Tightly Written Policy Shields Insurer From Damaging TCPA Claims

The 1st District Appellate Court recently held that an insured was not entitled to coverage for a settlement of class-action claims brought under the Telephone Consumer Protection Act of 1991, 47 U.S.C. Section 227, et seq.

In the process, the court directed how class-action attorneys pursuing such claims should fulfill their obligations to class members in the future. First Mercury Insurance Co. v. Nationwide Security Services Inc., 2016 IL App (1st) 143924 (May 18, 2016).

The insurer, First Mercury, was represented by Tressler LLP. Anderson & Wanca in Rolling Meadows represented the class members in the underlying lawsuit, proceeding as assignees of the insureds, Nationwide Security Services Inc., and its owner David Litt.

Litt, on behalf of Nationwide Security, hired a third-party entity, Business to Business Solutions, to send 3,671 unsolicited faxes advertising the company’s detective business. The underlying plaintiff class representative, CE Design Ltd., was one of the recipients of a fax and filed suit under the TCPA.

That statute makes it unlawful to fax an unsolicited advertisement unless the recipient has consented. The statute also provides for statutory compensatory damages of $500 per fax, which may be trebled if the violation is willful.

First Mercury’s policy issued to Nationwide Security covered both property damage and advertising injury subject to a $500 “per claim” deductible. Language in the policy provided, among other things, that “if the deductible is on a ‘per claim basis,’ the deductible amount applies … to all damages because of ‘property damage’ sustained by one person or one organization, as the result of any one occurrence.”

The policy also had a $1 million occurrence limit applicable to property damage, a $1 million each injury advertising limit and a $2 million aggregate limit. In addition, the policy contained a typical intentional acts exclusion and an exclusion applicable to punitive and “multiple” damages and attendant interest.

Following initiation of the underlying litigation, Litt tendered to First Mercury, which agreed to defend subject to a reservation of rights. Because of a conflict of interest, First Mercury assisted Litt in obtaining independent counsel.

The independent counsel proceeded to negotiate a settlement with CE Design for about $4.1 million. That amount, which was approved by the trial court, was determined by computing $1,000 per fax violation – thus doubling the $500 statutory minimum – plus prejudgment interest. Litt and CE Design agreed that the settlement would be enforceable solely against First Mercury, and Litt assigned his insurance rights to CE Design.

First Mercury filed this declaratory action seeking a determination of its coverage obligations, and, upon settlement of the underlying case, it and CE Design filed cross-motions for summary judgment. The trial court found in favor of First Mercury, and CE Design took this appeal.

Effect Of Deductible

In an opinion by Justice Terrence J. Lavin, the 1st District affirmed. He observed that when a fax machine is used without authorization, property damage could arise in the form of wasted ink and advertising injury might occur because of the invasion of the recipient’s privacy.

Each recipient thus would have a potential claim against the insured defendant for property damage and advertising damage or both, and to each such claim the $500 deductible provided for in the policy would apply. Accordingly, the question presented was whether CE Design established coverage above and beyond the deductible.

One of CE Design’s arguments was that, under the particular terms of the First Mercury policy, if the $2 million aggregate policy limit became implicated, the insured’s deductible would not be subtracted from that limit. CE Design thus contended that, since both property damage and advertising injury occurred, the policy aggregate was in fact implicated, and the deductible provisions did not apply.

Lavin disagreed. He found that no covered property damage occurred. He made that finding based on the facts of record from which he concluded that Litt “expected or intended” the property damage in the form of using the fax recipients’ ink and other resources. Thus, coverage for any property damage was excluded by the intentional acts exclusion.

So reasoning, Lavin said that only the advertising limit was implicated, and the aggregate limit of the policy was not in issue. The compensatory portion of the settlement of $500 per claim therefore was not covered due to the applicable deductibles.

Lavin then took up coverage for the amount of the settlement in excess of $500 per claim. He found that the portion of the settlement bringing the per claim total up to $1,000 per claim – i.e., the additional $500 per claim amount – represented part of the treble damages allowed under the TCPA. That portion constituted punitive damages or a “multiple” of the compensatory portion of each claim, coverage for which was excluded by the punitive or multiple damage exclusion.

As for any pre- or post-judgment interest, Lavin found that the “supplementary payments” section of the policy barred coverage, because it obligated First Mercury to pay interest only on the portion of any covered award of damages.

Counsel Fees

Finally, Lavin addressed what he referred to as the “policy reasons supporting affirmance.” He pointed out that TCPA class actions rarely have anything to do with insureds that face ruinous liability for sending faxes, or with compensating members of the class. Rather, they typically have everything to do with compensating the lawyers for the class.

The instant case, Lavin said, was typical, in that the likelihood of class members filing claims was low, and the only ones likely to reap a significant benefit were the attorneys for the class.

In the future Lavin said that courts should go forward with the claims process in such manner that only claims submitted prior to the deadline would be used in assessing the insured’s – and insurer’s – actual exposure to liability for unsolicited faxes.

The court should then realistically address the fee to which class counsel is entitled based on actual exposure for the claims submitted.

The court, therefore, affirmed judgment for First Mercury.

Key Points

• The intended acts exclusion excludes coverage for property damage arising out a TCPA violation where the insured expects or intends the damage that occurs.
• A policy’s per claim deductible applies to each individual claim submitted by members of a TCPA class of plaintiffs.
• Trial courts should complete the class-action claim submission process prior to addressing the fee to which class counsel is entitled.