Crypto Covered Under Homeowner’s Policy? Ohio Trial Court Holds Coverage and Bad Faith Claims for Bitcoin Theft Survive Motion for Judgment on the Pleadings
From the high market cap Bitcoin, Ether, Ripple, and Litecoin, to the quirky Fonziecoin, Selfiecoin, Pizzacoin, and (thank you, Dennis Rodman) Pot Coin, we have all been blasted by news of crypto and blockchain, and tales of kids in their parents’ basements getting rich off this new wonder that many of us struggle to understand. But what we might not have heard of, or thought about, is potential insurance coverage under a homeowner’s insurance policy in the event of theft of this “alt” currency.
On September 25, 2018, a Columbus, Ohio trial court judge denied an insurer’s motion for judgment on the pleadings on the grounds that its assessment of Bitcoin as “money” subject to a $200.00 sublimit under a homeowner’s insurance policy was proper and, therefore, the insured had no claims for breach of contract or bad faith. In doing so, Judge Charles A. Schneider relied on Internal Revenue Service Notice 2014-21, which provides that, “[f]or federal tax purposes, virtual currency is treated as property.” While termed “virtual currency,” the IRS recognized Bitcoin as property “and [Bitcoin] shall be recognized as such by this Court.” Kimmelman v. Wayne Ins. Grp., Case No. 18-cv-001041, Doc. 0E337-P71 (Ohio Ct. Comm. Pl., Civ. Div. Sept. 25, 2018).
In August 2017, the insured, James Kimmelman, submitted an insurance claim to his insurer, Wayne Insurance Group (“Insurer”), reporting roughly $16,000.00 of Bitcoin stolen from Kimmelman’s digital wallet. The Insurer investigated the claim and made a payment of $200.00 to Kimmelman, determining the Bitcoin was “money” and governed by a sublimit within the policy. Aggrieved, Kimmelman filed suit against the Insurer in February 2018, asserting claims for breach of contract and bad faith. The Insurer moved for judgment on the pleadings, which the court addressed in its September 25, 2018 order.
The court began by setting forth the applicable standard of review under Ohio state court procedural rules which, for judgment on the pleadings, is similar to that under Federal Rule of Civil Procedure 12(c). The court was limited to the allegations set forth in the complaint, accepted as true, with all inferences drawn in favor of the non-moving party. Only if it appeared beyond doubt that Kimmelman could prove no set of facts entitling him to relief would the court grant the Insurer’s motion. See Id. p. 2 (citing State ex rel. Midwest Pride IV, Inc. v. Pontious, 75 Ohio St.3d 565, 570 (1996)).
The Insurer argued Bitcoin is generally recognized as “money,” citing articles from CNN, CNET, and the New York Times. The Insurer also cited IRS Notice 2014-21, which subscribed the term “virtual currency” to Bitcoin. The court quickly disposed of Kimmelman’s responsive arguments, finding the authorities neither governing nor persuasive. Accordingly, the court held that the only authority it could “rely on in determining the status of Bit[c]oin is” IRS Notice 2014-21. Under the notice, “‘[f]or federal tax purposes, virtual currency is treated as property.’” Id. p. 3 (quoting IRS Notice 2014-21). Even though the IRS used the term “virtual currency,” the court found the IRS recognizes Bitcoin as property and, therefore, the court also recognized Bitcoin as property for purposes of the policy’s available limits of coverage.
In summary, the court held Kimmelman had properly plead his breach of contract and bad faith claims, denied the Insurer’s motion for judgment on the pleadings, and lifted the discovery stay. While the coverage result might be different in this case on a subsequent motion for summary judgment, the court broadly held that it was recognizing Bitcoin as property under the policy. Thus, it is also possible that, in subsequent dispositive motion rulings in this case, the trial judge will reiterate that position.
However, given that this appears to be an issue of first impression in Ohio and much (if not the entire) country, and in light of the IRS’s own use of the term “virtual currency,” on summary judgment review, the insurer should have valid arguments that it committed no bad faith. Tokles & Son, Inc. v. Midwestern Indem. Co., 65 Ohio St. 3d 621, 630, 605 N.E.2d 936 (Ohio 1992) (denial reasonably justified where “the claim was fairly debatable and the refusal is premised on either the status of the law at the time of the denial or the facts that gave rise to the claim”).
Cryptocurrencies and blockchain technologies present both emerging risks, and opportunities, for insurers in the global marketplace. As these technologies become more ubiquitous in our economy and everyday lives, the impact of rulings such as Kimmelman will likewise become more significant. Because Kimmelman serves as an early ruling on first-party property and bad faith issues associated with coverage for theft of cryptocurrencies, insurers can expect a great deal of citation to the opinion by policyholders. Insurers wishing to eliminate the risk of coverage for loss of cryptocurrencies may consider modifying policy language to expressly exclude coverage for virtual currencies.
 While the policy also included sublimits of $500.00 for “electronic funds” and $1,500.00 for “securities,” which the Insurer raised in its motion, the court’s opinion offered no analysis of whether those sublimits would apply to Bitcoin or other forms of cryptocurrency.