BIPA Win for Insurers

On December 19, 2023 the Illinois Appellate Court, First District provided the insurance industry with some holiday cheer. In National Fire Ins. Co., et al. v. Visual Pak Co., Inc., 2023 IL App (1st) 221160, the First District found that insurers did not have a duty to defend their policyholder Visual Pak with respect to a Biometrics Information Privacy Act (“BIPA”) claim based upon a violation of law exclusion in their general liability policies. In reaching this conclusion, the First District respectfully disagreed with a decision by the Seventh Circuit addressing the same issue, Citizens Ins. Co. of Amer. v. Wynndalco Enterprises, LLC, 70 F.4th 987 (7th Cir. 2023).

The Underlying Action

The Visual Pak decision arose from a dispute between National Union Fire Insurance Company and Continental Insurance Company (the “CNA Companies”) and its insured Visual Pak Company, Inc. (“Visual Pak”). Visual Pak retained a staffing and temporary employment agency named Elite Staffing. When Elite staffed an employee at Visual Pak the employee was required to enroll in an employee database using a fingerprint scan. The data collected by Visual Pak was transferred to Elite for payroll purposes. The class action plaintiff Luis Sanchez was an employee of Visual Pak via Elite as a warehouse worker from February to April 2016. He was required to scan his fingerprint at the beginning and end of each work day. Sanchez alleged that Visual Pak collected, stored, used and disseminated his fingerprints without his consent and without any policies in place regarding the retention and deletion of his fingerprints from the database. Sanchez claimed Visual Pak failed to inform him of how the biometric information would be used or provide him a release for the use of such information. Accordingly, Sanchez alleged that Visual Pak violated BIPA, 740 ILCS 14/15 (the “BIPA Action”).

Declaration Judgment Action Procedural History

The CNA Companies provided general liability insurance to Visual Pak [1]. Visual Pak tendered the BIPA Action to the CNA Companies. The CNA Companies denied the tender. The BIPA Action, being defended by Continental Casualty, was mediated and settled for $19.5 million. This settlement was based on a class size of 13,000 people. Visual Pak agreed to pay $3.5 million in a confession of judgment and assigned its claims against the CNA Companies to Sanchez and the plaintiff class.

The CNA Companies filed a declaratory judgment action, seeking a declaration that the CNA Companies owed no duty to defend or indemnify Value Pak with respect to the BIPA Action, and Sanchez filed a counterclaim. The CNA Companies moved for judgment on the pleadings. The circuit court ruled that there was a question of fact as to whether the CNA Companies were estopped from asserting a denial based on Sanchez’s argument that there was a delay in responding to the tender. The CNA Companies moved for reconsideration, arguing that estoppel did not apply because the plain language of the policies showed that the BIPA Action fell within an exclusion and estoppel only intervenes to prevent an insurer from raising certain defenses. In a second opinion, the circuit court granted the motion to reconsider and the motion for judgment on the pleadings, finding that the CNA Companies did not have a duty to defend or indemnify Visual Pak. Visual Pak appealed the ruling.

First District Ruling

The First District began its analysis by noting that the BIPA action alleged “personal and advertising injury” under Coverage B of the Continental Policies. Specifically, the court agreed with Visual Pak that the BIPA Action alleged “oral or written publication, in any manner, of material that violates a person’s right of privacy” under subparagraph e of the “personal and advertising injury” definition.

Next, the Court analyzed the Continental Companies’ argument that even if the BIPA Action alleged “personal and advertising injury” coverage was precluded based upon the violation of law exclusion in the policies. The Court recognized that until recently, federal courts were divided as to whether this exclusion applies under Illinois law. The Court explained that the Wynndalco decision by the 7th Circuit abrogated federal district decisions that found the violation of law exclusion applicable. However, the Court noted that it is “not bound by any federal court interpretation of Illinois law, be it a decision from a district court or a federal appellate court.” Id. at ¶45. Instead, the Court noted that its starting point in determining whether the violation of law exclusion applies is the Illinois Supreme Court decision of West Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc., 2021 IL 125978.

In West Bend, the Illinois Supreme Court found that a violation of law exclusion did not apply. The First District noted that the violation of law exclusion in West Bend contained different language than that in the Continental Policies. Both decisions focus on the catchall provision within the exclusion. The First District noted that the catchall phrase in the Continental Policies is broader than that in West Bend. The West Bend catchall phrase excluded coverage for injuries arising from a statute that “prohibits or limits the sending, transmitting, communicating or distribution of material or information” whereas, the Continental Policies catchall phrase included statutes that “prohibit or limits the printing, dissemination, disposal, collecting, recordings, sending, transmitting, communicating or distribution of material or information” (emphasis added). The First District noted that “disposal, collecting, [and] recording” undoubtedly broadens the exclusion at issue. Further, the First District noted that BIPA regulates the collection, dissemination, and disposal of one’s biometric identifiers and information.

The First District also discussed the interpretive canon ejusdem generis that was addressed in West Bend. The Court noted that the ejusdem generis canon, which means “of the same kind” seeks to identify a common theme among a list of items, a theme that would limit a more general catchall language of an exclusion. In applying this canon, the First District noted that the title of the exclusion in the Continental Policies is different from the title in West Bend. The Continental Policies exclusion is entitled “Recording And Distribution of Material or Information in Violation of Law”. The Court noted that this title is not limited to modes of communication, focusing on the word “recording”. Further, the Court noted that the statutes listed in the exclusion are more numerous than those in West Bend, including Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transactions Act (FACTA) which both seek to protect a consumer’s privacy, similar to BIPA. Under the canon of ejusdem generis, the Court concluded that the doctrine would limit the scope of the catchall to violations of statutes that protect personal privacy which would include BIPA violations. The First District noted that even if the canon of ejusdem generis was incapable of limiting the scope of the catchall phrase, the result would be the same as the phrase would need to be given its full breadth. The Court noted that “the catchall phrase, without a limiting gloss, plainly and obviously includes BIPA lawsuits.”

The First District criticized Seventh Circuit’s reasoning in Wynndalco for finding the catchall phrase too broad. The First District noted that “the fact that an exclusion has a ‘broad sweep’ is not, in and of itself, a reason to deem coverage ‘illusory’”. Id. at ¶84. Further, the Court noted that the fact an exclusion may conflict or clash with other provisions of a policy that are not at issue in the case is not a basis to invalidate an exclusion. Id. The Court noted that the breadth of an exclusion does not equate to ambiguity. The Court concluded that the violation of law exclusion does not swallow or nullify coverage for “personal and advertising injury” under the Continental Policies.

Impact of Decision

The Visual Pak decision will have a great impact on the coverage litigation with respect to BIPA claims, especially the cases pending in Illinois state courts. Many general liability policies contain violation of law exclusions such as the one at issue in the Continental Policies. The decision is the first Illinois state appellate decision to opine on the applicability of this exclusion.

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[1] Another CNA affiliate, Continental Casualty Insurance Company, issued an employment practices liability policy to Visual Pak.  Continental Casualty agreed to defend Visual Pak with respect to the BIPA action under this policy.