Where a homeowner’s policy required a “direct physical loss,” the theft of cryptocurrency was not covered. Cryptocurrency, by its nature, exists only virtually or digitally and has no physical or tangible existence.
Background
According to the amended complaint, on Dec. 31, 2021, Ali Sedaghatpour discovered that all of his cryptocurrency stored in the APYHarvest hot wallet — worth $170,424.67 at that time — had been stolen. On Jan. 3, 2022, he made a claim under his homeowner’s insurance policy. Defendant Lemonade Insurance Company denied the claim on the ground that the policy protects plaintiff’s “stuff,” or property, only when that property is “damaged directly” by one of the “specific losses” contemplated in the policy.
The claims’ specialist further reasoned that, even if plaintiff’s loss were covered by the policy, the policy limited coverage for plaintiff’s loss of cryptocurrency to $500.00. Accordingly, defendant paid plaintiff $500.00.
In this suit, Sedaghatpour seeks $159,500.00 in damages (the policy’s $160,000.00 limitation less the $500.00 that plaintiff had already received from defendant). Defendant has filed a motion to dismiss.
Analysis
The principal issue presented by the motion to dismiss is whether theft of cryptocurrency is a “direct physical loss” within the policy’s coverage. Although plaintiff does not define cryptocurrency, various dictionaries and governmental agencies define cryptocurrency as existing wholly virtually or digitally. Because 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.
Given the novelty of cryptocurrency, it is not surprising that the parties have cited no Virginia case considering whether theft of cryptocurrency constitutes a “direct physical loss” under a homeowner’s insurance policy like the policy defendant issued to plaintiff. Yet there is authority from a district court in California considering precisely this question and concluding that the theft of cryptocurrency does not constitute a “direct physical loss,” as required by the policy there and the policy here. The result reached here is also consistent with Fourth Circuit authority applying Virginia law in the computer context, albeit not specifically in the cryptocurrency context.
In response, plaintiff contends that the term “physical” is ambiguous and thus should be construed against defendant because defendant drafted the insurance policy. Second, plaintiff argues that defendant, in recent and subsequent insurance policies, specifically provides that loss of electronic currency, such as cryptocurrency, is not covered; the absence of this language in his policy, plaintiff argues, demonstrates that loss of cryptocurrency is covered in plaintiff’s policy. Neither of plaintiff’s two arguments is persuasive.
As to plaintiff’s first argument, although the Fourth Circuit has made clear that ambiguities in an insurance policy must be construed against the insurer, no genuine ambiguity is present in the policy’s use of the term “direct physical loss.” As to plaintiff’s second argument, the Supreme Court of Virginia has made clear that the task at hand is to interpret the insurance policy based upon the words “used in the document.”
And as the D.C. Circuit Court of Appeals has recently noted, “[a] policy is not ambiguous” merely because the insurer later “amends its provisions.” To hold otherwise would discourage insurance companies from clarifying their policies, which would in turn be most harmful to their customers.
Plaintiff finally argues that because defendant relied only on the electronic fund transfer $500.00 limitation language in denying plaintiff’s initial claim, defendant cannot now claim that the policy provides no coverage on the basis of the “direct physical loss” language because of the “mend the hold” doctrine, which plaintiff argues prevents a party at litigation from offering different reasons for refusing to perform a contract than the party offered before litigation.
Because Virginia has not adopted the “mend the hold” doctrine either through common law or statute, plaintiff’s argument based on the “mend the hold” doctrine fails. Even it applied, moreover, the claim specialist here sufficiently stated defendant’s position that the policy did not cover the loss. Nothing in the “mend the hold” doctrine forbids attorneys from expanding upon reasons given by a claim’s specialist.
Defendant’s motion to dismiss granted.
Sedaghatpour v. Lemonade Insurance Company, Case No. 1:22-cv-355, Feb. 6, 2023. EDVA at Alexandria (Ellis). VLW 023-3-047. 11 pp.
