(Article from Insurance Law Alert, November 2024)
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Holding
The Fourth Circuit affirmed a district court’s dismissal of a policyholder’s breach of contract suit, finding that the homeowner’s policy did not cover the theft-related loss of cryptocurrency. Sedaghatpour v. Lemonade Ins. Co., 2024 U.S. App. LEXIS 26924 (4th Cir. Oct. 24, 2024).
Background
The policyholder owned cryptocurrency stored on a “hot wallet,” a virtual storage option on a third-party server. When he realized that his cryptocurrency, worth $170,424.67, was stolen, he filed a claim with his property insurer. The insurer paid $500, the limit under a provision related to loss “resulting from theft or unauthorized use of an electronic fund transfer card or access device used for deposit.” The homeowner sought coverage for the remaining amount of the loss, which the insurer denied as outside the scope of policy coverage. The homeowner sued and the insurer moved to dismiss based on the homeowner’s failure to allege “direct physical loss.” The district court granted the motion and the Fourth Circuit affirmed.
Decision
Addressing this matter of first impression under Virginia law, the district court ruled that the loss of cryptocurrency did not constitute a “direct physical loss.” Ali Sedaghatpour v. Lemonade Ins. Co., 654 F. Supp. 3d 525 (E.D. Va. 2023). The court explained: “[C]ryptocurrency, by its nature, exists only virtually or digitally and has no physical or tangible existence. It follows, therefore, that the policy does not cover loss or theft of cryptocurrency because the loss or theft does not constitute a ‘direct physical loss’ to plaintiff’s property.”
The district court rejected the homeowner’s assertions that the term “physical” was ambiguous and that the inclusion of a cryptocurrency exclusion in later policies indicated an intent to cover cryptocurrency losses under the present policy. As the court noted, a policy is not ambiguous simply because an insurer later amends coverage or exclusion provisions.
The Fourth Circuit affirmed the district court decision.
Comments
Faced with a nearly identical fact pattern, a California district court reached the same conclusion in Burt v. Travelers Com. Ins. Co., 621 F. Supp. 3d 1049 (N.D. Cal. 2022). The decisions in Sedaghatpour and Burt are consistent with cases involving the loss of computer data. In numerous cases, courts have concluded that the loss of non-physical data, without accompanying damage to computer systems, does not constitute direct physical loss within the meaning of a first-party property policy.