Insurance and loss
Plaintiffs had a homeowners insurance policy with defendant insurance company. The policy covered personal property owned or used by the plaintiffs with a maximum limit of $359,500 for direct physical loss due to certain perils, including theft. In June 2021, hackers accessed plaintiffs’ computer and stole crypto tokens from their crypto wallets on two blockchain networks, amounting to approximately $750,000. Plaintiffs reported the incident and filed an insurance claim with defendant. Defendant only paid $200 on the claim because of a special limit of liability found in the policy.
Thinking that to be a pretty insufficient payment for such a dramatic loss, plaintiffs sued, alleging breach of contract and unreasonable denial of coverage under a Minnesota statute. Defendant moved for judgment on the pleadings. (“Judgment on the pleadings” in US federal court refers to a ruling made by the court based solely on the parties’ written pleadings and documents, without the need for a trial, when there are no genuine issues of material fact in dispute.) The court granted the motion.
Not direct and physical
Defendant had argued that the theft of digital assets (crypto tokens) did not constitute a “direct physical loss” under the policy, and thus, the claim was not covered. The court analyzed the language of the insurance policy, stating that “direct physical loss” required a distinct, demonstrable, and physical alteration to the covered property. Since crypto tokens are purely digital and lack physicality, according to the court, they do not meet the requirements for “direct physical loss” under Minnesota law.
Plaintiffs claimed that the policy’s language was ambiguous, but the court rejected this argument, applying the ordinary meaning of “direct physical loss” as required by Minnesota law.
The court also addressed plaintiffs’ statutory claim for bad-faith denial of coverage under Minnesota Statute § 604.18. To succeed in this claim, plaintiffs needed to prove that defendant lacked a reasonable basis for denying coverage and acted in reckless disregard of this fact. But since defendant did not breach the policy, the court found that the bad-faith claim failed as well.
Rosenberg v. Homesite Insurance Agency, Inc., 2023 WL 4686412 (D. Minn., July 21, 2023)
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