Rosenberg v. Homesite Insurance Agency, Inc.

Background

Evan and Shira Rosenberg had a homeowners insurance policy with Homesite. The policy covered personal property for direct physical loss caused by theft, subject to a maximum amount of $359,500 and several special limits and exclusions.

In June 2021, hackers accessed the Rosenbergs’ cryptocurrency wallets on two blockchain networks and transferred cryptocurrency tokens to another wallet that the Rosenbergs could not access. The Rosenbergs stated that the tokens were worth approximately $750,000. They reported the incident to the Federal Bureau of Investigation’s Internet Crime Complaint Center and filed an insurance claim.

Homesite paid the claim under the policy’s $200 special limit for categories including money, coins, stored-value cards, and smart cards. The Rosenbergs later sued Homesite. Their amended complaint asserted breach of contract and unreasonable denial of coverage under Minnesota Statute § 604.18.

Motion and legal standard

Homesite moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). The court applied the same standard used for a motion to dismiss for failure to state a claim. Under that standard, the court accepted the complaint’s factual allegations as true and drew reasonable inferences in the Rosenbergs’ favor, but required the allegations to state a plausible claim for relief.

Because the case was based on diversity jurisdiction and neither party raised a choice-of-law issue, the court applied Minnesota law. The court treated the insurance policy as part of the pleadings because the claims depended on it.

Breach-of-contract claim

The Rosenbergs argued that the policy’s language was ambiguous and that its references to property such as digital data supported coverage for their cryptocurrency. Homesite argued that cryptocurrency exists only in virtual form and therefore cannot suffer a direct physical loss.

Under Minnesota law, “direct physical loss” requires a distinct, demonstrable, and physical alteration to the covered property. The court stated that some physicality must accompany the alleged loss or damage. It also noted that no court in the District of Minnesota, Minnesota state courts, or elsewhere in the Eighth Circuit had considered whether cryptocurrency is covered under a direct-physical-loss provision.

The court rejected the Rosenbergs’ ambiguity argument. Reading the policy as a whole, the court found that the direct-physical-loss requirement was clear. The Rosenbergs had not identified legal authority suggesting that digital property is covered by such a provision. Because the lost cryptocurrency was purely digital and the record contained no indication that it had any physicality, the court concluded that Homesite did not violate the policy.

Statutory bad-faith claim

Minnesota Statute § 604.18 requires an insured to show that the insurer lacked a reasonable basis for denying benefits and knew that it lacked such a basis or acted with reckless disregard of that fact. The court held that this claim also failed because a bad-faith denial claim requires a breach of the insurance policy. Since Homesite had not breached the policy by refusing to pay the claim under a higher coverage limit, the Rosenbergs could not establish the statutory claim.

Disposition

The court granted Homesite’s motion for judgment on the pleadings. It dismissed the Second Amended Complaint with prejudice and directed that judgment be entered accordingly.