Sedaghatpour v. Lemonade Ins. Co.
| Decision Date | 06 February 2023 |
| Docket Number | 1:22-cv-355 |
| Parties | ALI SEDAGHATPOUR, Plaintiff v. LEMONADE INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — Eastern District of Virginia |
At issue in this diversity insurance coverage dispute is whether the insurance policy issued to Plaintiff Ali Sedaghatpour by Defendant Lemonade Insurance Company covers theft of cryptocurrency. Defendant's Motion to Dismiss the Amended Complaint has been fully briefed and argued orally, and thus the Motion is ripe for disposition. For the reasons that follow, the Motion to Dismiss the Amended Complaint must be granted.
The facts that follow are derived from the allegations of fact contained in the Amended Complaint which are taken as true solely for purpose of resolving the Motion to Dismiss. See Fairfax v. CBS Corp., 2 F.4th 286, 291-92 (4th Cir. 2021). Of course, the Amended Complaint's allegations of law are not accepted as true for purposes of resolving the Motion. Id.
Plaintiff alleges that he owned substantial amounts of various cryptocurrencies. Like many owners of cryptocurrency plaintiff elected to store his cryptocurrency on a hot wallet, a virtual storage option wherein cryptocurrency is stored on a third party's servers. In this case, plaintiff stored his cryptocurrency on a hot wallet known as APYHarvest. Although APYHarvest is physically located in Ireland and England, APYHarvest's hot wallet, like other hot wallets, was always accessible to plaintiff via the internet. Plaintiff alleges that, on December 31, 2021, he discovered that all of his cryptocurrency stored in the APYHarvest hot wallet worth $170,424.67 at that time had been stolen.
On January 3, 2022, plaintiff made a claim under his homeowner's insurance policy with policy number “LP3188F4105” (“the Policy”) for $160,000.00, the Policy's limit. Defendant denied plaintiff's claim. As an exhibit to the Amended Complaint reflects, defendant's claims' representative denied plaintiff's claim on the ground that the Policy protects plaintiff's “stuff,” or property, only when that property is “damaged directly” by one of the “specific losses” contemplated in the policy. Am. Compl., Ex. 2 at 2. The claims' specialist further reasoned that, even if plaintiff's loss were covered by the Policy, the Policy's limitation of $500.00 for loss “resulting from theft or unauthorized use of an electronic fund transfer card or access device used for deposit” limited coverage for plaintiff's loss of cryptocurrency to $500.00. Id. Accordingly, defendant paid plaintiff $500.00 to cover the loss of plaintiff's cryptocurrency.
Not satisfied with this result, plaintiff first invoked and then ultimately exhausted defendant's internal appeals procedures, all without success as defendant consistently denied that the Policy included coverage for loss of cryptocurrency. Plaintiff thereafter filed a Complaint in the Circuit Court of Fairfax County, seeking $159,500.00 in damages, the Policy's $160,000.00 limitation less the $500.00 that plaintiff had already received from defendant. Defendant then removed the Complaint to federal court and filed a Motion to Dismiss, arguing that the Complaint failed to state a valid claim for breach of contract as the Policy did not include coverage for theft or loss of cryptocurrency.
On May 16, 2022, an Order issued dismissing the Complaint without prejudice for failing to identify (i) the types of cryptocurrencies allegedly stolen from plaintiff, (ii) when and how the cryptocurrencies were stolen, and (iii) the place from which the cryptocurrencies were stolen. See Sedaghatpour v. Lemonade Ins. Co., No. 22-CV-355, Dkt. 10 (E.D. Va. May 16, 2022). The dismissal Order afforded plaintiff leave to file an Amended Complaint, and plaintiff timely did so on June 15, 2022. It is this Amended Complaint that is the subject of defendant's current Motion to Dismiss.
The Amended Complaint attempts to address the issues identified in the May 16, 2022 Order. First, the Amended Complaint identifies the eleven specific cryptocurrencies that were stolen.[1] Second, the Amended Complaint alleges that, between October 10, 2021 and December 30, 2021, plaintiff transferred those eleven cryptocurrencies from his laptop or smartphone while sitting at home to the APYHarvest hot wallet based in London, England and Dublin, Ireland. Third, the Amended Complaint alleges that, on December 31, 2021, plaintiff discovered that his cryptocurrency in the APYHarvest wallet had been stolen. The Amended Complaint further alleges that APYHarvest was itself the thief that had stolen plaintiff's cryptocurrency, first by moving plaintiff's cryptocurrency to a company in the Cayman Islands Binance.com and thereafter by selling the cryptocurrency to an unidentified third party. According to the Amended Complaint, Binance.com then informed plaintiff that his cryptocurrency had been sold on Binance.com. The loss, plaintiff alleges, totaled over $170,000.00.
On July 6, 2022, defendant filed the instant Motion to Dismiss the Amended Complaint, arguing (i) that the Policy does not cover loss of cryptocurrency or, in the alternative, (ii) that the Policy limits coverage for loss of cryptocurrency to $500.00, an amount that defendant has already paid plaintiff. In opposition to the Motion to Dismiss, plaintiff argues (i) that the Policy insures against loss of plaintiff's cryptocurrency, (ii) that no provision in the insurance policy limits coverage for such loss of cryptocurrency to $500.00, and (iii) that defendant is barred from raising arguments in its Motion to Dismiss that it did not raise when it initially rejected plaintiff's claim.
To survive a motion to dismiss, the Amended Complaint must “contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citation omitted). Thus, in this instance, the Amended Complaint must contain sufficient factual matter to state a plausible claim for breach of the insurance policy. Moreover, this case turns on the interpretation of an insurance policy, and Courts applying Virginia law[2] “interpret insurance policies like other contracts, in accordance with the intention of the parties gleaned from the words they have used in the document.” Seals v. Erie Ins. Exch., 277 Va. 558, 562 (2009). When the language in the policy is “clear and unambiguous,” the language is afforded “its plain and ordinary meaning” and the policy is enforced “as written.” Selective Way Ins. Co. v. Crawl Space Door Sys., Inc., 162 F.Supp.3d 547, 551 (E.D. Va. 2016) (citing Blue Cross & Blue Shield v. Keller, 248 Va. 618, 626 (1994)).
Analysis of the Motion to Dismiss properly begins with a review of the Policy provisions to determine the scope of the coverage provided to plaintiff. Once the scope of the coverage is determined, the next step is to determine whether plaintiff's claim of loss fits within that coverage. Here, the Policy provides that it insures against “direct physical loss” to plaintiff's personal property[3] “caused by any of the following perils,” one of which is “theft.” Am. Compl., Ex. 1 at 15. The Policy also makes clear that it covers “personal property owned or used by [plaintiff] while it is anywhere in the world.” Id. at 9.
Given this scope of coverage, the principal issue presented by the Motion to Dismiss is whether theft of cryptocurrency is a “direct physical loss” within the Policy's coverage. Resolution of this issue requires an understanding of cryptocurrency. Although plaintiff does not define cryptocurrency, various dictionaries and governmental agencies define cryptocurrency as existing wholly virtually or digitally. For example, Merriam-Webster's dictionary defines cryptocurrency as “any form of currency that only exists digitally... .” Cryptocurrency, Merriam-Webster.com, www.merriam-webster.com/dictionary/cryptocurrency (last visited Feb. 6, 2023). And the Internal Revenue Service defines cryptocurrency as “a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.” I.R.S. Rev. Rul. 2019-24. Thus, it is clear that cryptocurrency, by its nature, exists only virtually or digitally and has no physical or tangible existence. It follows, therefore, that the policy does not cover loss or theft of cryptocurrency because the loss or theft does not constitute a “direct physical loss” to plaintiff's property.
Given the novelty of cryptocurrency, it is not surprising that the parties have cited no Virginia case considering whether theft of cryptocurrency constitutes a “direct physical loss” under a homeowner's insurance policy like the policy defendant issued to plaintiff. Yet there is authority from a district court in California considering precisely this question and concluding that the theft of cryptocurrency does not constitute a “direct physical loss,” as required by the policy there and the Policy here. Specifically, in Burt v. Travelers Commercial Insurance Company, 2022 WL 3445941 (N.D. Cal. 2022), the Northern District of California concluded that loss of cryptocurrency was not a “direct physical loss” because cryptocurrency has a wholly virtual existence, but has no physical material existence. Burt, 2022 WL 3445941 at *3. Thus, although Burt is not controlling in this case, the reasoning of that Court firmly supports the conclusion reached here: the Policy here, like the policy at issue in Burt, does not cover loss of cryptocurrency because cryptocurrency exists wholly virtually and has no tangible existence, and thus, there can be no “direct physical loss” as...
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