In what appears to be a case of first impression, an Ohio trial court ruled in Kimmelman v. Wayne Insurance Group, that the crypto-currency, Bitcoin, constitutes personal property in the context of a first-party homeowners’ insurance policy and, therefore, its theft would not be subject to the policy’s $200 sublimit for loss of “money.”
The claim arises from the theft of some $19,000 in Bitcoin from Kimmelman’s online account. Kimmelman submitted the loss to his homeowners’ insurer, Wayne Mutual. The insurer paid Kimmelman $200 in response to the claim and denied coverage for the balance, citing to the policy’s $200 sublimit for money losses. Kimmelman challenged the claim determination contending that the Bitcoin was personal property, not unlike a backpack or other tangible asset. When the insurer refused to pay, Kimmelman brought suit alleging breach of contract and bad faith. The insurer moved for judgment on the pleadings, which was denied.
The court based its decision on Internal Revenue Service Notice 2014-21. According to that Notice, the purpose of which is to “describe how existing general tax principles apply to transactions using virtual currency,” virtual currencies like Bitcoin have no legal tender status in any jurisdiction and, therefore, for federal tax purposes are to be regarded as “property.” Noting that the IRS Notice was the only authoritative statement on point, the court concluded that the stolen crypto-currency was “property,” and not “money” for purposes of determining which sublimit would apply under the Wayne Mutual insurance policy.
The decision in Kimmelman applied the scant available authority addressing the treatment of crypto-assets as property to resolve the insurance limits question presented in that case. However, policyholders and insurers should not expect Kimmelman to be the final word on whether crypto assets constitute property and the policy sublimits should apply to their loss. Rather, Kimmelman raises a host of questions that will likely take some time for courts, policyholders and insurers to fully comprehend.
For instance, to the extent crypto-currency are indeed “property,” issues will arise with respect to underwriting and valuing that property, when the property valuation should occur and whether and under what circumstances the value of the asset should be reassessed. The valuation issue, in turn, raises further issues about ensuring that adequate limits are in place and ensuring that any increase in value that might occur during the policy period do not lead to an unanticipated coinsurance penalty in the event of a loss. Given the wild fluctuations in the value of crypto-assets, these issues could be difficult to manage.
The treatment of crypto-assets as property also raises issues under other typical first-party property coverages, such as Time Element. For instance, following Kimmelman, a loss of crypto assets could trigger a claim for resulting loss of business income and extra expense in mitigating any resulting loss.
Kimmelman marks the beginning, not the end, of the discussion concerning coverage for crypto-assets. The issues raised by Kimmelman and those outlined above underscore the importance that policyholders consult with experienced coverage counsel about how their crypto-assets might be treated under their specific insurance portfolio.