A policy exclusion prevented an insured from receiving coverage for an underlying Telephone Consumer Protection Act lawsuit in which it was obligated to pay damages, even after the plaintiff amended the complaint to exclude references to the statute, an Illinois appellate court recently determined.

G.M. Sign sued Michael Schane and his company, Academy Engraving Company, for sending unsolicited fax advertisements. The class action complaint sought statutory damages under the TCPA and contained three counts, including a violation of the statute.

G.M. Sign and Schane reached a settlement agreement, which noted that Schane faxed a total of 49,825 ads to class members during the defined class period and that a finding of statutory liability based on the number of faxes (roughly $25 million) would bankrupt him. The parties agreed to a judgment of $4.9 million that would presumably be satisfied from the State Farm insurance policy.

Schane tendered the settlement to his business insurer, State Farm Fire and Casualty Co. The insurer refused to provide coverage, pointing to Endorsement FE-6655: “This insurance does not apply to: Bodily injury, property damage, personal injury, or advertising injury arising directly or indirectly out of any action or omission that violates or is alleged to violate The Telephone Consumer Protection Act.”

G.M. Sign responded by filing an amended complaint that contained the same allegations as the original but contained no references to the TCPA and tweaked the language used from “faxed advertisements” to “unsolicited facsimile.”

When the amended complaint was tendered to State Farm, the insurer again denied coverage and G.M. Sign filed a declaratory judgment.

Reversing the trial court that held State Farm responsible for coverage, an Illinois appellate panel held the policy exclusion applied to the underlying litigation and remanded the case to enter judgment for State Farm, freeing it from coverage.

“Although the alternative counts selectively incorporated only those factual allegations that contained no referenced to the TCPA, to the faxes being advertisements, or to the lack of any established business relationships between Schane and the class members, they nevertheless were based on the same facts as the TCPA count,” the court wrote.

The vagueness of the amended complaint did not bring the action under the scope of coverage, the panel added. “G.M. Sign argues nothing more than it should be allowed to avoid application of the policy exclusion by deliberately and strategically leaving its complaint so bereft of factual allegations that myriad unpleaded scenarios could fall within its scope,” the court said. “Here, because it did not contain any factual allegations of faxes other than those that violated the TCPA, G.M. Sign’s amended complaint did not trigger State Farm’s duty to defend.”

With the policy exclusion in force, State Farm had no duty to defend or indemnify Schane in the underlying suit, the court concluded.

To read the opinion in G.M. Sign v. State Farm, click here.

Why it matters: The Illinois appellate court also frowned upon G.M. Sign’s litigation tactics in its efforts to garner coverage under the policy. “Having obtained the benefit of its settlement agreement in the underlying litigation by taking the position that Schane sent unsolicited fax advertisements in violation of the TCPA, G.M. Sign should not now be permitted to argue that State Farm owed a duty to defend Schane because its amended complaint potentially included faxes that fell outside of the TCPA,” the court said. “We doubt whether, under these circumstances, any amended complaint could have triggered State Farm’s duty to defend. In essence, G.M. Sign was attempting to re-characterize, at the eleventh hour, the class action that it had already litigated and negotiated to settlement, for purposes of obtaining insurance coverage. This is not a strategy that courts should condone.”