Reversing summary judgment for an insurer, the Illinois Supreme Court ruled that a general liability policy applied to a $1.7 million class settlement of claims under the Telephone Consumer Protection Act.

The court rejected Standard Mutual Insurance Co.’s argument that the statute was punitive in nature and therefore the damages were uninsurable.

Ted Lay Real Estate Agency hired a “blast fax” service that represented it had a list of people and entities that had consented to receive information via fax (a requirement under the TCPA). In June 2006 the company sent a fax ad with Lay’s contact info advertising the sale of a car wash to roughly 5,000 fax numbers.

Unfortunately for Lay, the recipients had not in fact consented to receive fax ads and one of them, Locklear Electric, filed a class action alleging violations of the TCPA. Lay sought coverage under a general liability insurance policy issued by Standard Mutual. The insurer agreed to defend Lay subject to a reservation of its rights, noting reasons including policy exclusions and that the TCPA “may constitute a penal statute.”

Lay settled the suit for $1,737,500 plus costs, based on the $500 TCPA-prescribed damages for 3,478 class members. Standard then filed an action in Illinois state court seeking a declaration that it had no duty to defend or indemnify. The insurer raised eight different arguments, but both the trial and appellate courts agreed that the $50-per-violation damages awarded under the TCPA constituted punitive damages and were therefore not insurable as a matter of Illinois law and public policy.

The state’s highest court disagreed.

The TCPA was enacted to protect the privacy interests of residential telephone customers by restricting unsolicited automated telephone calls as well as facilitating the interests of commerce by restricting certain uses of fax machines and automatic dialers. Therefore, the “manifest purpose of the TCPA is remedial and not penal,” the unanimous court concluded.

Addressing the $500 liquidated damages prescribed in the statute, the court said that Congress identified specific harms to consumers, like the loss of paper and ink, annoyance and inconvenience. While small, such harms “are nevertheless compensable.”

Further, the statutory award serves an encouraging purpose for potential plaintiffs to enforce the statute. “This added incentive is necessary because the actual losses associated with individual violations of the TCPA are small,” the court said. “Whether we view the $500 statutory award as a liquidated sum for actual harm, or as an incentive for aggrieved parties to enforce the statute, or both, the $500 fixed amount clearly serves more than purely punitive or deterrent goals.”

The court also noted that treble damages are available under the TCPA separate from the $500 liquidated damages, which “indicates that the liquidated damages serve additional goals than deterrence and punishment and were not designed to be punitive damages.”

Reversing summary judgment for Standard Mutual, the court remanded the case to the appellate court to consider the insurer’s other arguments to avoid coverage, including a contention that Lay failed to cooperate and entered into the settlement agreement without Standard’s consent.

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

Why it matters: The court’s decision was a victory not only for Lay but for other insureds seeking coverage in TCPA-related litigation. Standard Mutual’s argument that the statutory damages are punitive in nature is a common defense to avoid coverage but is now unavailable to insurers, at least in Illinois. The decision reflects a growing split in jurisdictions that have addressed the issue of whether TCPA-prescribed damages of $500 per violation constitute penal or punitive damages. Courts in Colorado and New York as well as the 10th U.S. Circuit Court of Appeals have reached the opposite conclusion of the Illinois Supreme Court. Thus insureds seeking coverage for a TCPA suit should check their policy to determine the governing law.