likely gaps in an institution’s current coverage or situations where common definitions are ambiguous when applied in the context of DLT.

4 Potential DLT Coverage Pitfalls

  1. Indirect Damages

    Commercial computer crime policies for financial institutions generally provide coverage for losses due to computer fraud causing “property” to be transferred, paid or delivered. “Property” is defined to include certificated and uncertificated securities, money, electronic data, computer programs and items of tangible property.  Even though this coverage grant appears to cover losses related to fraudulent modifications to a DLT system, consider a situation where an unauthorized person gains access to the ledger of equity swaps.  Instead of transferring assets for his own benefit, however, the unauthorized user modifies the ledger to make future transactions of his appear legitimate, causing the institution to make payments it would not otherwise have made.  In this situation, the subsequent payments might be excluded if the policy in question contains an “indirect or consequential damages” exclusion, which excludes losses that are proximately but not directly caused by a covered event.  In this context, the institution might not be covered for the improper payments it erroneously approved based on the modified ledger, because the approval of subsequent payments was not itself fraudulent, but rather the approval was indirectly caused by a fraudulent transaction.

  2. Business Interruption

    Business interruption coverage forms generally only provide coverage for suspension of operations caused by a direct physical loss and often contain clauses limiting coverage for electronic data or computer operations. Even in cases where such losses are covered, the covered loss may be limited to reconstructing the lost electronic data and specifically exclude profits or income that would otherwise have been generated during the suspension period.  Furthermore, unless specifically purchased, cyber liability and computer crime policies often provide very limited or no coverage for first-party liabilities, potentially leaving losses caused  by a suspension of operations for a DLT system uncovered if the cause of the suspension is anything other than a “direct physical loss.” While this potential gap in coverage exists with other forms of electronic data, the widespread adoption of DLT only serves to further highlight the need to review applicable business interruption coverage.

  3. Professional Services

    Professional services coverage, which traditionally provides for negligence or mistakes in the performance of services in exchange for a fee, often contains limiting definitions and exclusions that could bar coverage for a loss related to a mistake in the development or implementation of a DLT system.

  4. D&O Policies

    Directors and officers policies traditionally provide coverage for the company, board members and executives for claims relating to regulatory and governmental investigations and actions. These types of policies, however, often contain exclusions for professional services that may apply to activities related to the development or implementation of DLT.  For example, if a financial institution developed an in-house DLT system for brokerage transactions that was subsequently compromised, leading to a government enforcement action, that action might not be covered if the policy in question contained a professional services exclusion.

Recommendations and Action Items

  • Develop the use case and understand the strategic plan for DLT at your company and any third-party vendors in the short to medium term.
  • Assess the risks associated with the development of DLT based on the intended use.
  • Review applicable insurance policies to assess potential coverage.
  • Consult with counsel and insurance professionals to ensure existing policies provide sufficient coverage for DLT applications and, if necessary, endorse or modify coverage to ensure identified risks are covered.

Previous Post

Corps Issues Regulatory Guidance Letter on Jurisdictional Determinations

Next Post

Enhancing Board Oversight of Cyber Risk

Erin Illman

Erin Illman

Erin IllmanErin J. Illman is an attorney in the Charlotte office of Bradley Arant Boult Cummings LLP. Ms. Illman has a diversified practice representing corporate entities and financial institution clients in a wide variety of regulatory compliance, data privacy, litigation and contract matters. She helps companies to navigate compliance and litigation risks, as well as the related business concerns that arise from enforcement and regulatory issues; compliance with state and federal banking and consumer protection laws; government investigations; bankruptcy and insolvency matters; customer complaints; contract disputes; and commercial litigation. Ms. Illman also has a strong understanding of the operational aspects of commercial lending and broad experience in complex loan transactions. She represents clients in secured transactions, UCC and commercial contract-related disputes, as well as unsecured and secured creditors in bankruptcy and adversary proceedings. She further advises clients on privacy and information security compliance issues, regulatory compliance disputes, defense of enforcement actions, real property controversies, and internal risk assessment. Ms. Illman can be reached at eillman@bradley.com and (704) 338-6000.

Related Posts

growth what next

Growing Pains: Mid-Sized Auditing Firms Are Seeing an Influx of New Clients, But at What Cost?

by Jey Purushotham
January 25, 2023

The era of exponential growth among mid-tier accounting firms is upon us, driven largely by the trend of top-tier firms...

board tech purchase

Directors: Don’t Approve a Tech Purchase Without Asking These Questions

by Jean Hill
January 25, 2023

Board directors don’t need to be able to fix a broken server, but they do need basic technology competence, which...

frayed_white

New Year, Same ESG Challenges: Overstretched Boards Face Barrage of Global Regulation

by Helle Bank Jorgensen
January 25, 2023

Global economic uncertainty notwithstanding, 2023 is certain to bring a host of emerging risks for board directors to navigate. One...

doj sign front

4 Practical Tips for Complying With Monaco Memo

by Jennifer Kennedy Park
January 25, 2023

Preparing for expectations under the Monaco memo is easier said than done, but Jennifer Kennedy Park, an expert in white-collar...

Next Post
Reducing cyber risk

Enhancing Board Oversight of Cyber Risk

Compliance Job Interview Q&A

Jump to a Topic

AML Anti-Bribery Anti-Corruption Artificial Intelligence (AI) Automation Banking Board of Directors Board Risk Oversight Business Continuity Planning California Consumer Privacy Act (CCPA) Code of Conduct Communications Management Corporate Culture COVID-19 Cryptocurrency Culture of Ethics Cybercrime Cyber Risk Data Analytics Data Breach Data Governance DOJ Download Due Diligence Enterprise Risk Management (ERM) ESG FCPA Enforcement Actions Financial Crime Financial Crimes Enforcement Network (FinCEN) GDPR HIPAA Know Your Customer (KYC) Machine Learning Monitoring RegTech Reputation Risk Risk Assessment SEC Social Media Risk Supply Chain Technology Third Party Risk Management Tone at the Top Training Whistleblowing
No Result
View All Result

Privacy Policy

Founded in 2010, CCI is the web’s premier global independent news source for compliance, ethics, risk and information security. 

Got a news tip? Get in touch. Want a weekly round-up in your inbox? Sign up for free. No subscription fees, no paywalls. 

Follow Us

Browse Topics:

  • CCI Press
  • Compliance
  • Compliance Podcasts
  • Cybersecurity
  • Data Privacy
  • eBooks Published by CCI
  • Ethics
  • FCPA
  • Featured
  • Financial Services
  • Fraud
  • Governance
  • GRC Vendor News
  • HR Compliance
  • Internal Audit
  • Leadership and Career
  • On Demand Webinars
  • Opinion
  • Resource Library
  • Risk
  • Uncategorized
  • Videos
  • Webinars
  • Well-Being
  • Whitepapers

© 2022 Corporate Compliance Insights

No Result
View All Result
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe

© 2022 Corporate Compliance Insights

Welcome to CCI. This site uses cookies. Please click OK to accept. Privacy Policy
Cookie settingsACCEPT
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
SAVE & ACCEPT