Since Congress passed the Telephone Consumer Protection Act (“TCPA”), 47 USC §227(b), courts have struggled to determine the extent to which insurance coverage is available for damages awarded under the act. In Standard Mutual Ins. Co. v. Lay, 2013 IL 114617 (May 23, 2013), the Illinois Supreme Court removed any doubts that such damages are covered under a typical commercial general liability policy.
The TCPA outlaws four practices: the use of automated telephone dialing systems or artificial or prerecorded voice messages without the consent of the party being called, the use of artificial or prerecorded voice messages to residential phone lines without the express consent of the recipient, sending unsolicited fax advertisements, and the use of automatic telephone dialing systems to engage simultaneously two or more telephone lines of a business. 47 USC §227(b)(1)(A) through (D).
The TCPA creates a private right of action for people who have received calls or faxes in violation of these provisions, and provides for the call or fax recipient to recover their actual monetary loss or $500 per violation, whichever is greater. 47 USC §227 (b)(3). As actual damages due to the receipt of a fax or phone call in violation of the TCPA are generally nominal, most plaintiffs elect to receive the statutory $500 penalty. Also, since it is generally not cost effective to bring a single action for a $500 penalty, most TCPA suits are brought as class actions.
Insurers initially challenged coverage for TCPA claims on the basis that they did not fall within CGL liability coverage because there was no occurrence or property damage under Coverage A, and no covered offense under Coverage B. In Illinois this argument was successful at first, as the United States Court of Appeals for the Seventh Circuit ruled that there was no coverage for TCPA junk fax cases under the personal and advertising injury portion of the policy because it was not a covered offense. American States Ins. Co. v. Capital Assocs. of Jackson County, Inc., 392 F.3d 939 (7th Cir. 2004). The insured argued that TCPA provided for damages for a publication that violates a person’s right to privacy under the definition of personal injury. However, the court rejected this argument, and drew a distinction between privacy violations that invaded the right to secrecy and privacy violations that invaded the right to seclusion. The court concluded that the policy language was intended to cover invasions of the right to secrecy but not invasions of the right to seclusion. As junk faxes did not publish secrets of the recipient, they were not covered. Likewise, the court found that there was no coverage for property damage, since the only property damage suffered was the loss of paper and toner by recipient, and the fax sender intended to use the recipient’s paper and toner.
The insurers’ victory in American States was short lived, however. In Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill. 2d 352 (2006), the Illinois Supreme Court rejected the Seventh Circuit’s limitation on the coverage available, and ruled that damages under the TCPA fell within the personal and advertising injury coverage of a CGL policy. Specifically, the court ruled that TCPA damages fell within the policy coverage for “publication … of material that violates a person’s right of privacy.” The court considered the Seventh Circuit’s interpretation of this provision to be too narrow, and ruled that junk faxes invaded a person’s right of seclusion, and therefore fell within the terms of the policy.
The issue of coverage for junk fax cases seemed settled in Illinois after Valley Forge, until 2012, when an insurer challenged coverage on the basis that the statutory penalty of $500 per violation was in the nature of punitive damages, which were not insurable under Illinois law. This argument was accepted by an Illinois Appellate Court in Standard Mutual Ins. Co. v. Lay, 2012 IL App (4th) 110527, 975 N.E.2d 1099 (4th Dist. 2012). In the appellate court decision, the court reasoned that the purpose of the TCPA was “to deter future sending of unwanted fax transmissions by those sending the faxes and deterring others from doing the same by shifting the cost and imposing penalties on those sending the unwanted fax transmissions.” 2012 IL App (4th) 110527 at ¶31. The court reasoned that the actual cost of receiving an unwanted fax is well below the $500 statutory recovery available under the TCPA, so the damages provided constituted a penalty. Id. As the purpose of punitive damages is deterrence, and as the damages awarded were well in excess of the damages actually suffered, which is contrary to the purpose of compensatory damages, the court concluded that TCPA damages were essentially punitive damages and were therefor not insurable. Id. at ¶¶32-33.
The Illinois Supreme Court disagreed with the Appellate Court. In reaching its decision, the court stated, “the manifest purpose of the TCPA is remedial and not penal.” Standard Mutual Ins. Co. v. Lay, 2013 IL 114617, ¶30. The court reasoned that Congress’s “animating purpose” in enacting the TCPA was “to prevent advertisers from unfairly shifting the cost of their advertisements to consumers while simultaneously preventing the use of their fax machines for legitimate purposes.” Id. at ¶31. The court concluded that 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 the liquidated sum of $500 per violation.” Id. Additionally, the court noted that Congress provided for treble damages separate from the $500 liquidated damages, which indicated that the liquidated damages were not solely punitive in nature. Thus, the court concluded that the $500 per violation damages under the TCPA are insurable.
The Standard Mutual decision leaves open the potential that a claim for treble damages under the TCPA would not be insurable, although this will not prevent the insurer from having to defend an action which seeks both the $500 per violation “liquidated” damages and treble damages. Likewise, insurers are free to draft language in their policies that excludes TCPA claims, as many insurers have done.
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