Why it matters
Class action lawsuits alleging violations of the Telephone Consumer Protection Act (“TCPA”) have proliferated in recent years, and courts are now struggling with a broad variety of coverage issues related to the underlying litigation. A recent pair of cases demonstrates the spectrum of TCPA-related coverage litigation. In Delaware, a state court held that for purposes of determining insurer’s duty to defend, a putative class action against an insured alleging violations of TCPA was not related to, and therefore did not arise from or involve, prior lawsuits against insured involving third-party product vendors. The court determined that TCPA claims stand alone and are unrelated to prior lawsuits grounded in fraud, negligence and unfair competition. Meanwhile, an Illinois appellate court held that a TCPA exclusion negated any potential for coverage for the entire complaint, notwithstanding the underlying plaintiff’s attempt to plead around the exclusion by amending its claims for conversion and consumer fraud so that they did not allege violations of the TCPA.
Prior Suits Don’t Preclude Coverage
The Delaware coverage dispute arose out of the following circumstances. RSUI issued a claims-made D&O liability policy to Sempris effective from March 1, 2013, through March 1, 2014. Sempris is a marketing services company serving retailers, Internet companies, and third-party call centers.
A class action lawsuit was filed in October 2013 against Sempris alleging violations of the TCPA for unsolicited telemarketing phone calls and improper use of automatic telephone dialing systems. Sempris tendered the underlying lawsuit to RSUI during the policy period. RSUI denied coverage and filed its declaratory judgment action against Sempris and the parties filed cross-motions for summary judgment.
The parties agreed that the lawsuit met the definition of a “claim” under Sempris’ policy with RSUI. However, RSUI asserted that the underlying class action was nothing more than an extension of four prior lawsuits filed against Sempris, all of which were filed before the inception of the RSUI policy. Those prior lawsuits asserted causes of action for, among others, fraud, negligence, unfair competition, and breach of contract. Importantly, none of the four prior lawsuits alleged violations of the TCPA.
RSUI argued that the policy required that a claim be made during the policy period and because the underlying class action was related to the prior lawsuits, Sempris’ failure to make a claim during the policy period precluded coverage in the first instance. In addition, RSUI argued that the underlying lawsuit was related to the prior lawsuits and constituted a single claim under the policy pursuant to a policy condition which stated that “[a]ll claims based on … the same or related facts … shall be deemed to be a single Claim.”
The court rejected RSUI’s arguments.
The court concluded that the allegations in the prior lawsuits did not and would not give rise to a cause of action under the TCPA.
The court also rejected RSUI’s other arguments in finding that, for the same reasons above, the prior notice exclusion did not apply.
Finding that the policy provided coverage for the underlying lawsuit and no exclusions applied, the judge granted summary judgment for Sempris and ordered RSUI to provide a defense.
To read the opinion in RSUI Indemnity Co. v. Sempris LLC, click here.
Amended Complaint Fails to Dodge Exclusion
In another case addressing a TCPA coverage-related issue, an Illinois appellate court held that State Farm’s TCPA exclusion negated any potential for coverage for the entire complaint, notwithstanding the underlying plaintiff’s attempt to plead around the exclusion by amending its claims for conversion and consumer fraud so they did not allege violations of the TCPA.
A third-party claimant, G.M. Sign, sued Michael Schane and his company, Academy Engraving, for sending unsolicited fax advertisements.
The underlying suit, initially filed in August 2010, alleged that the insured Schane and his company had sent mass unsolicited fax advertisements to G.M. Sign and at least 39 other recipients. The underlying claimants alleged conversion and violations of the Illinois Consumer Fraud Act and the TCPA.
Schane tendered the suit to his insurer, State Farm Fire and Casualty Company, which refused to provide coverage, based on the policy’s TCPA exclusion which precluded from coverage damages “arising directly or indirectly out of any action or omission that violates or is alleged to violate … The Telephone Consumer Protection Act.”
G.M. Sign and Schane reached a settlement agreement, in which Schane acknowledged that he faxed a total of 49,825 ads to class members during the defined class period and that a finding of statutory liability based on the number of faxes (roughly $25 million) would bankrupt him. The parties agreed to a judgment of $4.9 million, which amount could be satisfied only by the State Farm insurance policy.
After the settlement agreement was granted preliminary approval by the court, G.M. Sign filed an amended complaint. This time, however, G.M. Sign omitted any reference to the TCPA and alleged only conversion and violation of the Illinois Consumer Fraud Act; both causes of action were included in the initial complaint. State Farm again denied coverage for the amended complaint and G.M. Sign filed a declaratory judgment.
Reversing the trial court, the appellate court held that the TCPA exclusion applied. The court reasoned that the TCPA exclusion precluded coverage for damages “arising directly or indirectly” out of actions that violate the TCPA. The court, therefore, held that the exclusion extended to alternative theories premised in the same facts.
“Although the alternative counts selectively incorporated only those factual allegations that contained no reference to the TCPA, to the faxes being advertisements, or to the lack of any established business relationships between Schane and the class members, they nevertheless were based on the same facts as the TCPA count.”
“G.M. Sign argues nothing more than it should be allowed to avoid application of the policy exclusion by deliberately and strategically leaving its complaint so bereft of factual allegations that myriad unpleaded scenarios could fall within its scope.”
The court also frowned upon G.M. Sign’s litigation tactics in its efforts to garner coverage under the policy. “Having obtained the benefit of its settlement agreement in the underlying litigation by taking the position that Schane sent unsolicited fax advertisements in violation of the TCPA, G.M. Sign should not now be permitted to argue that State Farm owed a duty to defend Schane because its amended complaint potentially included faxes that fell outside of the TCPA.”
To read the opinion in G.M. Sign v. State Farm, click here.