For companies issuing homeowners insurance policies, and consumers buying them, the usual list of policy details to consider includes items such as coverage for an individual’s personal belongings, the home’s structure, and protection in the event someone is injured on the property. In one of the first decisions to consider the issue, the U.S. Court of Appeals for the Fourth Circuit, which is based in Richmond, Virginia, has recently addressed a different coverage issue: whether a homeowners insurance policy covered the theft of $170,000 in cryptocurrency. In that case, Sedaghatpour v. Lemonade Insurance Company, the Fourth Circuit held that it did not.
Statistics indicate that questions related to coverage for cryptocurrency may become more common – one large cryptocurrency payments company estimates global cryptocurrency ownership at an average of 6.8%, with over 560 million cryptocurrency owners worldwide. The same company estimates that approximately 15% of individuals in the United States own cryptocurrency. Insurance companies will therefore want to monitor issues related to cryptocurrency since its ownership will likely continue to rise.
The policy holder in the case before the Fourth Circuit, Ali Sedaghatpour, stored his cryptocurrency on a “hot wallet,” which stores cryptocurrency virtually on a third party’s servers. The servers at issue were physically located in Ireland and England, but Sedaghatpour could always access his cryptocurrency via the internet. After discovering that approximately $170,000 in cryptocurrency was stolen from his hot wallet, Sedaghatpour made a claim under his homeowner’s insurance policy for $160,000.00, the policy’s limit. His insurer, Lemonade Insurance, denied the claim on two grounds. First, Lemonade reasoned that the policy protects Sedaghatpour’s “stuff,” or property, only when that property is “damaged directly” by one of the “specific losses” contemplated in the policy, including theft. Second, Lemonade reasoned that even if the policy did cover the loss, the policy’s limitation of $500 for loss “resulting from theft or unauthorized use of an electronic fund transfer card or access device used for deposit” limited coverage for the loss of cryptocurrency to $500.
Sedaghatpour filed a lawsuit against Lemonade and alleged that his homeowners policy covered the stolen cryptocurrency because he had transferred the cryptocurrency from his laptop or smartphone while sitting at home to the hot wallet that he used to store the cryptocurrency, and the cryptocurrency was stolen from that hot wallet. The United States District Court for the Eastern District of Virginia dismissed the lawsuit. The District Court reasoned that the policy at issue insured against “direct physical loss” to personal property “caused by any of the following perils,” one of which is “theft.” The District Court also reasoned that the policy made it clear that it covered “personal property owned or used by” Sedaghatpour “while it is anywhere in the world.” Ultimately, the District Court held that that the policy did not cover the stolen cryptocurrency because it was completely virtual, and there was therefore no “direct physical loss” to Sedaghatpour’s personal property.
In reaching that result, the District Court relied on various dictionaries and governmental agencies that define cryptocurrency as existing wholly virtually or digitally. The District Court therefore concluded that “it is clear that cryptocurrency, by its nature, exists only virtually or digitally and has no physical or tangible existence. It follows, therefore, that the policy does not cover loss or theft of cryptocurrency because the loss or theft does not constitute a ‘direct physical loss’ to plaintiff’s property.” The District Court also discussed the novelty of the issue before it, noting that it had only found one case addressing a similar issue from a court in California.
Sedaghatpour also argued that because Lemonade had added language specifically excluding coverage for the loss of cryptocurrency to its more recent insurance policies issued to other people, that suggested his policy did not exclude such a loss. The District Court also rejected that argument, reasoning in part that “[t]o hold otherwise would discourage insurance companies from clarifying their policies, which would in turn be most harmful to their customers.”
The Fourth Circuit affirmed the District Court’s order, agreeing that the digital theft of digital cryptocurrency did not amount to a “direct physical loss” under the policy.
Given the scarcity of court opinions addressing this issue, the decision in Sedaghatpour will be helpful for insurance companies to keep in mind should they face a similar claim. And since the few courts to address the issue have held that the loss of cryptocurrency is not a “direct physical loss” under a homeowners insurance policy, consumers who do own cryptocurrency and are looking for ways to protect that asset will want to investigate their options.
If you have questions about this article, or about insurance law in general, please contact Kevin Streit (kstreit@setlifflaw.com) at 804-377-1270 or Danielle Brim (dbrim@setlifflaw.com) at 804-377-1264.
The decision in the Fourth Circuit is Sedaghatpour v. Lemonade Insurance Company, No. 23-1237 (4th Cir. Oct. 24, 2024)
© 2025 Setliff Law, P.C.| View Our Disclaimer | Privacy Policy