No Coverage for Claim Over Unsolicited Faxes
October 20, 2009
The 7th U.S. Circuit Court of Appeals, applying an analysis rejected in Illinois, recently predicted that Iowa courts would find that a claim based on violation of the Telephone Consumer Protection Act, involving the sending of an unsolicited fax, would not trigger coverage under a typical commercial general liability policy. Auto-Owners Insurance Co. v. Websolv Computing, Inc., 2009 WL 2750263 (Sept. 1)
The insurer, Auto-Owners, was represented by David S. Osborne of Pretzel & Stouffer Chtd. Daniel A. Edelman of Edelman, Combs, Latturner & Goodwin LLC represented the insured, Websolv, and the underlying plaintiff, who had been named a party.
Websolv, an Iowa-based entity, was sued in Illinois state court for sending an unsolicited, one-page fax advertisement, the underlying plaintiff alleging a violation of the TCPA, 47 U.S.C. § 227. That statute, among other things, prohibits the use of a fax machine to send an unsolicited advertisement and provides for recovery of between $500 and $1,500 in damages for each violation.
Websolv tendered defense of the lawsuit to Auto-Owners under a commercial general liability policy. Auto-Owners accepted the tender, appointed counsel, and reserved its right to argue that it had no duty to defend under the policy. It then filed this action in federal court in Illinois seeking a declaration of no defense obligation.
Auto-Owners moved for summary judgment, whereupon Websolv moved to certify questions of state law to the Iowa Supreme Court, arguing that the matter called for application of Iowa law. Auto-Owners agreed that Iowa law should apply.
The district court nevertheless applied Illinois law apparently under the belief that the substantive law of the forum state should apply, and also believing that it could ignore the stipulation of the parties for application of Iowa law, because neither party had briefed the court on the substance of Iowa law. The court then found against the insurer and in favor of coverage, based on Valley Forge Insurance Co. v. Swiderski Electronics Inc., 223 Ill.2d 352, 860 N.E.2d 307 (2006), which held that "advertising injury" language like that at issue here covered TCPA claims. Auto-Owners took this appeal.
In an opinion by Judge Diane S. Sykes, the 7th Circuit reversed. She first took up the choice-of-law issue, noting that federal courts typically honor reasonable choice-of-law stipulations, whether made formally or informally. The parties by their conduct here effectively stipulated for the application of Iowa law, and it therefore should apply.
Sykes further noted that the district court was mistaken in finding that it had to apply the law of the forum state. Rather, a district court should apply the choice-of-law rules of the forum state to determine which state's substantive law would apply. Here, applying Illinois' choice of law rules, said Sykes, the court places the most importance on the location of the insured risk, which in this case was in Iowa, the location of Websolv. For this additional reason, Sykes found that Iowa law governs.
Turning to the merits, Sykes quoted the definition of "advertising injury" in the Auto-Owners policy, which included "oral or written publication of material that violates a person's right of privacy." This was the language principally argued by Websolv to give rise to coverage.
Sykes observed that, even though Iowa had no case law on point, the case was not one that should be certified to the Iowa Supreme Court, as requested by the underlying plaintiff. According to Sykes, certification is appropriate only for matters of vital public concern, and the issue here was not. Moreover, the insurance industry began issuing standard endorsements specifically excluding coverage for TCPA claims in 2005, making the issue even less worthy for certification. Certification therefore was unnecessary.
With respect to the right of privacy itself, Sykes relied on American States Insurance Co. v. Capital Associates of Jackson County Inc., 392 F.3d 939 (7th Cir. 2004), which organized the right of privacy into two broad categories: rights involving secrecy interests (such as the right to keep certain information confidential) and the right of seclusion or to be left alone.
According to Sykes, the underlying suit here involved only the seclusion interest. The question thus became whether the "advertising injury" coverage under the policy required Auto-Owners to defend a suit claiming an infringement of the underlying plaintiff's seclusion interests.
Sykes noted that the court in American States addressed this very issue under Illinois law at a time when Illinois had no relevant decisions interpreting the provision. Relying in part on the fact that businesses generally do not have a common law right to seclusion, the 7th Circuit predicted in American States that an insurer would have no obligation to defend a TCPA claim in Illinois.
Two years later, the Illinois Supreme Court in Valley Forge disagreed with American States and found that advertising-injury policy provisions do in fact cover TCPA claims. Notwithstanding the Illinois Supreme Court's rejection of American States, Sykes predicted that Iowa courts would be more likely to agree with the American States result rather than with Valley Forge. She emphasized that the most natural reading of the "publication" language in the Auto-Owners policy was that it covered the publication of secret or personal information, not claims arising when one's seclusion is disrupted.
Sykes also addressed Websolv's secondary argument that the underlying plaintiff's TCPA claim alleged property damage under the Auto-Owners policy because the one-page fax advertisement sent by Websolv consumed a small amount of the underlying plaintiff's ink and a sheet of paper. She rejected this argument based on the fact that, in sending the unsolicited fax, Websolv must have intended or expected to use the ink and paper. Accordingly, coverage was excluded by the policy's expected-or-intended exclusion, and Auto-Owners had no duty to defend.
The 7th Circuit therefore reversed the district court decision and remanded with instructions to enter summary judgment in favor of Auto-Owners.
