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Can cryptocurrency suffer direct physical loss?

Cryptocurrency, such as Bitcoin, Ethereum and Litecoin, is a digital or virtual currency.  Unlike traditional currency, cryptocurrency does not have any tangible existence, but rather exists purely as digital entries in an online database.  Given the relatively recent development of cryptocurrency, few courts have had occasion to address application of property insurance coverage principles to losses involving cryptocurrency.

Recently, the U.S. District Court for the Northern District of California was asked to address whether cryptocurrency could suffer direct physical loss despite its intangible nature. In Burt v. Travelers Comm. Ins. Co. (N.D. Cal. Aug. 16, 2022), the court held that theft of cryptocurrency was not a “direct physical loss” as a matter of law. The court’s decision was based, in part, on Ward Gen. Ins. Servs.  Inc. v. Employers Fire Ins. Co., where the California Court of Appeal found that the term “physical” required a “material existence formed out of a tangible matter and is perceptible to the sense of touch.”  Because cryptocurrency is intangible, the court concluded that it cannot sustain “direct physical loss.”

HKR is paying close attention to this emerging issue.  If you would like additional information, please contact any member of HKR’s team.