What Custody Insurance Actually Covers, and What It Does Not
Policy limits are aggregate, exclusions are broad, and the most likely loss is usually not covered. How to read the claim properly.
Priya Raman · 2 min read
Insurance is the most prominently advertised feature in custody and the least examined. Reading the actual terms changes how much comfort it provides. The contrast worth drawing is with a corporate crypto wallet with segregated accounts, where this is a requirement rather than a courtesy.
The limit is shared
A policy limit applies across all clients, not per client.
A custodian advertising a hundred million of cover while holding two billion in client assets has cover for five percent. If a loss exceeds the limit, clients share what is available.
That is arithmetic rather than criticism, and it means insurance is a partial backstop.
Ask two questions: what is the limit, and what are total assets under custody. The ratio is the meaningful number and custodians rarely volunteer it.
What is typically covered
Theft of assets from cold storage through physical compromise. Dishonest acts by employees. Damage or destruction of key material in storage.
These are real risks and cover for them is worth having.
What is typically excluded
Compromise of your own credentials. If someone accesses your account using your credentials and withdraws, that is generally not covered. This is the most likely way you personally lose assets and it is excluded.
Protocol or smart contract failure. A loss caused by the underlying technology rather than by the custodian.
Market movement. Obviously, but worth stating because people occasionally assume otherwise.
Insolvency of the custodian. Insurance covers loss of assets, not failure of the business. That risk is addressed by segregation, not by insurance.
Losses from assets held outside the specified storage arrangement. Assets in hot wallets for operational purposes are often covered differently or not at all.
The questions to ask
What is the limit, and is it per incident or aggregate annually.
What proportion of assets are held in the arrangement the policy covers.
Is the cover primary or excess, and if excess, what sits beneath it.
Can you see the certificate or a broker letter confirming the terms.
What is excluded, in writing.
A custodian that treats these as unreasonable is telling you something. A custodian that answers them immediately has been asked before by people doing proper diligence. The business-side equivalent runs through a platform set up for client account handling, with the screening already in place.
Why segregation matters more
Insurance addresses theft. Segregation addresses failure of the business, which is the more common way clients have actually lost assets in this sector.
A custodian with strong segregation under a proper regulatory framework and modest insurance is in a better position than one with large advertised cover and weak asset separation.
Compare the legal arrangement first. Insurance is the second question.
For a company
If custody insurance is part of your own risk assessment, get the certificate and have someone read the exclusions.
Your own insurance may also be relevant. Some commercial crime policies extend to digital assets and many companies never check whether theirs does. Compare anything you are offered against a crypto exchange with published fees before sending funds anywhere.
Move any remaining funds to a wallet with a newly generated seed phrase before anything else. Then revoke token approvals, and report the incident to your local authorities and the exchange involved. Do not pay anyone who promises to "recover" your coins. That is a second scam, aimed at victims of the first.