An $8.7 million Telephone Consumer Protection Act settlement based on insurance proceeds has been rejected by a Florida federal court judge.

The putative class action lawsuit was filed by Physicians Healthsource against Doctor Diabetic Supply LLC, alleging that the defendant sent 17,440 faxed advertisements that did not contain a clear and conspicuous notice in violation of the TCPA.

DDS’s insurers – Federal Insurance Co., Essex Insurance Co., and Endurance American Specialty Insurance Co. – all refused to defend the litigation. Because DDS said a verdict based on the number of faxes sent would send the company into bankruptcy, the parties reached a settlement deal based on DDS’s insurance proceeds.

Under the terms of the deal, the court would enter judgment in favor of the settlement class in the total amount of $8.72 million (or $500 for each of the alleged 17,440 faxes). DDS agreed to pay the cost of settlement notice up to $10,000. The class would execute a covenant not to seek any other recovery from DDS but to collect the remainder of the judgment from the insurers for the settlement amount as well as attorneys’ fees (30 percent of the future recovery) and a $15,000 incentive award for the named plaintiff.

The parties argued that the deal was reasonable and fair given the range of potential damages (up to $26.16 million if the statutory damages were trebled) and DDS’s inability to pay.

“Further litigation of the underlying claims against DDS in this court, on appeal, or in bankruptcy will be expensive for the class and will not move the class members closer to collecting any money,” according to the motion in support of preliminary approval of the settlement. “On the other hand, if this action is settled, the class can concentrate the efforts on seeking recovery from . . . the insurers. The settlement should be preliminarily approved because it will minimize the inevitable costs of future litigation of this matter.”

Not so fast, ruled U.S. District Court Judge Patricia A. Seitz, who found the deal too speculative to even grant preliminary approval.

In a terse order, she rejected the settlement. “The Court will not approve a settlement with such an uncertain recovery,” she wrote.

Both parties went back to the drawing board in the wake of the court’s ruling. Physicians Healthsource filed a motion to certify the class, while DDS filed a motion to dismiss the suit for lack of subject matter jurisdiction. The defendant told the court that it served an offer of judgment of the maximum amount of statutory damages plus costs and an injunction prohibiting future violations of the TCPA (around $6,000).

The offer of judgment would provide the plaintiff with the full relief requested in the complaint, DDS argued, and therefore the action no longer presented a live case or controversy and should be dismissed.

To read the proposed settlement in Physicians Healthsource, Inc. v. Doctor Diabetic Supply LLC, click here.

To read the order rejecting the settlement, click here.

To read DDS’s motion to dismiss, click here.

Why it matters: Insurers are increasingly playing a role in TCPA litigation as the suits continue to mount and plaintiffs look for deep pockets in their quest for multimillion-dollar awards. Judge Seitz refused to sign off on a proposed deal that was based solely on the defendant’s insurance proceeds, a move she said provided “an uncertain recovery,” which is not a surprising decision given the insurers’ refusal to provide defense coverage for the suit.