Why it matters: An unfair trade practices clause did not bar coverage for a policyholder's subsidiary, an Illinois federal court ruled, ordering the insurer to provide coverage to the insured's $3 million policy maximum. The subsidiary was hit with eight class action lawsuits for allegedly enrolling consumers in monthly membership programs and charging a fee without consent in violation of various consumer protection laws. Although the insurer initially provided a defense, it drew the line at the eighth lawsuit and said it would not pay more than $1 million for defense costs. The parent company sued the insurer, which relied upon a policy exclusion for claims related to alleged unfair trade practices. But reading the exclusion as a whole, the court said it was intended to cover antitrust-related violations, not fraud-based consumer protection claims such as those found in the underlying complaints. At best, the provision was ambiguous and needed to be resolved in favor of the insured, the judge wrote, granting summary judgment for the policyholder.

Detailed discussion: Big Bridge Holdings, Inc. purchased a $3 million liability policy from Twin City Fire Insurance Company that covered its entire organization, including subsidiary Sempris LLC. Sempris sells membership programs that provide discounts at various restaurants and retailers.

During the policy period, Sempris was sued eight times in various federal courts across the country. The lawsuits alleged both state and federal law violations for enrolling consumers in fee-based monthly membership programs without the consent of the plaintiffs.

Twin City initially provided coverage for the lawsuits. But when the eighth complaint was filed, the insurer sent a letter stating that it was denying coverage for any losses exceeding $1 million. Big Bridge responded with a declaratory judgment suit arguing that Twin City breached its duty to defend and/or indemnify Sempris, and breached the terms of the policy by failing to provide coverage in the full amount.

The insurer filed a counterclaim, arguing that coverage for the lawsuits against Sempris was barred by Section V(A)(5) of the policy, an exclusion that stated Twin City would not pay for any claim "based upon, arising from, or in any way related to any actual or alleged: … (5) price fixing, restraint of trade, monopolization, unfair trade practices or any violation of the Federal Trade Commission Act, Sherman Antitrust Act, Clayton Act, or any similar law regulating antitrust, monopoly, price fixing, price discrimination, predatory pricing or restraint of trade activities; provided, however, this exclusion shall not apply to Defense Costs incurred to defend such allegations up to a maximum of the lesser of (i) the remaining amount of the applicable limit of liability listed on the Declarations or (ii) $1,000,000."

Considering cross motions for summary judgment and applying Minnesota law, U.S. District Court Judge Robert M. Dow, Jr. sided with Big Bridge.

The term "unfair trade practices" was not defined by the policy, but the insurer emphasized the broad prefatory language of the exclusion to advocate for an extensive reading of the provision.

While the court agreed that the prefatory language was indeed broad, it took a different approach. "In order to understand the scope of a contractual term, it is necessary to consider the context in which the term appears, reading the provision as a whole," Judge Dow wrote. Section V(A)(5) contained eight separate categories of claims excluded from coverage, ranging from price fixing and restraint of trade to violations of the Sherman Antitrust Act and the Clayton Act.

"Read as a whole, these eight categories are best described as relating to antitrust violations," the court said. "One need look no further than the catch-all exception to reach this conclusion, as that exclusion describes the prior seven exclusions (or at least the prior three) as laws 'regulating antitrust, monopoly, price fixing, price discrimination, predatory pricing or restraint of trade activities.'"

In contrast, the eight underlying lawsuits "are best described as fraud-based consumer protection claims alleging deceptive (not anti-competitive) business practices," the judge explained. "[I]t would be an odd bit of contract drafting to aim to incorporate consumer-protection and other fraud-based violations into an exclusion that self-identifies as relating to 'antitrust, monopoly, price fixing, price discrimination, predatory pricing [and] restraint of trade activities' without mentioning the words 'fraud' or 'consumer protection' at all."

The court also rejected Twin City's contention that the phrase "unfair trade practices" encompassed both consumer protection and antitrust claims, similar to the Federal Trade Commission Act, which has both a consumer protection and an antitrust component.

"While there is some appeal to this argument, the total absence of any mention of fraud-based or consumer-protection claims in Section V(A)(5), coupled with the plain-language categorization of these exceptions in the catch-all provision as anti-competitive in nature, counsel in favor of reading 'unfair trade practices' as referencing that term in the antitrust context," the court said.

At a minimum, Judge Dow wrote, the phrase "unfair trade practices" is ambiguous as used in the exclusion. "And in the insured-friendly state of Minnesota, '[a]ny ambiguity is resolved in favor of the insured, and the burden is on the insurer to prove that the claim clearly falls outside the coverage afforded by the policy,'" the court said, citing similar decisions from the Seventh Circuit Court of Appeals and a federal court in Oregon.

"The plain language of Section V(A)(5), read as a whole, excludes antitrust violations and other anti-competitive conduct," the judge concluded. "Any argument that the exclusion should be read broadly because certain antitrust laws mentioned in the exclusion (e.g., unfair trade practices and the FTC Act) have applications beyond the antitrust realm is unavailing. If the insurers wanted to include consumer-protection or consumer-fraud violations into the exclusion, they should have mentioned those well-known bodies of law expressly, not indirectly through a provision clearly aimed at antitrust laws."

To read the opinion in Big Bridge Holdings, Inc. v. Twin City Fire Insurance Co., click here.