Theft of cryptocurrency not counted as physical loss in California
How do you buy property insurance for something that cannot be touched? The literal impossibility of physical damage is a red flag to many insurers.
The federal district court for the Northern District of California has ruled that a homeowner’s claim for stolen cryptocurrency is not covered because there was no direct loss to physical property. The case is Burt v. Travelers Commer. Ins. Co., 2022 U.S. Dist. LEXIS 147564 (N.D. Cal. 2022).
The Burt siblings (the Burts) inherited a large Coinbase account from their late father in November 2020. Five months later, hackers took over the account and transferred the entire account balance to their own accounts in less than a day. The Burts filed their claim one month later. They were told an exclusion applied, but the carrier was having trouble determining which one. The Burts made multiple requests for the determination in writing, which Travelers still had not provided as of August 2022. The siblings sued Travelers for declaratory relief, breach of contract, breach of the implied covenant of good faith and fair dealing, and multiple violations of California Unfair Trade Practices; Travelers, in turn, filed a motion to dismiss for failure to state a claim of relief.
The court looked to multiple examples of California state cases that found a requirement for physical alteration of property in claims for direct physical loss. They referenced the case Ward General Ins. Services, Inc. v. Employers Fire Ins. Co., 114 Cal. App. 4th 548 (Cal. Ct. App. 2003), where a claim had been filed for lost data after a system crash. In Ward, as in the case at hand, the allegedly damaged property did not have ”a material existence, formed out of tangible matter, and is perceptible to the sense of touch.” (Ward). The court also denied the plaintiff’s contention that permanent dispossession was equivalent to physical alteration; other courts that had made such an equivocation had dealt with cases where permanent dispossession referred to tangible physical property.
Editor’s Note: The insurance sector has finally begun to catch up to the exponential growth of the cyber market. While this trend is encouraging, it has not yet answered the question implied by Ward and Burt: How do you buy property insurance for something that cannot be touched? The literal impossibility of physical damage is a red flag to many insurers. Cyber policies have become increasingly common, and that trend shows no signs of stopping. But coverage by cyber policies or even a commercial crime or D&O policy is still only a possibility subject to the terms and definitions given in the specific policy.