In a recent Fourth Circuit Court of Appeals decision that leaves me scratching my head, Lemonade Insurance Company successfully argued that cryptocurrency isn’t covered under their homeowner’s policy because it’s not “tangible property.” 1 The irony is that a tech-forward insurance company named after a refreshing drink takes such a sour position on digital assets. I give their creative and winning lawyers a toast—but they only beat a pro se policyholder who failed to bring to the court’s attention that other insurance companies are issuing property insurance policies for bitcoins, blockchain, stablecoins and other forms of digital and cryptocurrency.

The Old Guard Leads the Way

Meanwhile, across the pond, the venerable Lloyd’s of London – an institution that began ensuring wooden ships in the 1600s – has embraced the digital age. Lloyd’s syndicates, including Atrium and TMK, now offer comprehensive property insurance coverage for cryptocurrency theft, including protection for both hot and cold wallets. These policies even feature dynamic limits that adjust with cryptocurrency value fluctuations, showing remarkable adaptability for an institution that predates electricity. Obviously, had this fact been brought to the attention of the federal judges, they may not have written that these digital currencies are not tangible property since Lloyds is issuing coverage for these under property insurance policies!

The Sweet and Sour of Insurance Innovation—The Contrast is Striking

Lloyd’s, with its centuries-old tradition of quill pens and maritime insurance, recognizes the reality of digital assets as property worthy of protection. Meanwhile, Lemonade, a startup digitech American company that prides itself on Artificial Intelligence to make claims determinations and digital underwriting automation, allowed its clever insurance attorneys to convince a federal district court judge and the Fourth Circuit Court of Appeals that when someone steals your Bitcoin, it’s not really a “direct physical loss” because you can’t touch it.

I suggest that the Covid case law denying coverage is now wrongly overreaching into general arguments against property damage coverage cases by limiting what “tangible property” consists of and what “physical loss” means in the context of cases outside of Covid-related losses. This needs to stop, and this case is an example of why.

A Bitter Taste for Policyholders

The Fourth Circuit’s decision in Sedaghatpour v. Lemonade Insurance Company, affirming a flawed district court opinion, 2  represents a concerning precedent for cryptocurrency holders. The court and Lemonade may have properly limited coverage to a measly $500 under an electronic fund transfer provision. The wrongful part of the decision is that billions in digital assets remain potentially unprotected under traditional property insurance policies, finding that bitcoins and other forms of digital currency are not tangible assets or property.

Perhaps it’s time for American insurers to take a page from Lloyd’s playbook and recognize that property in the 21st century isn’t limited to things you can drop on your foot. Until then, cryptocurrency owners might want to look across the Atlantic for their insurance needs – where, apparently, the “old dogs” are better at learning new tricks.

One lesson for policyholders and their counsel is to understand the insurance product and get your heads out of insurance case law. Judges are not learned insurance agents or property claims adjusters. My old friend, the late Gene Anderson of the excellent Anderson Kil policyholder firm, always said that “a doctor does not learn how to practice medicine from reading medical malpractice books. Why should an insurance lawyer learn insurance from simply reading insurance case law?” Those words are especially true given the obvious wrongful conclusion by the Fourth Circuit affirming the district court’s decision that cryptocurrency is not “tangible property.” That argument is simply not recognized in the property insurance marketplace.

Remember, when insurance companies try to squeeze their way out of coverage, sometimes you need to make lemonade out of their lemons. Just don’t expect Lemonade Insurance to cover it if someone steals your digital recipe or money.

Thought For The Day

Innovation distinguishes between a leader and a follower.
—Steve Jobs

1 Sedaghatpour v. Lemonade Ins. Co., No. 23-1237 (4th Cir. Oct. 24, 2024).
2 Sedaghatpour v. Lemonade Ins. Co., No. 1:22-cv-355 (E.D. Vir. Feb. 6, 2023).