Over 7,000 individuals lost more than $80 million from cryptocurrency scams, hacks, or thefts between October 2020 and March 2021, according to the Federal Trade Commission. That’s a nearly 1,000% increase from just a year ago, alongside an estimated total of $1.9 billion lost from similar causes when institutions are incorporated into the calculation. These losses are seen at a time of growing adoption of this emerging network by businesses, governments, and individuals.
When property is lost or stolen, businesses often look to insurance to cover the loss. But insurance policies don’t always keep up with the pace of modern technology or finance. Looking to insurance to cover the loss of cryptocurrencies due to a theft or hacking presents unique challenges.
In the event of a property loss, including money, corporate policyholders will typically look to one of three common forms of insurance: commercial property insurance, commercial crime insurance, and cyber liability insurance. That said, insurance companies are constantly finding new lines of coverage to sell, and many are beginning to market policies specifically designed to cover certain cryptocurrency losses. Until the insurance market catches up with this new technology, however, most policyholders will look to these more traditional forms of insurance. It is important to understand how these policies work, so that policyholders can be best positioned in the event of a cryptocurrency loss.
Commercial Property Insurance
Most businesses carry commercial property insurance. Generally, these policies provide coverage for “direct physical loss of or damage to Covered Property at the premises,” where the loss or damage is “caused by or resulting from any Covered Cause of Loss.” In other words, commercial property insurance is intended to protect against damage to the physical space in which a company operates, as well as the company’s physical property.
“Covered Property” is typically categorized as (1) buildings; (2) business property; and (3) property of others (in the custody of or being cared for by the insured). When a business loses cryptocurrency, either through a hacking, theft of a physical cold-storage wallet, or otherwise, insureds may look to their property coverage (similarly, an individual incurring such losses may look to the property coverage provided by their homeowners’ policy). At least one court has ruled that Bitcoin constituted “property” under a homeowners’ policy, but this was in the context of federal tax purposes, in which the court looked to an IRS policy regarding virtual currencies.
Yet the inquiry does not end there when it comes to the physical loss or damage usually required by commercial property insurance policies. For example, several courts have held that the loss of an investment does not constitute damage to tangible property. In those cases, the policyholders argued for coverage for economic losses suffered from fraudulent check usage by third parties. Because the funds did not have a “physical existence,” however, there was no “physical loss” or “physical damage,” unlike an instance in which, for example, a cashier’s check is destroyed by a fire.
Commercial Crime Insurance
Commercial crime policies are another place to look for coverage for cryptocurrency-related losses. These policies typically provide first-party coverage to “Covered Property” resulting from “Employee Theft” or “Computer Fraud.”
At the outset, it is important to note there may be endorsements or other provisions that specifically address cryptocurrency losses within certain policies. For example, some policies expressly exclude losses “involving virtual currency of any kind, by whatever name known, whether actual or fictitious, including, but not limited to, digital currency, crypto currency, or any other type of electronic currency.”
For the commercial crime policies not containing such an exclusion, the “Covered Property” is typically categorized by (1) “Money”; (2) “Securities”; (3) and “Other Property.” Assuming one of these definitions can be met, the next step in finding coverage under these policies is likely examining whether the losses qualify as “Computer Fraud.” This provision typically provides coverage for “loss of or damage to ‘money,’ ‘securities,’ and ‘other property’ resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the ‘premises.’” Insurers have argued against coverage because the cryptocurrency was not physically located within the policyholder’s offices. For these, among other reasons, coverage under crime policies may present challenges.
Finally, cyber policies are another potential source of coverage for cryptocurrency losses. Rather than just providing first-party coverage, cyber policies also provide third-party coverage for claims made against the insured arising from unauthorized use, access to, or loss of electronic data from the insured’s network. Some policies are starting to expressly include coverage for the theft or hacking of cryptocurrencies. If cryptocurrency issues are a substantial concern, this is worth discussing with an insurance broker. Theft coverage provided by these policies may cover the loss of money or other assets, which may include cryptocurrencies.
As evidenced above, whether traditional insurance policies will provide coverage for cryptocurrency losses is far from certain. While specific policy language and circumstances must be taken into account, standard policy language will often not suffice. It is important to check all potential policies for coverage, and sometimes to be creative. For those wanting more certainty that insurance will cover losses, they may need to purchase specific coverage for cryptocurrency losses.
Jason M. Rosenthal serves as vice chair of Much Shelist’s Litigation & Dispute Resolution group. Jason is an accomplished business litigator, with significant experience also representing corporate policyholders in a wide range of insurance coverage disputes. Dan Sechuga, a law student at University of Illinois, helped co-author this article.