From IRS rulings that “virtual currency” is taxed as “property” to a SEC lawsuit claiming digital assets are “securities” under federal law, the rapid growth of the largely unregulated crypto industry has raised numerous questions about Whether crypto-related risks are covered by insurance. In the latest example of the intersection of crypto and insurance, a California federal court recently ruled that cryptocurrency stolen from a Coinbase account does not constitute a loss covered under a homeowner’s insurance policy. The main issue was whether the stolen cryptocurrency met the policy requirements for “direct physical loss of property,” and more specifically, whether the losses were “physical” in nature. The court ruled against the coverage, arguing that losing control of the cryptocurrency is not a direct material loss as a matter of California law.
The dispute arose when two brothers inherited several cryptocurrencies (such as Bitcoin, Ethereum, Chainlink and Yearn Finance) that were held in a Coinbase account. The hackers took over the account and transferred the cryptocurrency to the electronic “wallet” of the criminals. The siblings sued for theft under their homeowners insurance policy and, after denying coverage, sued for advertising relief, breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of California’s Unfair Competition Act. .
The subject of the dispute was the policy’s insurance agreement covering personal property, which required (1) “direct material loss,” (2) “personal property.” Specifically, the court likened the stolen cryptocurrency to previous cases considering “data lost from database collapse,” concluding that cryptocurrency could not constitute a direct physical loss because the cryptocurrency had no “physical existence, made up of tangible material.” , can be perceived by the sense of touch. The plaintiffs cited other court decisions that state that cryptocurrency is considered “property.” But the court did not find any of these cases “proper” because they did not address cryptocurrency in the context of “direct physical loss” under California law.
If this analysis sounds familiar, it’s because it has been at the center of many controversies over whether the COVID-19 virus is covered by corporate commercial property or all-risk insurance policies, which typically require physical loss or property damage. If cryptocurrency is truly intangible, decisions like this underscore why the loss caused by the presence of a virus should be covered – the virus is tangible, has a physical presence, has a physical presence in property and in the air.
However, the decision has further implications for companies that hold cryptocurrency and expect to see insurance as a way to protect their investments. The rise and interest in cryptocurrencies is making the treatment of cryptocurrency in the context of insurance increasingly relevant. This decision underscores the need to ensure that adequate insurance is in place to protect such a loss.
For example, there are commercial, cybercrime, directors and officers (D&O) insurance policies that may respond to crypto-related losses. Endorsements can also be added to specific cryptocurrency policies. Coverage under these types of policies will be specific to facts, such as whether the cryptocurrency was simply stolen, whether a ransom was demanded in the event of extortion by a company, or whether there is a lawsuit being filed against an employee of the company holding the coin encrypted.
Additionally, while this California decision could be a sign against coverage under a homeowner’s policy for cryptocurrencies electronically stored in a Coinbase account, there is an open question as to what a court might decide if the cryptocurrency is held in “cold” storage – where it is not Store it online, but offline on a fixed storage medium (for example, in a hardware wallet), such as a flash drive. In this circumstance, the cryptocurrency is held in a solid format that is vulnerable to physical loss or damage.
Since cryptocurrency is still a relatively new way to pay with cash, the law will continue to develop in this area as new problems arise. It is critical for policyholders to consider how crypto is differentiated and moving forward may affect coverage under different policies, and the use of an experienced coverage advisor can help lead the way and advise on potentially viable coverage.
full opinion on Burt v. Travelers.com. Insurance company. 22-CV-03157-JSC, 2022 WL 3445941 (ND Cal. Aug. 16, 2022), can be found over here.
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