Property Insurance for Bitcoin Mining

Property Insurance For Bitcoin Mining

Property insurance for bitcoin mining protects physical assets including application specific integrated circuits (ASICs), pre-built mining containers, mechanical and electrical infrastructure, real property (such as buildings) and business income.

As described below, your bitcoin mining business model affects the type of property insurance coverage you should buy, who and what is covered and the cost. In this article we cover:

  1. Bitcoin mining business models
  2. Factors affecting property insurance for bitcoin mining
  3. What is “All Risk” property insurance?
  4. Actual cash value vs. replacement cost
  5. Admitted vs. non-admitted insurance
  6. What is business interruption coverage?
  7. Property insurance for bitcoin mining summary 

As bitcoin mining is incorporated into renewable energy projects, as well as helping to reduce methane emissions, property insurance for miners has never been in greater demand.1

Property Insurance For Bitcoin Mining Business Models

Property insurance for bitcoin mining depends on the business model of the bitcoin mining operation.

Your business model determines ownership of buildings, improvements, electrical infrastructure, business personal property, property of others, mining equipment (application specific integrated circuits – i.e. ASICs, GPUs, etc.), your mining infrastructure, business income, etc.

Below are common bitcoin mining business models:

  1. Owner/Operator: Mining operations owned and operated by a single company… The bitcoin miner needs property insurance for its 1st party assets including the real property (buildings and improvements), business personal property, aka “BPP”, that may include Antbox, Antspace or retrofitted shipping container, ASICs, GPUs, or other mining hardware and infrastructure, and digital assets.
  2. Landlord/Tenant: The physical facility is owned and operated by a real estate owner/landlord. The bitcoin mine is the tenant. The bitcoin miner needs property insurance for its 1st party assets including the real property (buildings and improvements), equipment and business personal property, aka “BPP”, including ASICs, GPUs, or other mining hardware and digital assets. The lease will determine other insurance requirements. 
  3. “WeWork”: WeWork does not own real estate, instead it leases and builds out office space to sublease an “experience” to smaller tenants. In the bitcoin WeWork business model the physical facility is owned and operated by a real estate owner/landlord. The bitcoin mine is the tenant. The bitcoin mine operator, in turn, sub-divides the leased space in various ways and sub-leases out smaller spaces, or rack space to other independent miners (mining tenants). The mining tenants own their own mining equipment but rely on the bitcoin mine for operations and maintenance of their machines. The leases will determine other insurance requirements for landlord, tenant and sub-tenants. 
  4. “Airbnb”: Airbnb famously owns no physical hotel properties, but is one of the largest hospitality providers in the world. The bitcoin Airbnb model is an online technology platform for connecting retail customers with 3rd party bitcoin miners who provide equipment and hosting facilities in exchange for fees, etc. The platform partners with, but does not own, the site hosts. In exchange for the customer referral and a long-term mining agreement to buy hash rate at a certain price, site hosts provide equipment, hosting space, electricity, operations and maintenance for the retail miners. The miners interact with the site hosts through the platform. The referral or partnership agreement will determine basic insurance requirements, if any. The 3rd party bitcoin miners will have their own insurance according to the “WeWork”, “Landlord/Tenant” or “Owner/Operator” descriptions above. 
  5. Colocation: Pre-built, commercial bitcoin mining containers and infrastructure can be colocated at the source of energy production. Renewable energy developers, oil and gas manufacturers, dairy farms and landfills are using bitcoin miners to monetize surplus renewable energy and reduce waste methane. Mining infrastructure may be installed on-site, in front of the meter with solar, wind and hydro developers to monetize waste energy. Owners of on-site infrastructure need property insurance, commercial general liability and other insurance to protect their investments.
  6. Revenue Share: Any of the above business models may include a revenue share, or other financial arrangements, between parties. 

The business models above each have unique property insurance implications. These are the business models I’m most familiar with as an insurance broker but the list is by no means exhaustive…2 

Property insurance may flow upstream, meaning additional insured status is provided by tenant to landlord, but not downstream from landlord to tenant. Insurance almost never “included” automatically.

In addition to property insurance, there are other bitcoin mining insurance coverages that miners should consider.

As described below, in placing property insurance for bitcoin mining, each business model has different considerations. 

What Factors Affect Cost Of Property Insurance For Bitcoin Mining?

As described in more detail in this article, four factors that affect commercial property insurance for bitcoin mining facilities are construction, occupancy, protection and exposure… Also known as COPE.

The acronym “COPE” comes from the four categories of property details that are collected on a property insurance application:

  1. Construction 
  2. Occupancy
  3. Protection
  4. Exposure

COPE focuses on evaluating real property exposures, such as buildings and facilities and their completed improvements.3

Underwriters rely on this information and actuarial data related to other similar insured risks to determine the likelihood of a property claim.

Construction” data is about your building’s construction materials, based on the ISO building construction categories, as well as the size of your building and the age of your building. 

Occupancy” property insurance data has to do with who occupies your building, the hours of operation and the type of activities going on there. 

Protection” focuses on internal and external building features that may reduce the frequency and severity of the most common property losses, such as from the perils of water and fire. This includes alarms, backup systems, fire suppression, sprinkler systems, etc.

Exposure” data includes your building’s geographic location, climate-related risk, proximity to the coast and external hazards or even nearby hazardous operations. 

While bitcoin mines may occupy new or retrofitted industrial facilities, ASICs are delicate, electrical hardware that may be easily damaged by physical and environmental factors. 

By understanding these four commercial property insurance cost factors, you’ll be better prepared when quoting property insurance for a bitcoin mine and how you may be able to reduce your insurance premiums.

What Is "All Risk" Property Insurance?

You may encounter contract language calling for “all risk” property insurance… 

But what does “all risk” mean? 

An “all risk” property policy, also called “special form” covers all perils unless specifically excluded. As such, it is a misnomer because an all risk policy does NOT cover all perils.4

You may also hear the term “open perils”… Open perils is another way of saying that every peril is covered unless it’s specifically excluded. 

A peril is any event, incident, occurrence or situation that could give rise to property damage or destruction. Certain perils that would be excluded in an “all risk” property policy are perils such as earthquake, flood, equipment breakdown, infestation, etc. 

An open perils policy is in contrast to a “named perils” policy. 

Named perils means the policy covers only the perils that are listed in the policy. 

There are two named peril policies, “basic” and “broad”. 

The basic form covers 11 perils or causes of loss including fire or lightning, smoke, windstorm, hail, explosion, riot or civil commotion, aircraft and/or vehicles (striking the property), glass breakage, vandalism & malicious mischief, theft, and volcanic eruption. 

The “broad” named perils policy includes all of the above perils, but adds falling objects, weight of ice, snow or sleet, accidental discharge or overflow of water or stream from within plumbing or related systems (does not include discharge or overflow of water from a sump) sudden and accidental rupture of heating, air conditioning, fire protective sprinkler, or hot water heating system, freezing of plumbing or related systems and sudden and accidental damage from artificially generated electrical current. 

If your mining equipment is transported regularly, you may need inland marine insurance. Property policies may exclude property damage while property is in transit. 

Inland marine, aka a property floater, protects ASICs and other bitcoin mining infrastructure while it is transported from one place to another. 

Valuation Of ASICs: Actual Cash Value Vs. Replacement Cost

ASICs are costly to replace and can have long lead times… Their value can also increase or decrease, fluctuating rapidly, depending on their demand in the market and the price of bitcoin.

The terms actual cash value (“ACV”) and replacement cost (“RC”) determine how property is valued in the event of a property insurance claim.

  • Actual cash value is equal to replacement cost minus depreciation, or the cost of the item when new, minus depreciation. The courts have sometimes disagreed on the meaning of “actual cash value” and have argued that it can mean “fair market value”.5 If you have a property claim with an ACV policy, you may only receive a fraction of the initial value of the item that was lost… As such, ACV property policies are often less expensive than RC property policies.
  • Replacement cost is equal to the cost to replace or repair an item as new. In a replacement cost property policy, insurers and the insured agree on the value of a piece of property ahead of time. RC can be the cost to repair or replace the item with equivalent or like-kind quality. A RC policy may be more expensive than an ACV policy.

If you have a property insurance policy with RC you should check on the values on an annual basis in case the property has gone up or down in value so you can adjust your policy as needed. 

Both you and your insurance company must agree what the value will be to replace the property… This means that you should check your policy every year to determine that the value you agreed on is still accurate.

Property insurance policies will often default to ACV and include options for RC or “agreed value”. If you and the carrier do not agree on the values, the use of an appraiser may be required according to the language of the policy.

Admitted Vs. Non-Admitted Insurance

Property insurance for bitcoin mining is often written on a non-admitted basis. 

While the term “admitted” sounds preferable, don’t let the nomenclature fool you… Learn the differences between admitted and non-admitted carriers.

In a nutshell, admitted insurance carriers are licensed by the State Departments of Insurance in all the states where they write insurance.

Non-admitted insurance carriers are not licensed by every state, but are allowed to do business through licensed wholesale brokers and agents in states where they’re not licensed.

Both admitted and non-admitted insurance carriers have benefits and each can be highly rated and excellent choices for business insurance coverage…

Business Interruption Coverage

Business interruption insurance (sometimes called “business income” or abbreviated as “BI”) protects your business if it is shut down due to direct physical loss or property damage at a covered property by a covered peril (such as a fire or theft).

Business interruption is a “time element” coverage, as opposed to a physical property damage coverage. This means business interruption pays for lost income for a certain period of time (the “period of restoration“).

If ordinary business income is replaced by other sources of income, such as a demand response fee, such new income offsets the lost ordinary income from the business. Insurance carriers account for this in calculating any payouts for claims.

BI may be paired with another property insurance coverage called “extra expense”.  Extra expense goes above and beyond normal operating expenses by paying money for the costs to relocate or bring operations online as a result of the business interruption.

Contingent business interruption, aka “CBI“, also referred to as “contingent business income” or “dependent business income” insurance, protects your business if it is interrupted due to a 3rd party’s covered business interruption.

Examples of contingent business interruption exposures for bitcoin miners may include:

  • Your electrical utility (to provide power)
  • Your ISP (to provide an Internet connection)
  • Your mining pool (to increase the chances of mining bitcoin by aggregating hashing power), etc.

Individual retail bitcoin miners working with a site host may be surprised to find that not only do they not have property coverage in the event of a fire or other loss, they also have no recourse for business interruption, or contingent business interruption if the site loses power or connection to the Internet.

Bitcoin mining property insurance often excludes “cryptocurrency” income by default, but may include income from other business income sources, such as rents, hosting fees, professional services, sale of electricity or energy, etc.

Property Insurance For Bitcoin Mining Summary

The business model of your bitcoin mining operation will impact your property insurance exposure as well as 1st and 3rd party coverage considerations.

Large facilities should consider the underwriting factors of construction, occupancy, protection and exposure (COPE), as well as the valuation method of your policy, actual cash value (ACV) or replacement cost (RC).

Be aware of what “all risk” means on a property policy and read through the policy language and exclusions. Also, understand that both admitted and non-admitted insurance policies may provide excellent coverage.

Business interruption protects your regular income in the event the business experiences downtime due to a covered property claim… Contingent business interruption may also be a common exposure.

Underwriting property insurance for bitcoin mining requires collecting detailed documentation in order to price.

It can also take time… 

You should work with a broker who will be your advocate, who understands the nature of your bitcoin mining operation and who asks the right questions when underwriting your facilities.

Footnotes

  1. Bitcoin miners need to consider other insurance including, but not limited to, commercial general liability, cyber liability, professional liability (aka "tech E&O"), umbrella or excess. Note: This article does not cover insuring bitcoin - the digital asset - held in a crypto wallet, hot or cold storage.
  2. I did not include personal bitcoin mining at home in the examples as this would be a micro version of "owner/operator" above.
  3. For buildings and facilities that are under construction, you would consider a builder's risk policy, as described here.
  4. Insurance carriers are moving away from this term because it could be misleading to insureds making them mistakenly think they're covered no matter what.
  5. The majority of times, the meaning is replacement value minus depreciation.
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