The U.S. court ruled that cryptocurrency losses do not qualify as “direct physical loss” under traditional insurance policies.
On October 24, 2024, the Fourth Circuit Appeals Court ruled against homeowner Ali Sedaghatpour in a $170,000 cryptocurrency fraud case, establishing a precedent for future insurance disputes. The court sided with Lemonade Insurance and confirmed the homeowner’s policy did not cover losses from the scam.
COURT RULES AGAINST $170K CRYPTO THEFT INSURANCE CLAIM
— Mario Nawfal’s Roundtable (@RoundtableSpace) October 25, 2024
A U.S. appeals court dropped the hammer on Ali Sedaghatpour, who tried to get Lemonade Insurance to cover his $170K loss from a crypto scam.
The court said his homeowner's policy is all about “direct physical loss,” and… pic.twitter.com/lkYgDjkn4X
Legal Interpretation of Physical Loss
The court focused on the exact wording of the insurance policy, which covered “direct physical loss” of property. Under Virginia law, this term demands visible, tangible damage or destruction – conditions not met by the digital theft of cryptocurrency. Therefore, the $170,000 loss in crypto assets fell outside the policy’s coverage.
The dispute started when Sedaghatpour was scammed by APYHarvest, a group later identified as fraudulent by the Central Bank of Ireland. In December 2021, he transferred a large amount, expecting investment returns, but discovered his digital wallet emptied. He argued that the crypto loss from his physical cold wallet should be treated as a covered peril, seeking a wider definition of “physical loss”.
The ruling highlights a rising challenge in the insurance sector: defining and handling losses tied to digital assets. As cryptocurrencies become more integrated into mainstream finance, their intangible nature conflicts with traditional insurance terms. Lemonade Insurance asserted that its policy terms were clear and that cryptocurrency, being intangible, did not meet the criteria for “direct physical loss”.
Despite the setback, Sedaghatpour continued legal action, appealing a February 2023 dismissal of his initial lawsuit. The legal argument revolved around the differences between digital and physical assets, a crucial factor in the decision against his claim.
A Surge in Crypto Phishing Scams
This case coincides with a rising trend in crypto scams, emphasizing the precarious nature of digital investments. Scam Sniffer reports that in September 2024 alone, over 10,000 victims lost approximately $46.7 million to crypto phishing. The broader impact is staggering, with the third quarter of 2024 witnessing over $127 million stolen from crypto assets, predominantly targeting Ether wallets.
The ruling not only clarifies the application of traditional insurance policies to modern digital assets but also sends a cautionary note to cryptocurrency holders about the limits of current insurance protections against crypto scams.
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