In an opinion adjudicating the insurability of claims brought under the federal Telephone Consumer Protection Act (“TCPA”), the Illinois Supreme Court recently ruled that public policy did not prohibit coverage of these claims. The decision is Standard Mutual Insurance Co. v. Lay, No. 114616 (Ill. May 23, 2013), and a copy of it is available here.

Ted Lay Real Estate Agency sent a blast fax to Locklear Electronic Inc. On behalf of a class, Locklear sued the Agency under the TCPA, which essentially forbids unsolicited faxes. The Agency settled the case for $1.7 million, a sum equal to the number of class members multiplied by $500. Locklear agreed that it would seek satisfaction of the judgment only from the Agency’s insurance policies. Even if insurance recoveries were unavailable, Locklear agreed that it would not seek recovery from the Agency’s non-insurance assets.

Standard Mutual Insurance Co., the Agency’s insurer, contested coverage of the settlement on the grounds that public policy prohibits insurance of punitive damages. $500 are the damages the TCPA dictates for each unsolicited fax. 47 U.S.C. § 227(b). The Illinois Supreme Court deemed the $500 per fax “non-punitive” (and therefore insurable) because that amount was both liquidated damages and an incentive for fax recipients to enforce the TCPA. It also found support in the fact that the TCPA trebled the damages for violations committed willfully or knowingly.

While Lay is law in Illinois, other states’ courts have reason to discount its persuasiveness as an authority. First, consider the nature of the $500 per fax as liquidated damages. Liquidated damages provide a recovery where the actual damages are difficult to ascertain. However, the liquidated damages’ amount still must be a reasonable estimate of the harm. E.g., UCC § 2-718. In fact, if the liquidated damages’ amount is found to be greater than the amount of the actual damages that should have been estimated, then the liquidated damages are a penalty. E.g., Restatement (Second) of Contracts § 356.

The court did not establish that $500 per fax were a reasonable approximation for the harm done to anyone in the United States upon receiving an unsolicited fax, no matter the circumstances. To the contrary, the TCPA permits recovery of “actual monetary loss” or $500, “whichever is greater.” 47 U.S.C. § 227(b)(3). If the recovery is $500, then in all likelihood the actual damages were less, which makes sense as these faxes are simply a nuisance. Indeed, the court justified the $500 as a “necessary” “added incentive” “because the actual losses associated with individual violations of the TCPA are small.”

Second, consider why the TCPA offers $500 per fax in order to induce fax recipients to enforce the TCPA. The threat of enforcement gives the law a deterrent effect, and deterrence is, as the court acknowledged, a function of a penalty. Congress specifically sought to ban unsolicited telecommunications so that they would not be sent. Whereas remedies merely correct harms that happened, penalties are threatened in order to discourage harms from happening in the first place. Insurance of penalties is forbidden, otherwise insurance would spare the policyholder the punishment. If unsolicited faxes are to be deterred, they cannot be insured.

Last, consider that $500 per fax in light of the possibility that they may triple if the violation were committed “willfully or knowingly,” 47 U.S.C. § 227(b)(3). That the larger amount is a penalty does not mean that the smaller amount is not. A reckless driver may pay a larger fine than a speeder does, because the reckless driver speeds with willful and wanton disregard for the safety of persons or property. But no one says that when the speeder is fined, he is not punished.

It remains to be seen how much Lay will persuade courts in other states to find the TCPA’s $500 per fax “non-punitive.”