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 constitute a “direct physical loss” under the terms of the policies. This decision reinforces the distinction between traditional physical property and digital assets in the context of insurance coverage.
Case Overview
Background: Ali Sedaghatpour owned a significant amount of cryptocurrency stored on a hot wallet server called APYHarvest, which is located in Ireland and England. On December 31, 2021, he discovered that all his cryptocurrency, valued at approximately $170,424.67, had been stolen.
Insurance Claim: Sedaghatpour filed a claim with Lemonade Insurance for the theft under his homeowners insurance policy, seeking the policy limit of $160,000. Lemonade denied the claim, arguing that the policy only covers property that suffers “direct physical loss,” and that cryptocurrency, being entirely virtual, does not meet this criterion.
Policy Limitations: Lemonade further contended that even if the theft were covered, the policy limited coverage for losses due to theft of electronic funds to just $500. They subsequently paid Sedaghatpour this amount.
Legal Proceedings: Sedaghatpour filed a lawsuit against Lemonade, which initially led to a dismissal of his complaint. After amending his complaint to specify the types of cryptocurrencies stolen and the circumstances of the theft, he faced another dismissal attempt from Lemonade, which was again based on the argument that cryptocurrency theft does not involve a “direct physical loss.”
Court Findings
Definition of “Direct Physical Loss”: The court emphasized that for a loss to be considered “direct physical loss,” there must be a physical impact on the covered property. Since cryptocurrency exists solely in a digital form, the court concluded that it does not have a physical or tangible existence.
Legal Precedents: The court referenced a previous Fourth Circuit case involving Hartford Insurance, which distinguished between physical loss and virtual loss. In that case, a hacker’s deletion of files from the plaintiff’s computer constituted a physical loss because it affected the plaintiff’s owned property. Conversely, in Sedaghatpour’s case, the theft did not impact any physical property that he owned, as the cryptocurrency was stored on a server controlled by a third party.
Conclusion: The Fourth Circuit upheld the district court’s ruling, confirming that the loss of cryptocurrency does not satisfy the “direct physical loss” requirement stipulated in the homeowners insurance policy. The court noted that the nature of cryptocurrency as a digital asset excludes it from traditional property coverage.
Implications
This ruling has significant implications for both consumers and insurers regarding the coverage of digital assets. As cryptocurrency becomes more prevalent, the distinction between physical and digital property in insurance policies will likely continue to be a critical issue. Consumers should be aware that standard homeowners insurance policies may not cover losses related to cryptocurrencies and may need to seek specialized coverage if they wish to protect their digital assets. Insurers, on the other hand, may need to clarify their policies regarding digital currencies to avoid disputes similar to this case.
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