A recent ruling by the Fourth Circuit Court of Appeals has clarified that homeowners insurance policies do not cover the theft of cryptocurrency, as such losses do not meet the requirement of “direct physical loss” stipulated in the policy. This decision upholds a February 2023 ruling by a federal district court in Eastern Virginia favoring Lemonade Insurance.
Case Background
The case centers around Ali Sedaghatpour, who owned a significant amount of cryptocurrency stored in a hot wallet server called APYHarvest, located in Ireland and England. On December 31, 2021, Sedaghatpour discovered that his cryptocurrency, valued at approximately $170,424.67, had been stolen. He subsequently filed a claim under his homeowners insurance policy with Lemonade for the policy limit of $160,000.
Insurance Claim and Denial
Lemonade denied the claim, arguing that the policy only covers property that has been “damaged directly” by specific losses, including theft. They contended that cryptocurrency, being a digital asset, does not involve any physical damage, thus failing to meet the “direct physical loss” requirement. Additionally, Lemonade pointed out that even if the loss were covered, the policy limited coverage for theft of electronic funds to $500, an amount they subsequently paid to Sedaghatpour.
Legal Proceedings
Sedaghatpour sued Lemonade, and the district court initially dismissed his complaint but allowed him to amend it to provide more details about the stolen cryptocurrencies. His amended complaint specified the types of cryptocurrencies stolen and alleged that APYHarvest was involved in the theft by transferring the assets to a company in the Cayman Islands, Binance.com, and subsequently selling them.
Despite these details, Lemonade moved to dismiss the amended complaint, reiterating that the policy does not cover cryptocurrency losses and that any potential coverage would be limited to $500.
Court Rulings
The main question for the court was whether the theft of cryptocurrency constituted a “direct physical loss” under the insurance policy. The court concluded that cryptocurrency exists only in a virtual or digital form and lacks any physical or tangible existence. Thus, it determined that the loss of cryptocurrency does not qualify as a “direct physical loss” to property, which is a prerequisite for coverage under the policy.
The court referenced previous case law, including a 2003 Fourth Circuit case involving Hartford Insurance, which established that a “direct physical loss” requires some form of physical impact to the insured property. In that case, the deletion of files from a computer constituted a direct physical loss because it caused damage to the plaintiff’s property. However, in Sedaghatpour’s case, the theft of cryptocurrency did not damage any physical property he owned, reinforcing the court’s conclusion.
Conclusion
The Fourth Circuit upheld the district court’s ruling, affirming that homeowners insurance policies do not cover losses related to cryptocurrency theft due to the lack of physical loss. This decision underscores the challenges faced by cryptocurrency holders in securing insurance coverage for their digital assets and highlights the need for insurance products specifically tailored to address the unique nature of cryptocurrencies.
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