From IRS rulings that “virtual currency” is taxed as “property” to an SEC lawsuit claiming that digital assets are “securities” under federal law, meteoric 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 held that cryptocurrency stolen from a Coinbase account did not constitute a covered loss under a homeowner’s insurance policy. The fundamental issue was whether the stolen crypto met the policy’s requirement for “direct physical loss to property” and, more specifically, whether the losses were “physical” in nature. The court ruled against coverage, reasoning that lost control of cryptocurrency is not a direct physical loss as a matter of California law.
The dispute arose when two siblings inherited various cryptocurrency (i.e., Bitcoin, Ethereum, Chainlink and Yearn Finance) that was held in a Coinbase account. Hackers took over the account and transferred the cryptocurrency into the criminals’ own electronic “wallet.” The siblings submitted a claim for the theft under their homeowners’ insurance policy, and after being denied coverage, brought suit for declaratory relief, breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of California Unfair Competition Law.
At issue was the policy’s insuring agreement covering personal property, which required (1) “direct physical loss to,” (2) “personal property.” Specifically, the court analogized the stolen crypto to prior cases considering “data lost from a database crash,” concluding that cryptocurrency cannot constitute a direct physical loss because cryptocurrency does not have “a material existence, formed out of tangible matter, and is perceptible to the sense of touch.” The plaintiffs cited other court decisions holding that cryptocurrency is considered “property.” But the court found none of those cases to be “on point” 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 heart of many disputes over whether the COVID-19 virus is covered under businesses’ commercial property or all-risk insurance policies, which typically require physical loss of or damage to property. If cryptocurrency truly is intangible, however, then decisions like this underscore why loss caused by the presence of a virus should be covered—a virus is tangible, has a physical presence, and has material existence on property and in the air.
In any event, the decision has other ramifications for businesses that hold cryptocurrency and expect to look to insurance as a way to protect their investment. The rise and interest in cryptocurrency makes crypto’s treatment in the insurance context increasingly relevant. This decision underscores the need to ensure the right insurance is in place to protect such a loss.
For example, there are commercial crime, cyber, and directors and officers (D&O) insurance policies that may respond to crypto-related losses. Endorsements can also be added to certain policies that are specific to cryptocurrency. Coverage under these types of policies will be fact-specific, such as whether the cryptocurrency has simply been stolen, whether a ransom demand has been made where a business is being extorted, or whether there is a lawsuit being instituted against an officer of the company which holds the cryptocurrency.
Additionally, though this California decision may be a sign against coverage under a homeowners’ policy for cryptocurrency stored electronically in a Coinbase account, there is an open question as to what a court might decide if the cryptocurrency is maintained in “cold” storage—where it is not stored online, but instead offline in a hard storage medium (i.e., in a hardware wallet), such as a flash drive. In this circumstance, the cryptocurrency is maintained in a hard format that is susceptible to physical loss or damage.
Given that cryptocurrency is still a relatively new method of monetary payment, the law will continue to be developed in this arena as new issues come up. It is vital for policyholders to consider how cryptocurrency is characterized moving forward may impact coverage under different policies, and the use of experienced coverage counsel can help lead the way and advise on potentially applicable coverage.
The full opinion in Burt v. Travelers Com. Insurance Co., No. 22-CV-03157-JSC, 2022 WL 3445941 (N.D. Cal. Aug. 16, 2022), can be found here.
About this Author
Geoff dedicates his practice to advising corporate policyholders and their directors and officers in complex insurance coverage matters, from placement of sophisticated insurance programs and policy reviews to claim advocacy through arbitration, litigation, trials, and appeals. As part of Hunton Andrews Kurth’s full-service insurance coverage practice, he works with clients to maximize insurance recoveries through policy analysis and audits, claims presentation and negotiation, alternative dispute resolution, and litigation.
Geoff regularly…
Yosef’s practice focuses on representing and advising corporate policyholders in complex insurance coverage matters.
Yosef has handled insurance coverage claims under all forms of policies, including commercial general liability, directors and officers liability, employment practices liability, business interruption, and cyber, among others. Yosef also has experience representing clients in products liability, environmental, mass tort, commercial, construction, employment, and other complex litigation matters.
In…
You are responsible for reading, understanding and agreeing to the National Law Review’s (NLR’s) and the National Law Forum LLC’s Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on www.NatLawReview.com are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.
Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is www.NatLawReview.com intended to be a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional. NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us.
Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.
The National Law Review – National Law Forum LLC 3 Grant Square #141 Hinsdale, IL 60521 Telephone (708) 357-3317 or toll free (877) 357-3317. If you would ike to contact us via email please click here.
Author
Administraroot
Related Posts
