The Supreme Judicial Court of Massachusetts, applying New Jersey law, has ruled that insurers had a duty to defend and indemnify a policyholder against class-action claims targeting unsolicited facsimile advertisements under the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227 (2000). Terra Nova Insurance Co. v. Fray-Witzer, et al., No. SJC-09801, 2007 WL 1966161 (Mass. July 10, 2007).

The court held that "these advertisements violated their recipients' right of privacy, such that insurance coverage is triggered." Although the law is mixed and there are serious coverage issues posed by TCPA claims, several other courts have reached similar conclusions. If that trend continues so that insurance coverage is widely thought to be available, that perception could well stimulate increased class-action litigation under the TCPA.

Litigation Background

The policyholder, Metropolitan Antiques LLC, a New Jersey auctioneer services company, sought to expand its New England business by advertising directly to doctors, accountants and attorneys who might use its services. Metropolitan purchased a database containing 60,000 Massachusetts facsimile numbers and then provided the numbers to a telemarketing company that sent out approximately 360,000 facsimile advertisements to those numbers over the course of 18 months. A recipient of the unsolicited facsimile advertisements filed a class-action complaint against Metropolitan, alleging violation of the TCPA, which restricts unsolicited fax ads.

Metropolitan was insured by two different insurance carriers during the relevant time period. Both policies provided liability coverage for "bodily injury and property damage" caused by an "occurrence," defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Both policies also provided coverage for "personal and advertising injury liability" caused by "oral or written publication of material that violates a person's right of privacy." One of the policies excluded coverage for personal or advertising injury if the policyholder had knowledge that the act would cause injury or if the injury arose out of a criminal act. The other policy similarly excluded coverage for willful violations of a penal statute and for punitive and exemplary damages.

One of the insurers initiated a declaratory judgment action against the class-action parties, and the other insurer was added to that suit. The Massachusetts trial court granted summary judgment in favor of the insurers, finding there was no coverage. The Massachusetts Supreme Court subsequently granted the class-action plaintiffs' petition for direct review.

No Property Damage Coverage

The insurers argued that the property damage coverage did not apply, because the injuries resulting from the facsimile advertisements were not caused by "accidents." Rather, the policyholder intended to send the advertisements and should have reasonably expected the consequences. The policyholder argued that it did not intend to violate the TCPA and that the court's inquiry should focus not on whether the injuring act was intentional but on whether the injury was intentional. The court, citing Voorhees v. Preferred Mutual Insurance Co., 607 A.2d 1255 (N.J. 1992), partially agreed with the policyholder's contention and emphasized that the "focus is on whether [the policyholder] intended or expected to cause the injury in question— i.e., the transmission of unsolicited facsimile advertisements—not whether the injury in question violated a particular statute." The court nevertheless concluded that the injuries were not caused by accident, because the policyholder purchased the 60,000 numbers without regard to whether people had consented to contact, knew the advertisements were unsolicited, and knew that the numbers represented new customers with which it had no prior contact. It found that these alleged injuries, i.e., the plaintiffs' consumption of paper and toner, and the temporary loss of use of their fax machines, were "an inherently probable result of Metropolitan's conduct." Thus, the court affirmed the ruling that there was no duty to defend or indemnify Metropolitan under its property damage coverage.

Advertising Coverage Applies

Turning to the advertising injury coverage, the court first rejected the insurers' assertion that the injuries were not the result of a "publication." Applying the definition of publication in Webster's Dictionary, i.e., "communication (as of news or information) to the public" or a "public announcement," the court concluded that the transmission of the numerous facsimile advertisements constituted "the announcement or communication of the material to the public." Thus, there was publication.

The court next addressed the term "right of privacy." The insurers argued that this phrase encompassed only a "right to secrecy" (e.g., a "person wishing to conceal a criminal conviction or bankruptcy"). The insured argued it also included a "right to seclusion," such as a "person asserting a desire to be free from door-to-door salespeople ringing the doorbell at night." The court concluded that, based on conflicting dictionary definitions of privacy and the "body of national case law addressing the same or similar policy language and falling on both sides of this interpretive ledger," the term "right of privacy" was "ambiguous." Therefore, citing New Jersey law requiring ambiguous provisions in insurance policies to be interpreted in favor of coverage, the court held that the allegations of violations of plaintiffs' rights to privacy under the TCPA constituted covered injuries under the policies.

The court also rejected the insurers' argument that the content of the material, rather than the mere existence of the material, must violate the right of privacy. The court emphasized that if the insurers "wished their policies to pertain only to violations of privacy created by the content of material, it was incumbent on them to draft explicit policies to that effect."

Exclusions Inapplicable

Finally, the court rejected the insurers' arguments that the policy exclusions noted above preclude coverage. The TCPA allows for the recovery of actual damages or $500 in statutory damages for each violation, whichever is greater. It also provides for treble damages if a violation is willful. The insurers argued that the TCPA constituted a "penal statute," because its statutory damages clause is punitive, rather than compensatory, in nature, and, thus, the exclusion for willful violation of a penal statute should govern. The court reasoned that a penal statute is one that punishes "an offense against the state as compared to a wrong against an individual." It determined that the TCPA is a "remedial" statute "intended to address misdeeds suffered by individuals, rather than one that punishes public wrongs."

The court also concluded that coverage was not barred by language providing that the policy "does not apply to and no duty to defend is provided for any claim of or indemnification for punitive or exemplary damages." The insurers argued that the statutory damages available under the TCPA were punitive in nature. The court rejected the argument, noting that the insurer could not provide evidence that Congress intended the provision to be punitive. Quoting Universal Underwriters Insurance Co. v. Lou Fusz Automotive Network, Inc., 300 F. Supp. 2d 888 (E.D. Mo. 2004), the court found that the statutory "damages provision serves to 'liquidate uncertain actual damages and to encourage victims to bring suit to redress violations.'" The court recognized, however, that if the trial court, in its discretion, "were to increase the amount of damages above $500 per violation, pursuant to the treble damages [allowable under the statute], such an increase would amount to punitive damages and would not be covered," due to the policy's punitive damages exclusion.

For these reasons, the Massachusetts high court held that the insurers had a duty to defend and indemnify Metropolitan in the underlying TCPA class action under the advertising injury coverages of both policies. Given that the American Trial Lawyers Association amicus brief claimed the availability of advertising injury coverage "is currently among the most important issues in the field" of TCPA litigation, it seems likely that decisions such as this one will stimulate an increase in TCPA fax ad litigation.