A U.S. appeals court has upheld the dismissal of a homeowner’s lawsuit that sought to compel his insurer, Lemonade Insurance, to cover losses from a cryptocurrency scam. The case, involving a $170,000 theft of crypto, was rejected on Oct. 24 by the Fourth Circuit Appeals Court, which ruled that the insurer was not liable under the terms of the homeowner’s policy.
The Lawsuit
Ali Sedaghatpour, a Virginia homeowner, filed the lawsuit in 2022 after he fell victim to a cryptocurrency scam. Sedaghatpour claimed that his homeowner’s insurance policy should cover the loss, arguing that the $170,000 worth of cryptocurrency stolen from him was equivalent to a “direct physical loss” under the terms of the policy. The lawsuit was one of the rare cases where a cryptocurrency user sought to have crypto theft covered under a homeowner’s insurance policy.
The policy in question provided coverage for “direct physical loss” of personal property, a standard clause in most homeowner’s insurance policies. Sedaghatpour argued that the digital theft of his crypto should be considered a “physical loss,” despite the intangible nature of the assets involved.
Court Ruling
The three-judge panel of the Fourth Circuit Appeals Court ruled that the lower court was correct in dismissing the case. According to the judges, the definition of “direct physical loss” under Virginia law requires “present or impending material destruction or material harm” to property. Since cryptocurrency is digital and intangible, they determined that the theft did not constitute a “physical loss” under the terms of the policy.
The court also referenced a section of the policy that provides up to $500 for losses related to “theft or unauthorized use of an electronic fund transfer card or access device.” The appeals court upheld the insurer’s decision to cover this amount, asserting that Lemonade Insurance had already fulfilled its obligations under that provision.
Sedaghatpour’s Response
Sedaghatpour expressed dissatisfaction with the court’s ruling, claiming that the decision lacked clarity regarding why digital theft should not be considered a physical loss. In a statement to Cointelegraph, he said the court “reached its conclusion without explaining how ‘digital’ theft is not a physical loss by theft.” He also pointed out that Lemonade’s policy included provisions for covering other types of digital property, such as cryptocurrency, and suggested that state laws might require broader coverage for digital assets beyond just “direct physical loss.”
Sedaghatpour had transferred $170,000 to a scam entity called APYHarvest in December 2021, believing it to be an investment firm. He was given a key to a crypto wallet by the entity, which he stored in a safe at his home. When he later discovered that the wallet had been emptied, he filed a claim with Lemonade Insurance, asserting that his loss should be covered under his policy’s personal property coverage, which was valued at up to $160,000.
Lemonade’s Argument
Lemonade Insurance argued that while the hardware used to store the cryptocurrency, such as a cold wallet, is a tangible object, the data contained within it is intangible and cannot be classified as a “direct physical loss” under the terms of the policy. They further argued that regardless of the manner in which the cryptocurrency was stored, the asset itself remains intangible and, therefore, outside the scope of coverage for physical property loss.
The Broader Impact
This case highlights a growing issue in the insurance industry as cryptocurrency becomes more integrated into personal finance. Many traditional insurance policies were not designed to account for digital and intangible assets like cryptocurrencies, and the legal landscape surrounding crypto-related insurance claims remains unclear.
For now, the ruling sets a precedent that crypto theft will not be covered by typical homeowner’s policies unless the theft involves tangible property or specific coverage for digital assets is explicitly stated in the policy. This leaves cryptocurrency holders facing the challenge of finding specialized insurance or protection for their digital assets.
Lemonade Insurance’s lawyers did not immediately respond to requests for further comment on the ruling.
