Illinois Supreme Court Holds TCPA Damages Not Punitive

Today the Illinois Supreme Court issued its decision in Standard Mutual v. Lay, 2013 IL 114617 (2013).  Locklear brought a class action claim against Lay under the Telephone Consumer Protection Act of 1991 (TCPA), which resulted in a court-approved settlement orchestrated by Lay and Locklear.  The settlement agreement provided for $500 statutory damages to be distributed to each of the 3,478 class members.  The settlement further restricted Locklear’s ability to satisfy the judgment to only Lay’s insurers.  Lay’s insurer, Standard Mutual, filed a complaint for declaratory judgment arguing that, among other things, the settlement was not covered as the TCPA-prescribed damages of $500 per violation constitute punitive damages, which are uninsurable.

The trial court and Appellate Court ruled that because the $500 statutory damages were disproportionate to the actual damages (loss of toner, paper, etc.), the damages assessed for a violation of the TCPA were punitive in nature and therefore uninsurable.  On appeal, Locklear contended, among other things, that the damages were not punitive given the legislative history underlying the TCPA.  The Supreme Court agreed, holding that the TCPA is “clearly within the class of remedial statutes which are designed to grant remedies for the protection of rights, introduce regulation conducive to the public good, or cure public evils.”  The court found that Congress intended to prevent advertisers from unfairly shifting the cost of advertisements to consumers, and imposed a liquidated sum of $500 to reflect the compensable damages and harms suffered by the recipient of an unsolicited fax.  The court also held that the $500 liquidated damages were available as an incentive for private parties to enforce the statute, and therefore the statute existed for more than punitive or deterrent purposes. Finally, the treble damages available under the TCPA, which are separate from the $500 liquidated damages, demonstrated Congress’ intent that the liquidated damages serve goals other than deterrence and punishment.  The court did not reach the issues of whether TCPA damages fall within an exception to the uninsurability of punitive damages, or Locklear’s argument that all punitive damages should be insurable.

South Carolina Court Holds No Coverage for Blast Fax Case Under E&O Policy

In its recent decision in BCS Ins. Co. v. Big Thyme Enters., 2013 U.S. Dist. LEXIS 20051 (D.S.C. Feb. 14, 2013), the United States District Court for the District of South Carolina had occasion to consider whether an alleged violation of the Telephone Consumer Protection Act triggered coverage under a professional liability policy.

BSC Insurance Company insured agents of Blue Cross and Blue Shield of South Carolina under an agents and brokers professional liability policy.  One of these agents, and his insurance agency, were named as defendants in an underlying suit alleging violations of the Telephone Consumer Protection Act based on defendants’ action in sending unsolicited facsimiles.  Plaintiff also alleged a cause of action for conversion for having wrongfully misappropriating plaintiff’s paper, fax machines, toner, and employee time.  BSC provided its insureds with a defense under a reservation of rights, and later commenced a declaratory judgment action. 

BCS argued, among other things, that the insureds’ conduct in sending unsolicited facsimiles did not trigger the policy’s insuring agreement, which among other things required a wrongful act arising out of the insured’s “professional services.”  The policy defined “professional services” as “specialized services rendered to a Client as a licensed Life, Accident and Health Insurance Agent.”  BCS argued that sending unsolicited faxes to non-clients as part of an advertising campaign does not involve the insureds’ “specialized knowledge or training as an insurance agent or agency.” The insureds, on the other hand, argued that advertising was central to its business and as such should be considered a professional service.   The court found in BCS’s favor, concluding that sending advertising does not fall within the category of contemplated “special services,” and as such, the policy was not triggered in the first instance.

The court further noted that even if the insureds’ actions in sending facsimiles could be considered professional services, the policy also required that the insured’s professional services be rendered to or on behalf of a client.  Because the facsimiles were sent unsolicited to potential clients rather than actual clients, the court concluded that this requirement of the policy was not satisfied, thus serving as an additional ground for noncoverage. 

Pennsylvania Federal Court Addresses Coverage for Blast Fax Suit

In Maryland Casualty Co. v. Express Products, Inc., 2011 U.S. Dist. LEXIS 108048 (E.D. Pa. Sept. 22, 2011), the United States District Court for the Eastern District of Pennsylvania considered whether an insured was entitled to coverage under a series of general liability policies for an underlying “blast fax” suit.

The insured, Express Products, Inc. (“Express”), was as a defendant in a class action filed in an Illinois state court alleging violations of the Telephone Consumer Protection Act (“TCPA”) and the Illinois Consumer Fraud Act based on Express’ transmittal of thousands of unsolicited advertisements via facsimile.  Express’ insurers, Cumberland Mutual Fire Ins. Co. and Maryland Casualty Company, denied coverage under their respective policies’ property damage coverage (Coverage A) on the basis that the underlying suit did not allege an occurrence.  The insurers also denied coverage under their policies’ advertising injury coverage (Coverage B) on the basis that the underlying suit did not fall within the definition of any of enumerated offenses constituting “advertising injury.” 

After determining that Pennsylvania law governed the policies, the court turned to the coverage issues under the policies two coverages.  In considering Coverage A, the court agreed that the underlying suit alleged property damage “through the use of paper and toner, and the loss of use of tangible property that is not physically injured, by tying up the fax.”  The court nevertheless concluded that the underlying suit did not allege property damage arising out of an “occurrence” because the suit alleged that Express intentionally sent the faxes.  While the underlying suit did allege that Express knew or should have known that it would cause property damage to the plaintiff class, such an allegation, in and of itself did not preclude a finding of intentional conduct since the suit also alleged that Express intentionally sent unsolicited facsimiles.  The court also rejected the insured’s argument that the mere inclusion of the word negligence in the underlying suit triggered a defense obligation. Plaintiffs’ use of this word, explained the court, was to allege that even if Express’ conduct was negligent, its conduct was still in violation of the TCPA.  This did not rise to the level of an actual allegation of negligent conduct.  The court further held in passing that the policies’ expected and intended exclusions applied, since the complaint alleged that Express sent the facsimiles knowing that such would result in the use of plaintiffs’ fax, toner, paper and ink.