Key Points:
- U.S. Appeals Court rules against covering a $170,000 crypto scam loss.
- Lemonade Insurance’s policy requires “direct physical loss” for claims.
- The homeowner received $500 for unauthorized electronic transfer coverage.
- Ruling aligns with recent U.S.-Nigeria efforts to combat crypto scams.
Appeals Court Sides with Lemonade Insurance in $170K Crypto Scam Case
In a notable decision, the U.S. Fourth Circuit Court of Appeals upheld a lower court’s ruling that Lemonade Insurance is not liable for a $170,000 loss from a cryptocurrency scam. The court’s October 24 ruling concluded that Ali Sedaghatpour, a Virginia homeowner, could not claim the substantial loss under his homeowner’s insurance, as the policy was limited to covering “direct physical loss” of property.
Sedaghatpour, who initially filed his claim in March 2022, sought compensation from Lemonade Insurance after discovering his funds had been fraudulently taken by APYHarvest, an entity falsely claiming to be a legitimate investment firm. According to Sedaghatpour, APYHarvest initially provided him with access to a crypto wallet, purportedly holding his investment, only for him to later discover the wallet was emptied. When he submitted a claim to Lemonade, he argued that his homeowner’s insurance, which insured up to $160,000 for personal property, should cover the loss.
However, Lemonade Insurance declined, leading to Sedaghatpour’s lawsuit. A district court dismissed the case in February 2023, stating that the insurance policy did not apply to digital assets, as they do not meet the requirement for “physical loss or damage.” Following the rejection, Sedaghatpour appealed, but the appellate court affirmed the dismissal, citing the policy’s language and Virginia state law.
Interpretation of “Direct Physical Loss” Limits Coverage for Digital Assets
The appeals court’s decision emphasized that while a physical hardware wallet may hold digital assets, the cryptocurrency itself lacks physical attributes. In line with Virginia law, the court ruled that Sedaghatpour’s claim did not satisfy the criteria of physical loss or material destruction required for insurance coverage.
According to the court, Lemonade Insurance acted within its obligations, awarding Sedaghatpour $500 for unauthorized electronic fund transfers under a separate provision in his policy. This limited reimbursement reflected the specific coverage for cases of unauthorized transactions rather than direct property loss.
The ruling underscores the challenges policyholders may face in seeking compensation for cryptocurrency losses under traditional insurance policies. With digital assets becoming more prevalent, the legal distinction between physical and digital property in insurance policies remains a significant factor in coverage eligibility.
U.S. and Nigeria Collaborate on Cryptocurrency Crime Prevention
This ruling occurs alongside an international initiative led by the United States and Nigeria aimed at addressing cryptocurrency-related crimes. Through a new Bilateral Liaison Group, both nations are collaborating to improve their capacity for investigating and prosecuting cybercrimes tied to digital assets. The U.S. Department of State recently confirmed this partnership, reflecting a growing focus on global efforts to mitigate risks associated with cryptocurrency scams.
As digital finance expands, this decision highlights the potential limitations of conventional homeowner insurance policies in covering losses related to digital assets. For investors and policyholders, it serves as a reminder to understand the scope and exclusions of their coverage, particularly when dealing with the complexities of cryptocurrency.
