From the IRS ruling that “virtual currencies” are taxed as “assets” to the SEC lawsuits alleging that digital assets are “securities” under federal law, the largely unregulated cryptocurrency industry is on the rise. The rapid growth raises many questions about whether cryptocurrency-related risks are covered. with insurance. In the latest example of the intersection of cryptocurrency and insurance, a federal court in California recently ruled that cryptocurrency stolen from Coinbase accounts is not a loss covered under a homeowner’s insurance policy. made a verdict. The fundamental question is whether the stolen virtual currency meets the policy’s requirement of “direct physical loss to property” and, more specifically, whether the loss is “physical” in nature. It was whether it was a thing or not. The court ruled that, as a matter of California law, the loss of control of the cryptocurrency was not a direct physical loss, and so denied compensation.
The dispute arose when the two brothers inherited various cryptocurrencies (Bitcoin, Ethereum, Chainlink, Yearn Finance, etc.) that were held in Coinbase accounts. Hackers hijacked accounts and transferred cryptocurrencies to criminals’ own electronic “wallets.” After filing a theft claim under the homeowner’s insurance and being denied coverage, the brothers were sued for declaratory relief, breach of contract, breach of implied covenants of good faith and fair dealing, and unfair competition in California. I filed a suit for violation of the law. .
At issue was an insurance policy covering movable property that claimed (1) “direct physical loss” and (2) “movable property.” Specifically, the court likened stolen virtual currency to “data loss due to database crashes,” likening previous cases, noting that virtual currency “has no physical existence formed from tangible objects and Virtual currencies cannot constitute a direct physical loss, since there is no perceptible physical presence.” Tactile. Plaintiffs cited other court decisions that cryptocurrencies are considered “property.” However, the court ruled that none of these cases were “appropriate” because they were not dealing with cryptocurrencies 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 much of the debate over whether the COVID-19 virus should be covered by a company’s commercial property or all-risk insurance. These insurances usually require physical loss or damage to property. But if cryptocurrencies are truly intangible, decisions like this highlight why losses caused by the presence of viruses should be covered.
Either way, the decision has other implications for companies holding cryptocurrencies and hoping to turn to insurance as a way to protect their investments. The treatment of cryptography in the context of is becoming increasingly important. This decision highlights the need to ensure that adequate insurance is in place to protect against such losses.
For example, commercial crime, cyber, and directors and officers (D&O) insurance policies may cover crypto-related losses. Authorization can also be added to specific policies specific to cryptocurrencies. Compensation under these types of policies is whether the cryptocurrency was simply stolen, whether a ransom demand was made where the business is being extorted, or there is a lawsuit brought against a company officer. Whether or not it will be fact-specific. I hold cryptocurrencies.
Additionally, while this California decision may be a sign against compensating cryptocurrencies stored electronically in Coinbase accounts under homeowners’ policies, it’s not the case that cryptocurrencies are stored in “cold” storage. If so, there is an open question as to how the court will decide. It is stored offline, not online, on hard storage media such as a flash drive (that is, a hardware wallet). In this situation, cryptocurrencies are maintained in a hard format that is susceptible to physical loss or damage.
Given that cryptocurrencies are still a relatively new method of monetary payment, legislation in this area will continue to develop as new issues emerge. It is important for policyholders to consider how cryptocurrencies are characterized, moving forward could impact coverage under various policies and experienced application The use of a coverage attorney can help pave the way and advise on potentially applicable coverage.
Full Opinion at Bart vs. Travelerscom.Insurance company., No. 22-CV-03157-JSC, 2022 WL 3445941 (ND Cal. Aug. 16, 2022) here.
Copyright © 2022, Huton Andrews Kurth LLP. All rights reserved.National Law Review, Vol. XII, No. 237