In Standard Mutual Ins. Co. v. Lay, 2012 IL App (4th) 110527, the Illinois appellate court decided as a matter of first impression in Illinois that statutory damages assessed under the federal Telephone Consumer Protection Act (TCPA) (47 U.S.C. § 227 et seq.) are punitive damages that cannot be covered by liability insurance policies. The TCPA is a federal statute that makes it unlawful for marketers to send automated telephone calls, text messages, faxes and similar media messages to anyone who has not previously consented to receive such communications. This decision is important for insurers issuing liability policies in Illinois because Illinois is part of a slim majority of jurisdictions permitting defense costs coverage for TCPA actions under general liability policies. This ruling confirms that, even if defense costs may be covered, any statutory award rendered against an insured under the TCPA is not insurable under Illinois law.


In June 2006, Theodore Lay, d/b/a Ted Lay Real Estate Agency (Lay), faxed an advertisement regarding the sale of a particular property to Locklear Electric, Inc. (Locklear) and others. Lay, a small real estate agency in Girard, IL, sent the fax through a fax broadcaster called Business 2 Business Services, which it had hired to assist in its advertising efforts. The broadcaster offered a "blast fax" service through which fax advertisements were sent to thousands of fax machines cheaply, and represented to Lay that the fax recipients would only be entities who had already consented to receiving fax messages such as those sent on Lay's behalf. Unknown to Lay, however, the recipients of its faxes had not given permission to receive the messages, so they sued Lay in a class action with Locklear as the representative, asserting that Lay violated the TCPA. The TCPA provides for the imposition of a penalty in the amount of $500 for each violation – here, for each fax sent – and allows for the statutory penalty amount to be trebled.

Lay tendered defense of the class action to its insurance carrier, Standard Mutual Insurance Company (Standard). Standard issued general liability and business policies to Lay affording coverage for, among other things, "property damage" and "advertising injury." Standard defended Lay under reservation of rights and filed a declaratory judgment action to determine its coverage obligations under the policies. Using counsel of its own choosing, Lay entered into a consent judgment with the TCPA plaintiffs, insulating itself from liability while assigning its rights against Standard to the TCPA plaintiffs. Lay settled the TCPA claim for the full amount sought by the TCPA plaintiffs of $1,739,000 (i.e., $500 per fax for 3,478 faxes) plus costs. The settlement was approved by the TCPA action court.


Following settlement of the underlying action, Locklear and Standard cross-moved for summary judgment in the instant coverage action. The appellate court affirmed the grant of summary judgment to Standard on the ground that "damages under the TCPA are in the nature of punitive damages" and so are "not insurable in Illinois" as a matter of public policy.

The appellate court reasoned as follows:

First, the TCPA is a penal statute because liability under it is not contingent but is instead imposed automatically when a violation of the statute is established. In this regard, the TCPA's statutory penalty provision imposes automatic liability for a violation of the TCPA in a predetermined amount of damages, and imposes damages without regard to the actual damages suffered by the plaintiff.

Second, because the $500 statutory penalty in the TCPA for each violation is far in excess of actual damages, it is the equivalent of punitive damages. It is established in Illinois that punitive damages are intended to punish rather than compensate. Pertinent here, the appellate court noted that:

The purpose of the TCPA is to deter future sending of unwanted fax transmissions by those sending the faxes and deterring others from doing the same by shifting the cost and imposing penalties on those sending the unwanted fax transmissions. The actual cost to a recipient of unwanted faxes is far below $500. It would amount to the cost of a sheet of paper and some toner, as well as the brief time involved in an employee taking the unwanted fax from the fax machine. The cost to the sender of an unwanted fax is far in excess of the costs to the recipient. It is a penalty to the sender.

Third, "damages in excess of actual damages suffered by Locklear and the other class members would be a windfall, which is contrary to the purpose of compensatory damages."

And fourth, "[s]hifting responsibility for payment of damages beyond actual damages frustrates the TCPA's purpose of deterring and preventing the sending of unwanted faxes. There is no incentive for a current or future fax sender to comply with the TCPA if a violation is covered by liability insurance."

The appellate court also considered and rejected case law from other state and federal jurisdictions that had found the TCPA is not a penal statute, specifically rejecting Motorists Mutual Ins. Co. v. Dandy-Jim, Inc., 182 Ohio App. 3d 311, 2009 Ohio 2270, ¶ 34, 912 N.E. 2d 659 (Ohio Ct. App., Cuyahoga County 2009) and Destination Ventures, Ltd. v. Federal Communications Comm’n, 844 F. Supp. 632, 637 (D. Or. 1994). The appellate court also noted that other courts have held that “a claim under the TCPA for $500 in liquidated damages per violation is a penalty.” See Kruse v. McKenna, 178 P. 3d 1198, 1201 (Colo. 2008) (en banc).

Learning Point

Coverage for TCPA actions is frequently sought by insureds under general liability and other liability insurance policies. A full spectrum of issues must be reviewed in such circumstances, including determining if any TCPA coverage is afforded at all (it is often excluded or specifically limited under new policy forms); if so, whether independent counsel must be retained to defend the insured in light of indemnity defenses; and the extent to which indemnity coverage may be precluded.

Illinois is one of a slim majority of jurisdictions that have held that TCPA claims trigger the duty to defend under a general liability policy. Therefore, this ruling will significantly reduce an insurer’s exposure for TCPA claims in Illinois by eliminating from indemnity coverage any statutory penalties permitted under the TCPA. Given that out-of-pocket loss is minimal and difficult to prove in TCPA actions, this ruling virtually eliminates indemnity coverage in Illinois for TCPA actions.