As more companies and people are migrating to the metaverse to conduct business, interact, and spend time, companies need to be prepared for losses and claims that could arise from their presence and activity there.
Insurance coverage, including bespoke policies and coverage from policies within a company’s existing insurance program, can be vital to protect companies against these potential risks.
Many risks companies face in the real world will exist in the metaverse, albeit with a digital twist. For example, many metaverse projects involving the use of a “currency” feature their own native coins, which in many instances can be swapped for other cryptocurrencies or even fiat currency. These activities and operations may lead to allegations of wrongful acts implicating directors and officers (D&O) or errors and omissions (E&O) coverage, among other types of coverage.
“Moreover, many metaverse projects will feature content creation that could implicate intellectual property rights, thereby triggering these same coverages or, potentially, commercial general liability (CGL) coverage or specialized intellectual property coverage,” said Noel Paul, Partner at Reed Smith.
According to a report by Reed Smith LLP, a global law firm, in the metaverse, people can interact with each other via their avatars and haptic feedback and, in some cases, may be accused of causing emotional distress or other torts through those interactions.
Events like that may trigger a variety of liability insurance policies, including, if occurring within the virtual workplace, employment practices liability policies. These examples,, are just a sample of the core insurance coverages that could be implicated by risks presented by the metaverse.
D&O insurance
D&O insurance shields a company’s board and management and protects their personal assets from liability.
It typically insures claims made against the directors and officers when the company does not indemnify them (“Side A” coverage) and the company itself when it is required to indemnify its directors and officers for those claims (“Side B” coverage).
D&O policies also can include entity coverage protecting the company against its own liability in a securities claim or (in the case of private companies) any non-excluded claim made against the company (“Side C” coverage).
D&O insurance is particularly important because it can cover defense costs and indemnity for a variety of claims and suits, depending on the policy language.
According to the report, D&O risks presented by the metaverse may include:
- Securities claims
- Intellectual property claims
- Breach of fiduciary duty claims
- Misrepresentation claims
- Shareholder and derivative lawsuits
- Regulatory investigations
Miranda Jannuzzi, Counsel at Reed Smith, said, “An insured company must be wary of the specific terms and provisions of their D&O policies. While existing D&O policies likely would cover metaverse-related claims for directors and officers of companies entering the metaverse in the same manner that they cover non metaverse claims, many insurers deny coverage for cryptocurrency-related losses or issue policies with language severely limiting such coverage.”
Therefore, companies dealing in cryptocurrency should be mindful of the definition of a “Securities Claim.”
Depending on the policy language and the applicable law of the jurisdiction, a D&O policy may protect a company and / or its management from metaverse-related liability as a “Securities Claim.”
Additionally, regulators in the future could investigate metaverse companies for a variety of alleged acts or omissions involving operations, cryptocurrency, and non-fungible token (NFT) transactions, user conduct, and privacy and data security, to name just a few.
These investigations can be costly. A D&O policy may cover some or all of the costs associated with such an investigation. However, it is important to ensure that the policy does not exclude investigations for cryptocurrency related activities or the insured’s operations in the metaverse.
Other considerations
Metaverse projects may involve alternative governance structures, e.g., decentralized autonomous organizations (DAOs). For this reason, nontraditional organizations and companies active in the metaverse must be particularly careful in naming the correct entities as insureds under their policies. In many jurisdictions, DAOs are not legal entities so they may be precluded from purchasing insurance policies and may need to secure insurance through another legal entity structure. Some DAOs have foundations to protect their legal rights (e.g., The Decentraland Foundation), while others may utilize more traditional forms of corporate governance. Either way, a company must ensure that it and its board and management have adequate insurance coverage against risks presented by the metaverse.
“If metaverse-related losses or liabilities arise, companies should take a careful look at their existing insurance programs to see whether coverage may be available,” said Nick Pappas, Associate at Reed Smith.
Companies operating in the metaverse should also keep abreast of any new insurance products for metaverse applications, such as specific coverages for digital assets, he added.
As this area develops, it is especially important to retain experienced insurance coverage counsel to assist with negotiating and procuring insurance and in navigating any disputes that may arise related to losses and claims.