The Missouri Supreme Court ruled that an insurer was obligated to defend a policyholder’s Telephone Consumer Protection Act suit because damages under the act are not a “fine” and are therefore insurable.

Columbia Casualty Company refused to defend a TCPA suit filed against HIAR Holding LLC that resulted in a $5 million settlement plus interest (estimated at a total of $8.4 million). HIAR allegedly sent 12,500 unsolicited fax advertisements during the period under which it was insured by a commercial general liability policy from Columbia. One of the recipients filed a class action suit under the act.

Although HIAR tendered the suit to Columbia, the insurer refused to defend. When HIAR and the class reached a settlement agreement, Columbia rejected the deal and refused to participate in the negotiations. After a federal judge approved the settlement without any objections, the class filed a garnishment suit against Columbia. The insurer responded with a declaratory action seeking a clarification of its duties.

Fighting coverage on every possible ground, Columbia argued that HIAR’s TCPA violations were intentional and resulted in statutory damages akin to fines and penalties, making them uninsurable under the policy.

Joining an increasing majority of courts to address the issue, the Missouri Supreme Court disagreed.

“TCPA statutory damages of $500 per occurrence are not damages in the nature of fines and penalties,” the court said, relying on an opinion from the Eighth Circuit Court of Appeals in Universal Underwriters Ins. Co. v. Lou Fusz Automotive Network, Inc. (401 F.3d 876 (2005)) and reversing prior case law from an appellate court in the state.

The $500-per-occurrence statutory damages award serves more than purely punitive or deterrent goals, the court wrote, and the fact that treble damages are available separately from the fixed damages shows the $500 statutory damage awards, by themselves, are not a penalty.

The court rejected an argument by the insurer that HIAR intentionally sent the faxes, meaning an “occurrence” – defined as “an accident” in the policy did not occur. “The circuit court determined that HIAR’s actions in violating the TCPA reflected negligent conduct, as it found that HIAR did not intend to violate the TCPA and did not intend injury to the class,” the court said. “The circuit court accepted HIAR’s assertions that it believed that its marketing company had the consent of fax recipients to receive HIAR’s advertising faxes.” Thus the property damage coverage was invoked by the TCPA action.

Further, because HIAR’s policy included coverage for advertising injury – including offenses committed in the course of advertising materials that violate a person’s privacy rights – the claims fell under the policy’s coverage, the court said.

Although Columbia contended that “advertising injury” damages covered by the policy must be compensatory damages, the court noted that nothing in the policy expressly defined the term “damages.”

The unanimous court also took Columbia to task for attempting to challenge the settlement deal after wrongfully refusing to defend its insured. “Where the trial court has entered judgment after a hearing on liability and damages, then…the insurer is not entitled to a second hearing on reasonableness in any garnishment or declaratory judgment action based on the policy,” the court said. “The ‘insurer cannot have its cake and eat it too by both refusing coverage and at the same time continuing to control the terms of settlement in defense of an action it had refused to defend.””

To read the decision in Columbia Casualty Co. v. HIAR Holding LLC, click here.

Why it matters: The Missouri Supreme Court’s decision is significant because it not only reversed a lower appellate court ruling adverse to insureds, but also further supports opinions from the Eighth and Eleventh Circuits, federal courts in Massachusetts and Ohio, and the Illinois Supreme Court concluding that TCPA damages are not punitive in nature and are therefore insurable. Thus policyholders facing a suit under the act have a growing body of case law upon which to rely which holds that coverage is available and that the statutory damages are not punitive in nature, and will not preclude coverage.