Decrypting First-Party Coverage Issues for Digital Assets
Tuesday, June 7, 2022
by: Christina Anh Ho

Section: Spring 2022

Christina is a WDTL member. Her practice includes assisting insurers with examinations under oath in Washington, Oregon and California, as well as handling first-party coverage and bad faith litigation in Washington and Oregon. Her practice also includes third-party litigation in Washington and Oregon.
With the increase in Americans holding digital assets[1], the likelihood insurers who write homeowners’ policies will encounter property claims involving them is ever increasing.  This is true even though at the time such polices were underwritten, the insurer was unlikely to have considered that the policy could apply to digital assets. As such, insurers should analyze their policies to determine whether digital assets would fall under personal property coverage.  The lack of clarity as to classification regarding many digital assets is important to consider in analyzing coverage of cryptocurrencies and NFTs. The case law and regulatory guidance as to this asset class is constantly evolving.

There is one United States case that addresses whether a type of cryptocurrency, Bitcoin, should be classified as currency or property under a homeowners’ policy. In the Ohio Court of Common Pleas, in a case of first impression, Kimmelman vs. Wayne Ins. Group, Franklin County Court of Common Pleas Case No. 18CV001041 (2018), the Court held Bitcoin was considered property – not currency.  Kimmelman involved a dispute between an insurer and their insured regarding coverage under a homeowner’s policy for stolen Bitcoin. The insured suffered a $16,000 loss. The insurer took the position that Bitcoin was subject to the $200 policy limitation for currency. The Court held virtual currency is property and the policy limitation for currency did not apply. In arriving at its holding, the court looked to the IRS’s classification of virtual currency.   The IRS defines virtual currency as property “for tax purposes.” See also IRS Notice 2014-21.

Courts in international jurisdictions have also classified cryptocurrency as property – however in doing so, those courts looked to whether cryptocurrencies at issue met the definition of property in their respective jurisdictions. See CLM vs. CLN, SGHC 46  (General Div. of Singapore High Court 2022), Ruscoe vs. Cryptopia Ltd. (in liq),  NZHC 728 (New Zealand High Court 2020).  

Therefore, it appears cryptocurrencies held by an insured would, if courts in the U.S. follow the reasoning in Kimmelman, be personal property, subject to the personal property limits. It is important to note, Kimmelman involved Bitcoin, which many investors and crypto industry experts believe is set apart from other types of cryptocurrencies.  In the future, as more litigation addresses the issue, it would be reasonable to expect an attorney could make the argument that whether a cryptocurrency is considered property over currency will depend on the specific attributes of the cryptocurrency. However, the argument has not yet been made and courts have not yet addressed that issue.

The distinction between Bitcoin, as well as Ethereum, has already been made in the context of opinions regarding securities set forth by the Securities and Exchange Commission (“SEC”). As to Bitcoin and Ethereum, the SEC has found those assets are not securities. However, there are no rulings as to other cryptocurrencies. A well-known case is ongoing regarding this issue as it relates to a cryptocurrency issued by Ripple Labs, XRP. See SEC v. Ripple Labs, Inc., et al.

As of March 2022, there exist over 18,000 different cryptocurrencies in circulation, but no SEC ruling as to whether they would be considered securities. Understanding the test for determining whether a cryptocurrency is a security is important to a full analysis of coverage under a standard homeowners’ policy because many policies have dollar limitations under personal property coverage for securities.  

An example of this language is below:
Special Limitations on Certain Property

We will not pay more than the following amount for each category in any one loss. These limitations do not increase the amount of insurance under Coverage C – personal property.
2. Securities[2].  $5,000 for securities, checks, cashier’s checks, traveler’s checks, money orders and other negotiable instruments, accounts, bills, deeds, evidence of debt, letters of credit, notes other than bank notes, passports, stamps at face value, and tickets. 
The term “securities” is almost never defined in insurance policies, meaning any court interpreting the policy would likely look to the Howey test, which is used to evaluate whether a cryptocurrency is a security. The Howey test determines whether a transaction qualifies as an “investment contract,” and therefore would be considered a security and subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. See SEC v. W.J. Howey Co., et al., 328 U.S. 293 (1946).  Under the Howey test, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Many cryptocurrencies have the potential to meet the definition of securities. However, it is always important to look to the specific policy language, the attributes of each cryptocurrency and the applicable case law in one’s jurisdiction.

While some insurers have taken steps to create digital asset specific insurance and many mainstream insurers are exploring options for policies or endorsements that will insure such assets, the development of these options will take some time.

A solution, which is likely to come in the future, is an endorsement which specifically addresses coverage for digital assets and places appropriate parameters on coverage of such assets. The endorsement should contemplate whether other insurance policies are available to cover the loss –be it an excess policy or insurance via a cryptocurrency exchange[3]. Last, the endorsement should be drafted by attorneys familiar with digital assets, as well as the classification issues surrounding them.

[1] Digital assets as used in this article refers to crypto currencies and non-fungible tokens (“NFT”). However, the focus of this article is on cryptocurrencies. 
[2] Notably in this particular homeowners’ policy, “securities” were not defined.
[3] Some centralized crypto exchanges such as Coinbase provide crime insurance which protects a portion of digital assets held across their storage systems against losses from theft. However, Coinbase specifically states “our policy does not cover any losses resulting unauthorized access to your person Coinbase or Coinbase Pro account(s) die to a breach or loss of your credentials.” See