Watch that cryptocurrency. Insurance may not cover it

A man named Ali had his cryptocurrency stolen from his online account. He tried to get his homeowner’s insurance to cover the loss, but they refused.

Here’s why:

• Cryptocurrency is digital: It only exists online, not in a physical form.

• The insurance policy only covers “physical loss”: This means things that are physically damaged or stolen, like a TV or jewelry.

• The court ruled that losing cryptocurrency online isn’t the same as a physical loss.

Even though Ali lost a lot of money, the court said his insurance company doesn’t have to pay because the policy doesn’t cover this type of loss.

Policy covers physical loss, courts hold

The ruling by the Fourth Circuit Court of Appeals upheld a February 2023 ruling by the federal district court for Eastern Virginia in a win for the insurer Lemonade Insurance. That’s the last stop before the Supreme Court. 

The plaintiff in the case, Ali Sedaghatpour, owned substantial amounts of various cryptocurrencies that he stored on a hot wallet server known as APYHarvest, which is physically located in Ireland and England.

APYHarvest’s hot wallet, like other hot wallets, was always accessible to him via the internet. On December 31, 2021, he discovered that all of his cryptocurrency stored in the APYHarvest hot wallet—worth $170,424.67 at that time—had been stolen.

On January 3, 2022, Sedaghatpour made a claim under his Lemonade homeowner’s insurance policy for the policy’s limit of $160,000. Lemonade denied the claim on the ground that the policy protects plaintiff’s “stuff,” or property, only when that property is “damaged directly” by one of the “specific losses” contemplated in the policy including theft.

Lemonade did pay him $500 because of a clause in the policy that it would pay up to that amount for loss “resulting from theft or unauthorized use of an electronic fund transfer card or access device used for deposit.” 

The complaint identified the 11 specific cryptocurrencies that Sedaghatpour said were stolen after he transferred them from his laptop or smartphone while sitting at home to the APYHarvest hot wallet.

The complaint went on to allege that APYHarvest was itself the thief that stole his cryptocurrency, first by moving it to a company in the Cayman Islands and then by selling the cryptocurrency to an unidentified third party.

After the district court ruled for Lemonade, Sedaghatpour appealed that dismissal. The Fourth Circuit panel last week upheld the district court and dispensed with oral argument because further “argument would not aid the decisional process.”