Burt v. Travelers Commercial Insurance Company

Background

Heidi Burt and another plaintiff, who the opinion identifies as siblings, inherited their father Harry Burt’s estate. Before his death, he had purchased Bitcoin, Ethereum, Chainlink, and Yearn Finance through a Coinbase account. Hackers later took control of his email account and Coinbase account and transferred the digital property to their own electronic wallet.

The homeowners insurance policy was in effect from June 16, 2020, to June 16, 2021, and included $555,800 in personal-property coverage. It covered direct physical loss to personal property caused by specified perils, including theft. The policy also included a $1,500 limit for certain categories of property, including securities and accounts, regardless of whether the material existed on paper or computer software. The plaintiffs submitted a claim for the stolen digital property. The insurer investigated the claim, and the plaintiffs alleged that the insurer did not provide a written coverage decision or pay the claim.

The plaintiffs sued for declaratory relief, breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of California’s Unfair Competition Law. Travelers moved to dismiss all claims for failure to state a claim.

Breach of Contract

The court applied California law, under which interpreting an insurance policy is a legal question. It explained that coverage provisions are generally read broadly and exclusions narrowly, but clear policy language controls.

The court focused on the requirement for a “direct physical loss” to personal property. Relying on California authorities and Ninth Circuit precedent, it held that this requirement calls for a physical alteration of tangible property and does not cover an intangible or purely economic loss without a distinct, demonstrable physical change.

The court held that the plaintiffs’ alleged loss of cryptocurrency did not qualify. Cryptocurrency did not have a material existence formed from tangible matter and perceptible by touch, and the plaintiffs’ loss of control over it was not a direct physical loss under California law. The court rejected the plaintiffs’ arguments that cryptocurrency’s status as property in other legal contexts, or the possibility that permanent dispossession could qualify as physical loss, changed the result. The court also rejected the argument that the policy’s reference to prerecorded computer programs created an ambiguity about the meaning of direct physical loss.

The court concluded that the plaintiffs failed to state a claim for breach of contract because the alleged loss was not covered by the policy.

Related Claims

The court held that the implied-covenant claim also failed because an insurance bad-faith claim ordinarily requires benefits to be due under the policy. Although the court recognized that unusual circumstances can sometimes support a bad-faith claim even when the policy does not provide coverage, it found that the circumstances alleged here did not establish such a claim as a matter of law.

Because the complaint did not allege a covered loss, the court further concluded that the plaintiffs failed to state derivative claims under California’s Unfair Competition Law and for declaratory relief.

Disposition

The court granted Travelers’ motion to dismiss with leave to amend. The plaintiffs could file an amended complaint by September 15, 2022. If they did not, the court stated that judgment would be entered. The order disposed of Docket No. 13 and vacated the initial case-management conference.