Risk Management in the Metaverse

For many, the “metaverse” sounds like some obscure sci-fi fantasyland. You may be asking, where is it? How does one get there?

Well, if you’re reading this article on a screen, you are already scratching the surface of what could be characterized as the metaverse. That’s right. Generally speaking, the metaverse is just a new way of talking about cyberspace. And you know cyberspace. Think about that line you say when you’re on the phone with a colleague and you send an email: “I just sent it and its traveling through cyberspace to your inbox.” That is cyberspace. Only now, instead of being an exclusive highway for sending data, people are showing up and doing things.

Not physically, of course. After all, the metaverse is a virtual universe. You can access and interact with others there simply by playing a game on your phone. You could also put on a headset that will virtually transplant you to the metaverse or bring the metaverse to you in an augmented reality. And the communities in the metaverse are thriving. They are buying things, building things, visiting old friends and making new ones.

For example, in the metaverse, individuals can buy one-of-a-kind digital art to hang on their wall inside their home, which others will see when they visit. They can park a car in their driveway or take their boat for a ride.

The metaverse is just getting started. Many believe the introduction of the metaverse is a critical inflection point in our relationship with technology — the point where the physical world and the virtual world begin to merge into singular form. It could also sputter out if its use isn’t widely adopted. Only time will tell whether the metaverse lives up to the hype it’s currently receiving.

A Pivotal Role

One thing is certain, though. If the metaverse is to succeed, insurance will play a pivotal role. The metaverse is not without risk.

Goods purchased in the metaverse can be damaged or stolen via hacking or ransomware, and there can be errors or mistakes made in providing services in the metaverse.

Employers that hold events in the metaverse may be held responsible for things that happen during those events. For example, metaverse users have reported that their avatars have been groped or even raped by other users. If this is done between employees at a virtual event hosted by an employer, one can see how the employer could face liability for these actions.

Thus, whether the metaverse becomes widely used will depend on the risk associated with that use and how we manage it. Put simply, if people can’t afford the risk associated with “living” in the metaverse, then they won’t live there. And what better device do we have for managing risk than insurance? After all, most banks won’t lend money to a person to buy a house if the home isn’t insured. Banks won’t view the purchase of a home in the metaverse any differently. So, if the metaverse is going to succeed, you can be sure there will be insurance for the attendant risks.

But, are these and other risks posed by the metaverse currently insurable? The answer is, possibly.

Currently there is no insurance that is specifically designed to insure every aspect of the metaverse; however, insurance products are beginning to emerge to manage some of the risks associated with digital assets. For example, Breach Insurance, a crypto insurtech, recently introduced two products to protect against the theft of digital wallets that hold cryptocurrency. According to its website, Breach Insurance provides up to $1 million in crypto coverage and covers 20 types of coins.

In addition, existing policies insuring risk in the real world may implicitly provide coverage for digital assets. For example, policies insuring “cyber” risk do not specifically contemplate covering losses to digital assets; however, such policies typically cover loss resulting from a cyber intrusion (i.e., a breach), including the restoration and recollection of electronic data. Thus, one could argue that such policies cover the cost of restoring or recollecting digital assets containing electronic data that are stolen or damaged as a result of a breach.

Similarly, traditional property insurance may provide coverage for some digital assets. At least one court found that virtual currency was property and rejected the insurer’s argument that it was “money.” [Kimmelman v. Wayne Ins. Grp., No. 18 CV 1041, 2018 Ohio Misc. LEXIS 1953, at 3 (Ct. Com. Pl. Sep. 25, 2018) (relying on IRS guidance that cryptocurrency is property and not currency).]

Interestingly, the policy covered both loss of “money” and loss of property, but the coverage for money was much lower than the coverage for loss of property. Thus, the dispute wasn’t whether the property policy covered the loss of the virtual currency; rather, it was about how much coverage was available.

Likewise, general liability policies may provide coverage for “bodily injury” or “property damage” that occurs in the metaverse. Most general liability policies issued in the United States provide coverage for “bodily injury” or “property damage” occurring in a particular “coverage territory” that is usually defined broadly to include the United States and the activities of a person anywhere in the world if that person’s home is in the United States.

Most policies are silent on whether this extends to virtual areas like the metaverse. Thus, one could argue it does or, at best, the policy is ambiguous (i.e., it’s not unreasonable to interpret it that way).

For some policies, the locale of the coverage-triggering event should be irrelevant for purposes of determining whether coverage is available. For example, discrimination or harassment in the metaverse is conceptually no different than such conduct taking place in the real world. Thus, employment practices liability coverage should still cover such claims.

As the risks associated with the metaverse materialize and metaverse users make more claims under their traditional insurance policies, insurers will likely start adding exclusions to limit their exposure. But this will simply open the door for the industry to create and market new products to fill this need. Thus, insurance specifically designed for the metaverse will likely begin to emerge in the not-so-distant future. If it doesn’t, it’s doubtful the metaverse will ever achieve its potential.