In Standard Mut. Ins. Co. v. Lay, — N.E.2d —-, 2012 WL 1377599 (Ill. Ct. App. Apr. 20, 2012), the Appellate Court of Illinois, Fourth District, held that the $500 in liquidated damages available under the federal Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, is a penalty and punitive, and therefore not insurable under Illinois law.
In the underlying class action, Theodore Lay dba Ted Lay Real Estate Agency allegedly violated the TCPA by faxing an advertisement without the recipients’ permission. Lay’s insurance carrier agreed to defend subject to a reservation of rights and filed an action for declaratory relief. Lay settled with the class action plaintiff for the full amount sought (in excess of $1.7 million) and assigned its rights against its insurance carrier in exchange for a promise not to execute against Lay’s property or assets. The district court approved the settlement as made in reasonable anticipation of liability, the amount being fair and reasonable in that Lay sent 3,478 unsolicited faxes, believing it had the consent of the fax recipients and without intent to injure.
In upholding the carrier’s motion for summary judgment in the declaratory relief action, the court held that the statutory damages available under the TCPA are punitive in nature, which is dispositive of coverage under Illinois law. The TCPA permits recovery of actual monetary loss or $500 for each violation, which may be trebled for willful or knowing violations. Observing that the TCPA is a strict liability statute, the court reasoned that the provision permitting recovery of $500 for each violation of the TCPA is a penalty to the sender in that the actual cost to the recipient of unwanted faxes is far below that amount. The court determined this statutory penalty serves two of the purposes of punitive damages—the purpose of deterring the defendant as well as others from similar conduct—and, because it far exceeds the actual harm suffered, would constitute a windfall, contrary to the purpose of compensatory damages. Shifting payment of these amounts to an insurance carrier would defeat the deterrent and preventative effect of the statutory award by removing any incentive for compliance with the TCPA.
The Lay court acknowledged mixed rulings in other jurisdictions—some finding the remedies available under the TCPA are remedial, some that they are penalties. However, the Lay court determined that a statute is remedial only when actual damage results from a violation and liability is contingent on damage proven by the plaintiff. A penal statute imposes liability automatically when there is a violation, without regard for damage proven by the plaintiff. Under this rationale, the court held the $500 in liquidated damages available under the TCPA is a penalty and punitive, and is not insurable as a matter of Illinois law and public policy.
Following the rationale of the Lay court, even in the context of TCPA claims where there is a potential duty to defend, a carrier may have no obligation to indemnify under Illinois law, absent the underlying plaintiff’s proof of actual damages from receipt of an unsolicited fax.