Why it matters

In a closely watched case out of Illinois, an appellate court held that a $1.7 million settlement in a Telephone Consumer Protection Act case against an insured requires indemnification by the insurer – even though the policyholder reached the agreement on its own. Last year, the coverage dispute between a realtor and an insurer reached the Illinois Supreme Court, which issued a key victory for policyholders when it ruled that damages pursuant to the TCPA are not punitive in nature and can therefore be insured. On remand, the insurer turned to its fallback position: it played no part in the settlement, so it should not be responsible for paying for it. The appellate court disagreed, but the case could make a return to the state’s highest court as the insurer has already filed an appeal.

Detailed Discussion

Ted Lay Real Estate, a small agency located in Girard, Illinois, contracted a now infamous marketing company to send fax advertisements to drum up business (the company, Business 2 Business Services, has been involved in dozens of TCPA class actions nationwide). B2B sent approximately 5,000 faxes on behalf of the real estate agency in June 2006.

One of the recipients, Locklear Electric, Inc., filed a class action under the TCPA. Lay turned to insurer Standard Mutual Insurance Company, which initially agreed to defend subject to a reservation of rights. Standard listed numerous grounds on which coverage could be denied, including that the complaint sought damages based on willful behavior and the policy excluded coverage for intentional or nonaccidental acts. Noting that a conflict of interest existed, Standard permitted Lay to select its own counsel or waive the conflict. Lay chose to waive the conflict initially and the carrier appointed counsel.

Lay, however, later selected its own counsel and settled the suit on its own for a total of $1,739,000 plus costs. Lay also assigned its rights against Standard to the class in exchange for a covenant not to execute.

Standard initially contended that the $500 per violation statutory damages under the act was in the nature of punitive damages because it was far in excess of actual compensation for any injuries suffered by class members. The appellate court agreed, but the Illinois Supreme Court reversed.

On remand, Standard unsuccessfully resorted to various fallback positions.

First, it argued that the policies were limited to liability arising out of the operations of Lay’s real estate business at designated locations. The court held that while several of the policies certainly referred to specific locations, there was no additional language in the policies themselves restricting coverage to those locations.

Second, the carrier invoked the policies’ professional services exclusion. The court rejected this argument, noting that Lay was a real estate business and that the underlying class action did not allege that Lay had performed (or failed to perform) such services.

Third, Standard argued that there was no “property damage,” and, if there was, Lay had caused it intentionally. The court held, however, that the underlying action alleged misappropriation of paper, toner and employee time and therefore constituted “property damage.” The court also noted that Lay itself believed that the faxes had been properly authorized and therefore its conduct was not intentional. (The court also found coverage under the policies’ advertising injury sections.)

Fourth – and finally – the carrier argued that it had not consented to the settlement. Because Standard had relinquished control of the defense due to the conflict of interest, however, it also lost the right to control the settlement of the class action.

Notwithstanding its complete vindication of Lay in finding coverage, the panel’s parting shot took aim at the supreme court’s previous conclusion that TCPA fines constitute covered damages. “We find Standard’s policies issued to Lay cover the damages alleged here, but note the purpose of the Telephone Act is ‘to address telemarketing abuses attributable to the use of automated telephone calls to devices including telephones, cellular telephones, and fax machines,’ ” the court wrote. “By allowing liability for telemarketing abuses to be covered by insurance, the company responsible for the abuses, in this case Lay, has no incentive to stop the abuses from occurring in the future and the purpose of the Telephone Act is unfulfilled.”

To read the decision in Standard Mutual Insurance Co. v. Lay, click here.