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Cryptocurrency Complications in the Property Insurance Context

Cryptocurrency, such as Bitcoin, Etherium and Litecoin, is a digital or virtual currency that is secured by cryptography. A distinct feature of cryptocurrency is that it is not issued by any central authority, such as a bank. Instead, internet users help maintain and manage the value of cryptocurrencies.  Cryptocurrency does not have any tangible existence, but rather exists purely as digital entries in an online database. 

In recent years, the cryptocurrency industry has exploded.  With this increase in prevalence, insurers have been faced with new and unique issues under their property insurance policies due to the unique nature of the currency.  For example, insurers must grapple with whether cryptocurrency is treated as property or money and securities.  This is important because property insurance policies typically treat money and securities more strictly than property. 

The proper classification of cryptocurrency in the property insurance context is far from settled.  At this time, only one reported decision, Kimmelman v. Wayne Ins. Grp. (Franklin County, Ohio C.C.P. Sept. 25, 2018), has addressed the issue.  There, the court relied on IRS Notice 2014-21, which states that cryptocurrency should be treated as property for federal income tax purposes, and held that cryptocurrency should, therefore, be considered property, not money, under the homeowners policy at issue.

Another issue posed by cryptocurrency’s intangible nature is the question of whether it can suffer the “direct physical loss or damage” necessary to trigger coverage under most property insurance policies.  This question has not yet been addressed by the courts.  However, in cases involving economic losses from the use of fraudulent checks, courts have reasoned that the electronic funds were not physical in nature and, thus, were not susceptible to physical loss or damage. The same could be argued about cryptocurrency.

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