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U.S. Appeals Court Upholds Dismissal of Homeowner’s $170,000 Crypto Scam Claim

Key Points:

  • A U.S. appeals court denied a homeowner’s $170,000 insurance claim for a crypto scam.
  • The court ruled that insurance policies only cover physical property loss.
  • The homeowner’s insurer, Lemonade Insurance, was found not liable for crypto theft.
  • Cryptocurrency scams remain a prevalent issue, with millions lost to fraud in 2024.

Court Rules Against Insurance Coverage for Crypto Theft

In a significant legal decision, the U.S. Court of Appeals for the Fourth Circuit ruled against a Virginia homeowner’s effort to recoup $170,000 in losses from a cryptocurrency scam through his homeowner’s insurance policy. The court upheld a previous Virginia District Court decision, which had determined that the homeowner’s policy did not cover digital asset theft as it was not considered a “direct physical loss.”

The appeal was filed by Ali Sedaghatpour, who sought compensation from his insurer, Lemonade Insurance, after his crypto assets were stolen through a scam in 2021. The legal dispute originally began in 2022 when Sedaghatpour argued that his homeowner’s insurance should cover the fraud-related losses as part of his personal property. However, the policy specifically covered physical property losses, a restriction upheld by the appeals court.

Rationale Behind the Court’s Decision

According to the court’s October 24 ruling, homeowner’s insurance policies in Virginia require losses to entail physical damage or destruction. Citing Virginia law, the three-judge panel clarified that “direct physical loss” pertains to tangible damage or harm, criteria that do not encompass digital theft such as cryptocurrency fraud.

Sedaghatpour’s claim centered on his argument that cryptocurrency should be classified as personal property eligible for coverage under his homeowner’s policy. Despite being a valuable asset, cryptocurrency lacks the physical attributes required under the policy’s definitions. This decision further affirms that, for insurance purposes, cryptocurrency is considered intangible property, a categorization that prevents it from being covered under traditional homeowner’s policies.

The court further noted that Lemonade Insurance had already fulfilled its contractual obligations by providing limited protection for losses tied to unauthorized use of electronic fund transfer tools, such as access devices. This coverage, however, did not extend to digital assets like cryptocurrency.

Background on the Crypto Scam and Legal Fallout

Sedaghatpour’s ordeal began in December 2021 when he transferred $170,000 in cryptocurrency to APYHarvest, an alleged investment entity later exposed as fraudulent by the Central Bank of Ireland. After receiving a digital wallet key from APYHarvest, Sedaghatpour discovered that his crypto holdings had been wiped out. In response, he filed a lawsuit against Lemonade Insurance in early 2022, arguing that the scam-related loss should be covered under his homeowner’s policy.

The case took a notable turn in February 2023, when a district court dismissed the lawsuit, a decision Sedaghatpour quickly appealed. Lemonade Insurance countered his claim, stating that despite cryptocurrency being potentially stored in a physical device like a cold wallet, it still did not satisfy the conditions for a “direct physical loss” as outlined in the policy.

This ruling reinforces the prevailing interpretation that homeowner’s insurance policies do not extend coverage to intangible assets, a decision with broad implications for crypto holders hoping to use traditional insurance policies for protection against digital fraud.

Rising Crypto Scams Highlight Need for Security

Phishing and fraud remain significant challenges in the cryptocurrency sector. In recent reports, Scam Sniffer, a Web3 anti-scam platform, disclosed that over 10,000 individuals fell victim to crypto phishing scams in September 2024 alone, losing a total of $46.7 million. The issue remains widespread, with a reported $127 million in cryptocurrency lost to phishing and scams during the third quarter of 2024, primarily targeting Ether wallet users.

As crypto fraud continues to rise, industry experts advise investors to exercise caution and consider alternative insurance options designed for digital assets. This includes specialized crypto insurance policies that explicitly cover digital theft and fraud, filling the gap that traditional homeowner’s insurance policies currently leave unaddressed.

The Sedaghatpour case serves as a critical reminder of the limitations traditional insurance policies place on digital assets. This ruling not only affects those in Virginia but also sets a precedent for homeowners nationwide, as courts continue to refine their interpretations of coverage in the face of evolving digital assets.