Companies defending claims in Illinois that they violated the Telephone Consumer Protection Act (TCPA) can breathe a sigh of relief: damages under the Act are insurable, according to the Illinois Supreme Court. Interpreting Congress’ intent in enacting the TCPA—which bans automated marketing phone calls and faxes, among other communications, without prior consent—the court held last week, on May 23, in Standard Mut. Ins. Co. v. Lay, 2013 IL 114617, that the $500 award for each violation of the Act is remedial, and not punitive, and thus is insurable under Illinois law. The court’s ruling is a significant victory for policyholders, as courts in Illinois had issued varied decisions on the issue over the past two decades, and Illinois companies remain frequent targets of class action suits alleging violation of the TCPA.
The case arose out of a “blast fax” sent by Lay, an Illinois real estate agency, to approximately 5,000 fax numbers with Illinois area codes. Contrary to Lay’s understanding at the time, the recipients of the fax had not consented to receive fax advertisements. In 2009, Locklear filed a class action suit against Lay alleging violation of the TCPA, and ultimately represented a putative class of approximately 3,500 plaintiffs. Lay’s insurer, Standard Mutual, defended Lay in the class action but reserved its rights to deny coverage because, among other reasons, the TCPA “may constitute a penal statute.” Lay ultimately settled the suit for approximately $1.7 million, and assigned to Locklear its rights for coverage from Standard Mutual.
In light of the settlement, Standard Mutual filed a declaratory judgment action against Lay and Locklear seeking a declaration that it was not required to provide coverage for the settlement. Among other arguments, Standard Mutual asserted that settlement represented damages that were punitive and not insurable under Illinois law. The circuit court agreed and denied coverage to Locklear. The appellate court affirmed, concluding that the settlement was not insurable because the TCPA is a penal statute: “The ‘actual’ damages incurred by a violation of the TCPA are more in the nature of an irksome nuisance … and [are] not meant to compensate for any actual harm.” 2012 IL App. (4th) 110527, ¶ 36.
The Illinois Supreme Court rejected the appellate court’s interpretation of the TCPA as punitive. While recognizing that the monetary effect of an unsolicited communication is relatively minor, the court stated that it is nevertheless a compensable harm. “The harms identified by Congress, e.g., loss of paper and ink, annoyance and inconvenience, while small in reference to individual violations of the TCPA are nevertheless compensable and are represented by a liquidated sum of $500 per violation.” 2013 IL 114617, at ¶ 31.
The court acknowledged that its decision contradicted that of other courts that have found the TCPA-prescribed damages of $500 per violation constitute punitive damages, citing US Fax Law Center, Inc. v. iHire, Inc., 362 F. Supp. 2d 1248, 1253 (D. Colo. 2005), aff’d, 476 F.3d 1112 (10th Cir. 2007); Kruse v. McKenna, 178 P.3d 1198, 1201 (Colo. 2008) (en banc), but that its holding was in line with the decision of several other courts holding that these damages were remedial, citing Universal Underwriters Ins. Co. v. Lou Fusz Automotive Network, Inc., 401 F.3d 876, 881 (8th Cir. 2005); Subclass 2 v. Melrose Hotel Co., 503 F.3d 339 (3d Cir. 2007); Penzer v. Transportation Ins. Co., 545 F.l3d 1301, 1311 (11th Cir. 2008).
The court’s decision in Lay will help policyholders litigating TCPA class action claims in Illinois to secure coverage for what could be many millions of dollars of statutory damages. The decision also could reverberate nationally, as state and federal courts continue to litigate the insurability of damages under the TCPA.
The ruling does not mean that coverage for TCPA claims in Illinois will be a slam dunk in every instance, as some courts continue to deny coverage for TCPA claims under general liability coverage. Moreover, policyholders also should be careful to provide timely notice of TCPA claims against them to their respective insurers, in compliance with their policies’ conditions to coverage.