Ali Sedaghatpour Appeals Fourth Circuit Ruling on Insurance Coverage for Cryptocurrency Loss
On Thursday, November 7, 2024, Ali Sedaghatpour filed a petition in the United States Court of Appeals for the Fourth Circuit seeking a rehearing or en banc consideration regarding a previous ruling that denied coverage for his alleged cryptocurrency loss under a homeowners insurance policy. The case stems from Sedaghatpour’s claim for a loss amounting to $170,000, which he asserts occurred when his cryptocurrency stored in a digital wallet was stolen on December 31, 2021.
Sedaghatpour had initially reported the theft of all his funds, totaling approximately $170,424.67, from a hot wallet known as APYHarvest. Following the incident, he filed a claim with Lemonade Insurance Company on January 3, 2022. However, the insurance provider denied the claim, arguing that the policy only covers tangible property that has suffered direct damage from specific types of loss outlined in the contract. Lemonade stated that coverage for losses resulting from the theft of electronic funds is capped at $500, which the company subsequently paid to Sedaghatpour.
In response to the denial, Sedaghatpour initiated a breach of contract lawsuit against Lemonade in the Fairfax County Circuit Court. The case was later removed to the U.S. District Court for the Eastern District of Virginia, where Lemonade moved to dismiss the lawsuit. On May 16, 2022, Judge T. S. Ellis III dismissed the case without prejudice, citing Sedaghatpour’s failure to adequately identify the stolen cryptocurrencies, the circumstances of the theft, and the specific location from which they were taken.
Following this, Sedaghatpour filed an amended complaint, but Lemonade again moved for dismissal. On February 6, 2023, Judge Ellis granted this motion, concluding that Sedaghatpour’s cryptocurrency loss did not constitute a “direct physical loss” necessary to trigger coverage under the homeowners policy.
Sedaghatpour subsequently appealed the decision to the Fourth Circuit. On October 24, 2024, a panel of judges—Paul V. Niemeyer, Pamela A. Harris, and Senior Judge William B. Traxler Jr.—upheld the lower court’s ruling. The panel indicated that even if the district court erred in its determination regarding the coverage of intangible property, they were not restricted to the grounds of the district court’s decision and could affirm based on any supportable basis in the record.
The judges noted that the relevant section of the insurance policy provides coverage specifically for “direct physical loss” of personal property. They emphasized that the theft of digital currency does not meet this criterion, referencing a previous case, Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., which established that digital theft does not equate to a physical loss.
The panel also pointed out that although the policy allows for up to $500 in coverage for theft involving electronic fund transfers, Sedaghatpour had already received this amount, leaving no grounds for a breach of contract claim against Lemonade.
In his petition for rehearing, Sedaghatpour contended that the Fourth Circuit’s ruling failed to adequately address how “digital” theft cannot be considered a physical loss. He argued that the digital realm is composed of physical elements and that the theft of cryptocurrency involves tangible actions. Sedaghatpour also referenced updates to the insurance policy that purportedly acknowledge coverage for digital assets, as well as regulatory frameworks that define loss in terms of direct impact rather than physical loss.
The outcome of Sedaghatpour’s petition remains pending as he seeks to overturn the previous ruling and clarify the interpretation of coverage for digital assets in homeowners insurance policies.
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