How cryptocurrencies are viewed by courts can be determinative when seeking coverage for a cryptocurrency-related loss, and whether cryptocurrency is “money,” “securities,” or “property” has been the subject of heavy debate.

In our previous blog post, we explored how your current D&O and/or cyber insurance policies may provide coverage for crypto-related losses. In this article, we discuss whether and how coverage may also exist for certain losses under typical property and/or specie insurance policies.

Is cryptocurrency “property”?

When determining whether your loss of or inability to access your cryptocurrency is covered under your property and/or specie policy, the first question to ask is whether cryptocurrency constitutes covered “property.”

The Internal Revenue Service (“IRS”) has provided some guidance.  In March 2014, the IRS declared that “virtual currency”, such as Bitcoin and other cryptocurrency, will be taxed as “property” and not currency. See IRS Notice 2014-21, Guidance on Virtual Currency (March 25, 2014); see also IRS Has Begun Sending Letters to Virtual Currency, Internal Revenue Serv. (July 26, 2019), (“IRS Notice 2014-21 … states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions.”). 

Relying on this IRS Guidance, an Ohio court rejected an insurer’s argument that its policyholder had no breach of contract claim for the insurer’s failure to indemnify the policyholder for its loss of cryptocurrency because it was not considered “property” as defined in its property insurance policy. Kimmelman v. Wayne Ins. Grp., No. 18 CV 1041, 2018 Ohio Misc. LEXIS 1953, at 3 (Ct. Com. Pl. Sep. 25, 2018) (“The only authority the Court can rely on in determining the status of Bitcoin is the Internal Revenue Service Notice 2014-21. Under Notice 2014-21, the IRS states, “For federal tax purposes, virtual currency is treated as property.”).

Courts in multiple jurisdictions around the world have agreed that cryptocurrency should be recognized as “property.” See Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02 (24 February 2020) (Singapore; “[T]here may be much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property”); Aa v Persons Unknown [2019] EWHC 3556 (Comm) (17 January 2020) (United Kingdom; noting that while “property” is typically classified as either “tangible” (physical object) or “chose in action” (bundle of rights), that something cannot be so classified is not necessarily a bar to it being “property.”); David Ian Ruscoe and Malcolm Russell Moore v Cryptopia Limited (In Liquidation) [2020] NZHC 728 (8 April 2020) (New Zealand; finding cryptocurrency were indeed “property”); Joint Liquidators of Torque Group Holdings Limited (In Liquidation) v Torque Group Holdings Limited (In Liquidation) BVIHC (COM) 0031 of 2021 (2 July 2021) (British Virgin Islands; concluding that cryptocurrency assets were “property” within the meaning of the BVI Insolvency Act 2003).

Will insurance cover crypto-related losses?

Following the increasing recognition of cryptocurrency as “property,” policyholders should not overlook specie and property insurance policies when evaluating coverage for cryptocurrency-related risks.   To the extent currency is a species of covered property at all, currency losses are often subject to a sublimit, restricting coverage to an amount less than that available for other types of personal property.

Specie insurance

An important, but lesser-known, insurance product is specie insurance. This specialized form of coverage protects high value, portable items like securities, precious metals, gems, cash, and, as this article suggests, even cryptocurrency. Whether your cryptocurrency loss is covered by a specie policy will depend on the cause of the loss itself.  For example, specie policies typically do not cover ransomware attacks or hacking, but often cover loss caused by theft or destruction of assets while stored in secured locations.

There are several mechanisms cryptocurrency holders can employ to manage their holdings, such as a digital wallet, a cloud-based provider (such as Coinbase for example), a software wallet installed directly on a holder’s computer or mobile phone, or “cold storage”, which refers to storing cryptocurrency offline in a hardware wallet (like Trezor). Because cold storage is offline, and therefore inaccessible by others through the Internet, it is more resistant to theft by hacking.  That said, it remains susceptible to loss or damage from a variety of other perils like other tangible assets. Accordingly, specie coverage may be sufficient to protect “cold” cryptocurrency that is lost, destroyed, or simply cannot be accessed because you permanently misplaced your private key.

Property insurance

Property insurance policies typically provide coverage for “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” ABA Insurance Services, Specimen Policies and Endorsements, Property form ECP 00 560 08 16, “Covered Property” generally includes “Personal Property,” but typically excludes “[a]ccounts, bills, currency, food stamps or other evidences of debt, ‘money’, notes or ‘securities’”.

Insurers will argue that crypto and digital assets are not physical, and therefore the loss of cryptocurrency or a digital asset cannot be covered physical loss of or damage to property.  See, e.g., Am. Online, Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89, 96 (4th Cir. 2003) (labeling the data stored within physical hard drives as “abstract ideas, logic, instructions, and information” and not “tangible property.”).

Because the machines that create or store cryptocurrency and digital assets, however, are physical, insureds have much to say in response to insurers’ argument. Cold storage is one example. Another is mining operations, which typically use Application-Specific Integrated Circuit (ASIC) computers to mine cryptocurrency. Any physical damage to these tangible machines that create or store crypto and digital assets may very well be covered under property policies.  Many courts have held in accord. See, e.g., Am. Guar. & Liab. Ins. Co. v. Ingram Micro Inc., 2000 U.S. Dist. LEXIS 7299 (D. Ariz. Apr. 18, 2000) (holding loss of computer data was physical damage to the insured’s computer equipment); NMS Services Inc. v. The Hartford, 62 Fed. Appx. 511, 2003 U.S. App. LEXIS 7442 (4th Cir. Apr. 21, 2003) (finding “no question that [the policyholder] suffered damage to its property, specifically, damage to the computers it owned” when a former employee sabotaged its computer system, erasing vital computer files and databases necessary for business operations); Lambrecht & Assoc. Inc. v. State Farm Lloyds, 119 S.W.3d 16 (Ct. App. Tex. 2003) (requiring insurer to cover costs necessary to restore data after introduction of a computer virus, otherwise policy provision that implied coverage for business interruption resulting from loss of electronic records would be “illusory”.); Southeast Mental Health Center Inc. v. Pacific Ins. Co. Ltd., 439 F. Supp. 2d 831 (W.D. Tenn. 2006)(finding policyholder proved necessary direct physical loss where the insured’s pharmacy computer data was corrupted due to a power outage); EMOI Servs., LLC v. Owners Ins. Co., 180 N.E.3d 683, 693-96 (Ohio Ct. App. 2021) (rejecting the insurer’s arguments that “the software and data have no physical existence and thus are not susceptible to physical loss or damage” and ruling that the encryption of a policyholder’s software and data caused “direct physical loss or damage” to the policyholder’s property).  

Thus, policyholders may be able to recover cryptocurrency-related losses under their property insurance policies.

Key takeaways

  1. Last month, we discussed how D&O and cyber insurance could cover your cryptocurrency-related losses. In addition to these policies, current property insurance policy and/or specie policy may also provide coverage.
  2. Courts in the U.S. and around the world, as well as the IRS, have suggested or ruled that cryptocurrency is considered or treated as “property.”
  3. Insurers will almost certainly point to its virtual nature, but loss of cryptocurrency may still constitute physical loss.
  4. Cryptocurrency can also be physically damaged or stolen when stored offline on hard drives or flash drives like any tangible assets.
  5. Experienced insurance coverage counsel can help navigate terms of your policy.