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Cryptocurrency Insurance: Ohio Court Says Bitcoin is “Property” not “Money” and May Be Covered Under Cryptocurrency Insurance: Ohio Court Says Bitcoin is “Property” not “Money” and May Be Covered Under

Cryptocurrency Insurance: Ohio Court Says Bitcoin is “Property” not “Money” and May Be Covered Under Homeowner’s Policy

A little over a month ago, an Ohio trial court determined Bitcoin was “property” and not “money” under the terms of a homeowner’s insurance policy and, thus, may be covered. This was an issue of first impression that will likely result in future policy changes. While other terms in the policy at issue—such as the sublimits on “electronic funds” or “securities” and proof of loss requirements—may still bar the policyholder from complete coverage, this case shows how few precedents currently govern cryptocurrency risks and the legal developments that are quickly changing this market.

Background

In Kimmelman v. Wayne Ins. Grp., a policyholder filed a claim with its insurer seeking coverage for $16,000 worth of Bitcoin that was allegedly stolen from the policyholder’s online account. After investigating the claim, the insurer determined the property lost was “money” and paid the policyholder $200 under the policy’s special limit of liability for losses of “money.” The policyholder, however, argued the sublimit did not apply, because Bitcoin is not “money” but rather “property.” When the insurer refused to provide additional coverage, the policyholder brought suit in the Franklin County Court of Common Pleas and sued the insurer for breach of contract and bad faith denial of coverage.

The insurer immediately sought a judgment from the court, arguing “its assessment of Bitcoin as ‘money’ was proper and, therefore, [the policyholder] has no claim against it for breach of contract or bad faith.” To support its characterization of Bitcoin as “money,” the insurer referenced dictionary definitions, news articles and an Internal Revenue Service (IRS) Notice. The insurer cited a New York Times article declaring “Bitcoin is money for the Internet.” Perhaps most compelling to the court, the insurer cited the IRS’s characterization of Bitcoin as “virtual currency that has an equivalent value in real currency, and acts as a substitute for real currency…” See. IRS Notice 2014-21.

In response, the policyholder asserted the IRS expressly recognizes Bitcoin as “property,” notwithstanding the use of the phrase “virtual currency.” See IRS Notice 2014-21. Although the court found none of the references to be binding on its decision, it found the policyholder’s argument most persuasive.

Accordingly, the only authority the Court can rely on in determining the status of Bitcoin is the Internal Revenue Service Notice 2014-21. Under Notice 2014-21, the IRS states, “For federal tax purposes, virtual currency is treated as property.” Accordingly, the Court finds Bitcoin, although termed ‘virtual currency,’ is recognized as property by the IRS and shall be recognized as such by this Court.

Analysis

This case provides an example of the uncertainty that still exists in the cryptocurrency market. The insurance industry has recognized the challenges to insuring cryptocurrency risks and the current deficiencies in many policies to address them. According to the Agents Council for Technology’s November 2016 Risk Advisory on Bitcoin, it stated that:

As a purely digital asset, which holds a variable market value, insurance coverage for loss or theft of Bitcoins presents an opportunity and a challenge…[such as its] fluctuation in value, anonymous nature of transaction, [and] lack of insurance on deposits.

The insurer in Kimmelman even admitted the homeowners’ policy at issue in the case—Homeowners 3 - Special Form—has a copyright dated in 2000, which was nine years before Bitcoin was first used. While many insurers have not yet specifically addressed cryptocurrency in their policies, some have. For example, the Insurance Services Organization has already created endorsements for Bitcoin insurance coverage under CR2545 and CR2546.

The Kimmelman court’s characterization of Bitcoin as “property” and not “money” is a basic yet significant development in cryptocurrency coverage. As an issue of first impression, the court signaled to insurers that certain policies do not sufficiently address cryptocurrency risks. As a result, insurers will likely begin addressing cryptocurrencies like Bitcoin by adding, for example, specific exclusions or endorsements for cryptocurrency coverage.

For more information, contact Christian Robertson or a member of our Internet of Things Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

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