Monies Collected as Compensation to the Public at Large are Covered "Damages"
August, 2006
State Farm Fire and Casualty Co. v. National Research Center for College and University Admissions, 445 F.3d 1100 (8th Cir. 2006) (applying Missouri law).
Facts
The National Research Center for College and University Admissions (NRCCUA) surveys high-school students and distributes the results to colleges and universities for purposes of recruitment and admissions. In 2001, the Federal Trade Commission began investigating the survey’s funding and use of the data for commercial purposes not disclosed to the students. NRCCUA entered into a consent decree with the FTC requiring it to make disclosures to the students; NRCCUA made no money payments to the FTC. Several state attorneys general then investigated NRCCUA for violations of their states’ consumer-protection laws. Eventually, the Iowa Attorney General, acting on behalf of other states, demanded that the NRCCUA pay $300,000 as part of an Assurance of Voluntary Compliance. In a separate investigation, the Missouri Attorney General requested that NRCCUA pay $20,000 in another Assurance. In addition to these payments, NRCCUA also incurred its own attorney fees responding to the states and the FTC.
State Farm issued a business liability policy to NRCCUA which provided that State Farm would pay those sums that the insured becomes legally obligated to pay as “damages because of…personal injury or advertising injury to which this insurance applies…” The policy did not define the term “damages.” NRCCUA tendered its defense and indemnification to State Farm for coverage under the policy. State Farm then filed suit seeking a declaration that it was not required to defend, indemnify, or reimburse NRCCUA for any payment in response to the FTC or the states. The trial court granted summary judgment for State Farm finding that NRCCUA’s claims were not for “damages” under the policy.
Analysis
The Eighth Circuit affirmed in part and reversed in part. The appellate court first affirmed the trial court’s finding that the FTC and the attorneys general alleged a “personal injury” under the policy because they alleged invasion of privacy. It then affirmed the trial court’s finding that State Farm had no obligations with respect to the FTC investigation:
[T]he relief sought by the FTC - an order that the NRCCUA stop making misrepresentations and make clear and conspicuous disclosures - is not designed to compensate anyone. Therefore, that relief does not constitute “damages” under the Policy.
As for the sums sought by the state attorneys general to be paid into state funds for consumer education, investigation, and litigation, the Eighth Circuit agreed with the trial court that these sums were “clearly punitive in nature” and imposed as “penalties,” as opposed to “restitution and injunctive relief.” As such, these sums were not covered “damages” under the policy. However, the Eighth Circuit disagreed with the trial court and found that the $15,000 sought by the Missouri Attorney General to be paid to the “Custodian of the Public School Fund” was covered under the policy as “damages.” Although paid into a fund designed to benefit the public at large as opposed to any specific individual, the court reasoned that NRCCUA had inflicted a personal injury upon Missouri high school students and the payment was in compensation for that injury:
True, the public school funds receive all fines and penalties for violations of the penal laws. However, the facts ... show that the personal injury was to high-school students, and that the Missouri Attorney General has information that the NRCCUA has released personally identifiable information by selling it to commercial third-parties not disclosed to the students. The payment to the public school fund is compensation or satisfaction for that injury.
Learning Point:
As in the State Farm policy at issue here, general liability policies provide coverage for specifically defined “damages.” In order to determine whether a particular claim incorporates “damages” under a policy, the underlying recipient and the purpose for the payment must be explored. According to the court in State Farm, money sought for the purpose of punishment or as punitive or exemplary damages does not satisfy the definition of “damages” under a general liability policy. Funds sought by a government entity for the purpose of compensating the public at large or a specific group can satisfy the definition of “damages” under a policy even if none of the money will go to a specific aggrieved individual. Recovery of funds on behalf of the public at large for the purpose of compensating those individuals for their injury is sufficient to satisfy the definition of “damages.” •
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