On October 24, the Fourth Circuit Court of Appeals affirmed Lemonade Insurance’s decision to deny homeowner Ali Sedaghatpour’s claim for $170,000 he lost as a result of crypto fraud.

The decision comes after Sedaghatpour filed a lawsuit in December 2021 as a result of being exposed to a crypto investment scam called APYHarvest. Sedaghatpour had been identified as fraudulent activity and had provided him with a crypto wallet key. He claimed that he kept this key in a safe at his home.

However, when he later discovered that his crypto assets had been drained, he sought compensation under his own homeowners policy. This policy covered personal property losses up to $160,000.

In its response to Sedaghatpour, Lemonade Insurance argued that while the cold hardware wallet may be a tangible asset, the cryptocurrency is digital and therefore cannot be considered within the scope of “direct physical loss.”

The court adopted Lemonade Insurance’s reasoning and stated that Sedaghatpour’s policy was for physical damage or destruction of tangible assets. Since cryptocurrency is not a tangible asset, digital theft is excluded.

Sedaghatpour appealed this decision and took the case to the appeals court. A three-judge panel on the appeals court affirmed the Virginia District Court’s original decision. “We reviewed the file and found no reversible errors,” the appellate judges said.

Relying on Virginia law, the court stated that the definition of “direct physical loss” requires “material destruction or harm.” Considering that the cryptocurrency could not be physically damaged, he concluded that Sedaghatpour’s homeowners policy was invalid.

This decision could set a precedent for future lawsuits regarding crypto losses. The court made clear that standard home insurance policies will not apply to digital assets. This situation may increase uncertainties regarding the insurance of cryptocurrencies, causing investors to question their security in this area.

At the same time, the court’s decision highlights the limitations of standard insurance policies and highlights the growing demand for specialized crypto insurance products. Digital asset insurance is still a relatively new market and is slowly evolving as insurers explore coverage options for the unique risks associated with digital assets.

Some providers, such as Evertas and Relm Insurance, offer policies to protect exchange, custodians and certain individual wallet assets from theft, hacking and operational errors. However, these offers are generally aimed at corporate customers, and personal crypto insurance options remain quite limited.

This court decision is an important warning for cryptocurrency investors. There are still uncertainties about insuring digital assets, and it is obvious that more private insurance products need to be developed to eliminate these uncertainties.

These developments also reveal the need for a broader regulatory framework in the cryptocurrency market.