Befuddled by Bitcoin?
Five years after the emergence of bitcoins, consumers are using them to buy everything from pizza to cars, from drugs to real estate. Political donations can even be made in bitcoin. Just about every day, companies are announcing they will accept this “digital cash.”
Like traditional currency, bitcoins facilitate the exchange of goods or services. The advantages of bitcoin are fast payments worldwide with very low transaction costs. International monetary transactions can take three days to clear, whereas bitcoin transactions are considered settled after just one hour.
Credit card transaction fees are roughly 2 percent of the purchase price, while the minimum bitcoin transaction fee is 0.001 of the bitcoin’s value.
Video: New York State Superintendent of Financial Services Benjamin Lawsky on the future of digital currency regulation.
Using bitcoin is somewhat similar to online banking. Software known as a “wallet” stores bitcoin addresses (similar to an account number) and handles transactions. The wallet can reside on any computing device, or on a website known as a “web wallet.” Wallets securely store bitcoin using encryption and can send them to an individual or company for payment.
Wallets connected to the Internet and used for transactions are called “hot wallets.” Wallets stored on devices without Internet connections are “cold wallets.” A cold wallet can be stored on a stand-alone USB device, for example. Similar to an online bank account, the user name and password must be protected from unauthorized access to protect the bitcoins within the wallet.
How Does Bitcoin Work?
Bitcoin does not have banks that log transactions or track how many bitcoins are held in individual accounts. Instead, the bitcoin network uses a “block chain” to perform these functions openly and publicly.
The block chain is a public ledger containing all confirmed transactions. The integrity and chronological order of the block chain is maintained with encryption provided by the bitcoin network. User identities are protected by recording the bitcoin address in the ledger instead of user names. As long as bitcoin users do not identify themselves as the owner of a bitcoin address, their transactions remain anonymous.
No single entity or central bank controls the bitcoin network or sets economic policy. Instead, bitcoin users control the bitcoin network, with a subgroup of bitcoin “miners” who use their computers to process transactions and add them to the block chain by “mining.”
Roughly every 10 minutes, the bitcoin network bundles recent transactions and sends them to the miners. The miners’ computers perform complex calculations or “proofs of work” that require billions of calculations per second, turning the effort into a type of lottery.
The first miner to satisfy the proof of work is rewarded in bitcoins. This incentive motivates miners to participate in the bitcoin network.
As the bitcoin network grows in computing power, it automatically adjusts the difficulty of the proof of work to ensure the calculations take roughly 10 minutes. This keeps mining competitive and ensures that no single individual or entity can control the network.
The transactions, combined with the proof of work and control data, are now a block in the chain. The calculations for the proof of work are based off the previous block in the chain to enforce chronological order.
As more blocks are added to the chain, it becomes increasingly difficult to reverse previous transactions since all subsequent blocks would require recalculation.
As with any emerging technology, this new practice brings associated — and sometimes uncharted — risks.
Like cash, a lost bitcoin is lost forever. There is no recourse to recover the money if the password to a bitcoin wallet is forgotten. The same is true if the wallet is corrupted due to hardware failure, or if the USB storage device containing a cold wallet is lost. Having good backups of the wallet is critical.
Additionally, bitcoin transactions are not reversible. Once a transaction has been confirmed in the block chain, it cannot be undone. This benefits merchants since chargeback fraud, (e.g., when someone purchases an item with their credit card, then petitions their credit card company for a refund claiming they never received the item), is not possible.
By the same token, unscrupulous companies may keep the bitcoin and never fulfill an order.
Like cash, a lost bitcoin is lost forever. There is no recourse to recover the money if the password to a bitcoin wallet is forgotten.
Acting too fast could result in lost payment. Bitcoin transactions can occur nearly instantly, however, blocks are added to the block chain every 10 minutes; it takes at least that long for the transaction to be confirmed by the bitcoin network.
If an order is fulfilled before the transaction is confirmed, a company may find that product has been shipped, but payment never occurred. For particularly large transactions, waiting until several blocks are added to the chain may be wise.
Bitcoin value is volatile. Bitcoin values have risen and fallen significantly over the last two years. This makes storing value in bitcoins somewhat of a gamble. Many companies that accept bitcoins immediately exchange them for local currency, protecting their organizations from potentially dramatic price swings.
Malware can steal bitcoins. Computer processing power can be stolen to mine for bitcoins. Such malware has been found on computers, tablets and cell phones. Such malware can also attack the wallet software itself and potentially drain the wallet of any bitcoins it contains.
Bitcoins can be lost to theft or exchange failure. In early 2014, hackers exploited weaknesses in several bitcoin exchange websites. By sending many copies of the same bitcoin payment, a vulnerable exchange sent out the requested bitcoins repeatedly.
Using this technique, hackers stole thousands of bitcoins, worth millions of dollars. Unable to return bitcoins to their customers, the hacked exchanges closed. Since there is no FDIC-like insurance protecting users, the only remedy is through the legal system.
Transactions may be anonymous, but they are recorded. Bitcoin is popular with criminals since their identities are protected. However, every transaction is recorded in the public ledger and IP addresses are recordable by Internet service providers.
This makes it possible for law enforcement agencies to reconstruct past bitcoin transactions if a user’s identity can be matched with a bitcoin address. Once the identity is matched, the criminal’s entire history of bitcoin use becomes available.
A company may not wish to have its customer list revealed to others. It might be a competitive disadvantage or perhaps the company might lose customers (especially if it is in a socially gray area where customer privacy is greatly valued).
Laws and regulations are still emerging. In the United States, various federal and state agencies disagree on how to classify bitcoins and regulate their use.
At the federal level, for example, the IRS is treating bitcoin as property, not currency. This means that capital gains and losses must be calculated and reported for tax purposes, thereby complicating everyday use since every purchase requires accounting documentation.
Most states have not adopted a regulatory approach to digital currency. Texas has issued a regulatory guidance on its decision to not treat bitcoin as currency. As of this writing, New York is developing virtual currency exchanges, while Florida is applying existing laws to bitcoin exchanges, particularly money-laundering laws.
Until government agencies fully decide exactly what bitcoin is, insurers are unlikely to feel comfortable offering standardized coverage. Pending that, companies seeking insurance can inquire about customized offerings.
Internationally, the legal landscape is just as complicated, with many laws in development.
Some countries, such as Iceland, have restricted the foreign exchange of bitcoin. Others, such as Ecuador, have banned the currency. China has barred its financial institutions from transacting in bitcoin, while India has advised the public to avoid buying and selling virtual currencies.
Given all of the media coverage that bitcoin receives, it is important to remember that it emerged only five years ago. Will bitcoin revolutionize the financial world? Or will it join other valueless currencies only found in history books? It’s too soon to know for certain.
Should a company accept bitcoin as payment today? If approached thoughtfully, accepting bitcoin can be a differentiator in today’s competitive marketplace.
If implemented poorly, accepting bitcoin can be risky. Taking appropriate steps to minimize risks allows companies to adopt virtual currencies and attract the growing user base.
And if nothing else, being educated about virtual currencies ensures each company will be prepared for the future — whichever direction it may take.
Lloyd Takata is executive vice president of OneBeacon Technology Insurance. JOE BUDZYN is the organization’s assistant vice president and senior business development manager. They can be reached at email@example.com.
Legal Spotlight: September 1, 2014
Excess Policy Off-Limits to Company
In 2008, Martin Resource Management Corp. (MRMC), a company with $3 billion in annual sales, was accused in a Texas state court of wrongdoing in a shareholder derivative action filed by two brothers, which affected control of the company.
MRMC eventually settled that litigation for an undisclosed price in 2012, including repurchase of all shares held by Scott D. Martin and SKM Partnership Ltd. About the same time, the corporation filed suit against its primary and excess D&O insurers for defense in the underlying litigation.
The company later settled its suit against Zurich American Insurance Co. — which held a $10 million primary D&O policy from Feb. 1, 2008 to Feb. 1, 2009 — for less than the policy limit, according to court documents. MRMC also settled with Arch Insurance Co., which had issued a $10 million excess policy, in a confidential agreement.
That left Axis Insurance Co., which also held a $10 million excess policy, as the remaining insurer in the MRMC lawsuit. In seeking summary dismissal of the litigation, Axis argued that its policy was not triggered because the underlying limit in the Zurich policy was not “exhausted by actual payment.”
The corporation argued that the Axis policy language was ambiguous — that it did not “clearly state that ‘actual payment requires payment of the full limit of the underlying Zurich policy’ by Zurich alone,” according to court documents.
MRMC also argued that entering a settlement agreement was consistent with Texas public policy, and that by allowing excess insurers to “escape their coverage obligations based solely on settlements with underlying insurers for less than total policy limits, policyholders will have no choice but to fight every coverage case to the bitter end to avoid forfeiture of their excess coverage.”
The Harris County Judicial District of Texas disagreed with MRMC’s position, and dismissed the case. On appeal to the U.S. District Court for the Eastern District of Texas, a federal judge agreed with the lower court, stating that “it is clear that in order to trigger the Axis policy, Zurich must have paid the full amount of its limit of liability as specified in the Zurich policy.”
Scorecard: Axis need not pay up to the $10 million in excess policy limits.
Takeaway: Efforts to emphasize portions of policy language in isolation are usually unsuccessful. Policy language must be read in context of the entire policy.
Checkout Practices Negate Coverage
Since August 2009, Urban Outfitters (UO) has collected ZIP code information at checkout, in violation of Massachusetts law, according to a class-action lawsuit filed by customers.
Similar allegations were filed against the company in California, claiming the practice of collecting ZIP codes since February 2010 violated the Song-Beverly Credit Card Act of 1971.
While slightly different, the state and district regulations generally forbade companies from requesting “personal identification information;” from misrepresenting the fact that providing such information was not required to complete a purchase; from engaging in unfair and deceptive business practices; and from invading customer privacy.
UO sought indemnification and duty-to-defend coverage from OneBeacon America Insurance Co., which had issued successive commercial general liability and umbrella policies beginning July 7, 2008 and ending July 7, 2010. OneBeacon also issued a similar policy for July 7, 2010 to July 7, 2011, which was a “fronting” policy for which the Hanover Insurance Group is responsible. Hanover issued successive CGL and umbrella policies from July 7, 2011 to July 7, 2013.
When coverage was denied, UO and Anthropologie sought a court declaration that the insurers must defend and/or indemnify them. The carriers asked for dismissal of the case — and the insurers’ motions were ultimately granted by the U.S. District Court for the Eastern District of Pennsylvania.
Judge Stewart Dalzell agreed with the carriers that, in the District of Columbia case, there was no coverage under the “personal and advertising injury provision” because the information was not “published,” under the common use of the word, as it was shared only between the insured and its customer.
In the California case, the court found that the companies did “publicize” the information by sharing it with third parties for marketing purposes, but that coverage should be denied because of an exclusion in the policies for statutory violations.
The court also rejected coverage for the action in Massachusetts, which alleged the receipt of junk mail was a “breach of their privacy,” because the term, “privacy” is confined to “secrecy interests,” and not to “intrusions upon seclusion.”
Scorecard: The carriers did not have to indemnify or pay for a defense. In just one of the lawsuits, each statute violation subjected the corporations to $1,500 per violation.
Takeaway: The collection of ZIP code information leaves organizations vulnerable to a variety of legal claims.
Insurer Did Not Have to Pay for Defense
In 2002, Paul Schoen filed a lawsuit alleging securities claims against Amerco, the parent of truck rental company U-Haul, which was founded by his father and is controlled by the Schoen family.
Amerco sought coverage under its directors’ and officers’ policy issued by National Union Fire Insurance Co., and was denied. The insurer cited “insured vs. insured” provisions, which excluded coverage for any claims involving “any security holder of the company” and unless such a claim was “totally without the solicitation of, or assistance of, or active participation of, or intervention of, any member of the Schoen family.”
After that claim was denied, two more lawsuits were filed against Amerco, and all three were consolidated by the courts. National Union again denied coverage, citing the participation of Paul Schoen. The situation reoccurred when two additional actions were filed, and all were consolidated into one court action.
In 2006, pursuant to a ruling of the Nevada Supreme Court, which reversed a lower court order dismissing the case, the plaintiffs were permitted to amend their pleadings. Instead of filing separate complaints, as the court permitted, they filed a single consolidated complaint, with Paul Schoen’s counsel acting as lead counsel.
Six years later, the cases were settled, with the plaintiffs gaining “nothing by way of settlement,” and court costs for Amerco exceeding $9 million.
In 2013, the company filed suit against National Union, alleging breach of contract and bad faith in denying the claim. Those allegations were rejected in May by a federal judge in the U.S. District Court for the District of Arizona.
In the opinion, Judge Paul G. Rosenblatt ruled that the claims in the consolidated court action “were not prosecuted totally independently of Paul Schoen, totally without Schoen’s assistance, and totally without Schoen’s active participation, and therefore the exclusion provisions apply.”
Scorecard: National Union Fire Insurance Co. will not have to pay a $9 million claim for defense costs in a shareholder lawsuit.
Takeaway: Regardless of the complexity of the litigation, the policy language was unambiguous as to its exclusions.
The Re-Invention of American Healthcare
Consolidation among healthcare providers continues at a torrid pace.
A multitude of factors are driving this consolidation, including the Affordable Care Act compliance, growing costs and the ever-greater complexity of health insurance reimbursements. After several years of purchasing individual practices and regional hospital systems, the emergence of the mega-hospital system is now clear.
“Every month, one of our clients is either being bought or buying someone — and the M&A activity shows no signs of slowing down,” said Brenda Osborne, executive vice president at Lexington Insurance Co.
This dramatic change in the landscape of healthcare providers is soon to be matched by equally significant changes in patient behavior. Motivated by growing out-of-pocket costs and empowered with new sources of information, the emergence of a “healthcare consumer” is on the horizon.
Price, service, reputation and, ultimately, value are soon to be important factors for patients making healthcare decisions.
Such significant changes bring with them new and challenging risks.
Although physicians traditionally started their own practices or joined medical groups, the current climate is quite the opposite. Doctors are now seeking out employment by health systems. Wages are guaranteed, hours are more stable, vacations are easier to take, and the burdens of running a business are gone.
“It’s a lot more of a desirable lifestyle, particularly for the younger generation,” said Osborne.
Brenda Osborne discusses the changing healthcare environment and the risks and opportunities to come.
Given the strategic importance of successfully integrating acquired practices into a larger healthcare system, hospitals are rightfully focused on how best to keep doctors happy, motivated and focused on patient safety.
A key issue that many hospitals struggle with is how to provide effective liability insurance for their doctors. Physicians who previously owned their practice are accustomed to a certain type of coverage and they expect that coverage to continue.
Even when operators find comparable liability insurance solutions for their doctors, getting buy-in from their staff is often an additional hurdle to overcome.
“Physicians listen to two things — physician leaders and data,” said Osborne. “That’s why Lexington provides assessments that utilize deep data analysis, combined with providing insights from leading doctors to help explain trends and best practices.
“In addition, utilizing benchmarks against peers helps to identify gaps in best practices. It’s a very powerful approach that speaks to doctors in a way that will help them improve their risk.”
Focusing on the “continuum of care”
There’s been a fundamental shift in how healthcare providers care for patients: Treatment is becoming more focused on a patient’s overall health status and related needs.
A cancer patient, for example, should have doctors in a number of specialties communicating and working together toward a positive patient outcome. But that means a change in thinking: Physicians need to work collaboratively with one another — not easy for individuals or groups that are used to being independent. Healthcare is a team sport.
“If there isn’t strong communication, strong leadership, and the recognition of proper treatment procedures between physicians, healthcare providers can increase the risk of error,” said Osborne. “The provider has got to treat the whole patient rather than each individual condition.”
That coordination must extend from inpatient to outpatient, especially since the ACA has led to a rapid increase in patients being treated at outpatient clinics, or via home health or telehealth to reduce the cost of inpatient care
“Home health is going be a growing area in the future,” Osborne continued. “Telehealth will become an effective and efficient way of managing and treating patients in their home. A patient might have a nurse come in and help the healthcare provider communicate with a physician through an iPad or computer. The nurse can also convey assessment findings to the physician.”
Metrics matter more than ever
Patients have not always thought of themselves as healthcare consumers, but that’s changing dramatically as they pay more out of pocket for their own healthcare. At the same time, there’s an increase in metrics and data available to the public — and healthcare consumers are drawing upon those metrics more and more when making choices that affect their health.
“Consumers are going to start measuring physicians against physicians, healthcare systems against healthcare systems. That competition will force everyone to improve the quality of care.”
– Brenda Osborne, Executive Vice President, Lexington Insurance
Think about all the research a consumer does before buying a car. Which dealership has the best price? Who provides the best service? Who’s offering the best financing deal?
“Do patients do that with physicians? No,” said Osborne. “Patients choose physicians through referrals from friends or health plans with minimal information. Patients may be putting their lives in the physicians’ hands and not know their track record.
That’s all going to change as patients’ use of data becomes more widespread. There are many web based resources to find information on physicians.
“Consumers are going to start measuring physicians against physicians, healthcare systems against healthcare systems,” said Osborne. “That competition will force everyone to improve the quality of care.”
Effective solutions are driven by expertise and vision
The rapidly evolving healthcare space requires all healthcare providers to find ways to cut costs and focus on patient safety. Lexington Insurance, long known as the leading innovative and nimble specialty insurer, is at the forefront in providing clients cutting-edge tools to help reduce costs and healthcare exposures.
These tools include:
- Office Practice Risk Assessment: To support clients as they acquire physician practices, Lexington developed an office practice assessment tool which provides a broad, comprehensive evaluation of operational practices that may impact risk. The resulting report, complete with charts, graphs and insights, includes recommendations that can help physicians reduce risk related to such issues as telephone triage, lab results follow-up and medication management. .
- Best Practice Assessments: High risk clinical areas such as emergency departments (ED) and obstetrics (OB) can benefit significantly from external, objective, evidence-based assessments to identify gaps and assure compliance with best practices. In addition to ED and OB, Lexington can provide a BPA for peri-operative care, prevention of healthcare-acquired infections, and nursing homes. All assessments result in a comprehensive report with recommendations for improvement and resources along with consultative assistance and support. .
- Continuing Education: In an effort to improve knowledge, decrease potential risk and support healthcare providers in the use the most current tools and techniques, Lexington provides Continuing Medical Education credits at no cost to hospitals or their physicians.
- Targeting the Healthcare Consumer: With Medicare reimbursement impacted by patient-satisfaction surveys, assuring a positive patient experience is more critical than ever. Lexington helps hospitals understand and improve the patient experience so they can continue to earn the trust of healthcare consumers while preserving their good reputation. .
To learn more about Lexington Insurance’s scope and depth of the patient safety consulting products and services healthcare solutions, interested brokers may visit their website.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.