By Michael Menapace, Esq., Wiggin and Dana LLP
When I first wrote here about insurance coverage related to cryptocurrency theft, I discussed whether these digital assets were securities (as suggested by the SEC) or property (as suggested by the IRS) and how that might impact insurance coverage under a typical homeowners policy.
I also discussed whether the full policy limits for generic property were available for the theft of the assets or a policy sublimit for money would apply.
At that time, courts had provided little guidance on the issue, and few situations were analogous. In recent years, however, guidance has emerged, including from a line of cases that would not appear to have much relevance at first glance.
Wrestling over “physical” loss
Nearly every appellate court in the country has wrestled with the issue of whether economic losses experienced by businesses as a result of the COVID-19 pandemic were covered by their commercial property insurance policies. A commercial property policy typically covers the “physical” loss of or damages to property. Insurers uniformly denied those business interruption claims and thousands of businesses sued. Courts consistently rejected the businesses’ claims for coverage because the COVID-19 virus does not change the structure of the insured property, and purely economic losses are not “physical” loss or damage.
Similar to the commercial property insurance policies at issue in the COVID-19 claims, a typical homeowners policy covers the direct physical loss of covered personal property.
In 2021, Ali Sedaghatpour had approximately $170,000 of his cryptocurrency stolen and made a claim under his homeowners insurance policy. The insurer paid him the $500 limit for the theft of electronic funds, but denied coverage for the remainder of the loss. The homeowner sued and the federal district court for the East District of Virginia ruled in favor of the insurer. Recently, the United States Court of Appeals for the Fourth Circuit affirmed the decision in favor of the insurer. The case was titled Sedaghatpour v. Lemonade Insurance Co. (Case No. 23-1237).
The court ruled that the digital theft of the homeowners’ currency did not amount to direct “physical” loss and the insurer owed the homeowner nothing more than the $500 it had already paid. The appellate court did not disturb other findings by the trial court – including the lower court’s citation to dictionary definitions of cryptocurrency, which state that cryptocurrency exists “wholly virtually”
Looking ahead
In the Sedaghatpour case, the courts were applying Virginia law; however, given the uniform development of “physical loss” throughout the country in the COVID-19 context, I expect other courts around the country will come to the same conclusion when the issue of how to treat digital assets comes before them. I likewise observe that some insurers have revised their policy language to state expressly that the loss of “electronic currency” is not covered.
These recent court cases confirm that individuals owning cryptocurrency should take extra care to protect their digital assets and should not rely on standard language in homeowners insurance policies to hedge against theft.
Michael Menapace is a Triple-I Non-Resident Scholar, Co-chair of the Insurance Practice Group at Wiggin and Dana LLP, a professor of Insurance Law at the Quinnipiac University School of Law, and a Fellow of the American College of Coverage Counsel.