The issue of whether CGL policies cover junk fax liabilities under the federal Telephone Consumer Protection Act (TCPA) has largely faded from view. During the 2004-2010 period, insurers won several key victories in federal courts only to lose much of this ground through adverse state supreme court rulings on the key issue of whether a consumer's receipt of a fax constituted a covered "personal injury" as involving the publication of material that invaded a person's right of privacy. At the same time, however, the widespread use of TCPA exclusions after 2007 and the growing awareness of most business concerning TCPA exposures substantially reduced the number of coverage disputes.
Although the junk fax wars are no longer on page 1 of the coverage news, a number of recent decisions make clear that the wars continue and, indeed, are being fought on several different fronts. In particular, insurers have recently argued with success that the $500 statutory damages allowed under the Act are a type of penalty or punitive damages for which coverage is unavailable as a matter of public policy.
In Illinois, where the state supreme court ruled in Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 860 N.E.2d 307 (Ill. 2006) that TCPA claims trigger "personal injury" coverage, the intermediate appellate court ruled last month that there is no duty to indemnify such claims because the $500 statutory penalty for sending unauthorized telefaxes is a form of punitive damages and thus uninsurable under Illinois law.
In Standard Mut. Ins. Co. v. Lay, No. 4-11-0527 (Ill. App. April 20, 2012), the insurer agreed to defend TCPA claims under a reservation of rights. The insured insisted on Peppers counsel, however, who negotiated a settlement with class action claim representative for the full amount demanded ($1,739,000) in consideration of an agreement to only pursue recovery from Standard Mutual's policy proceeds. In affirming a lower court's ruling in favor of Standard Mutual, the Appellate Court noted that actual cost in loss of paper, toner and ink caused by receiving a fax is far less than $500, the purpose of this award must be one of deterrence and not compensation. It ruled, therefore, that these damages were in the nature of a penalty that, as with punitive damages, is uninsurable as a matter of public policy in Illinois.
More recently, a divided panel of the Missouri Court of Appeals (Eastern District) took a slightly different approach in reaching the same result. In Olsen v. Siddiqi, No. ED 97455 (Mo. App. May 9, 2012), a class of TCPA claims pursued a garnishment demand for $4.9 million against a telemarketer's liability insurer (American Family) that the plaintiffs had obtained by way of a consent judgment that could only be satisfied through the policy proceeds without risk to the insured. Although a trial court found coverage, American Family appealed on the grounds that the claims were not for "property damage."
In reversing and finding no coverage, the Missouri appellate court ruled 2-1 that the claims were not "damages" on account of "property damage." The court distinguished the Eighth Circuit's Missouri ruling in Universal Underwriters Ins. Co. v. Lou Fusz Automotive Network, 401 F.3d 876 (8th Cir. 2005), noting that the policy at issue in that case had expressly defined damages as including punitive damages (where insurable by law). The Missouri Supreme Court has ruled that fines and penalties are not insurable "damages" unless the policy expressly provides to the contrary. In this case, the majority declared that the option of recovering statutory damages under the TCPA had a penal purpose and that $500 damages are therefore not insurable. (The court also rejected the insured's claim for "personal injury" coverage, noting that he had expressly given up this coverage by endorsement). A minority opinion argued that the loss of toner and fax paper is clearly "property damage." Justice Mooney also claimed that a $500 award is, in fact, remedial and that it only the provision for trebled damages in the event of intentional TCPA violations that has a penal purpose.
TCPA claims also remain a source of tension between state and federal courts.
In Illinois, state and federal courts have reached conflicting conclusions as to whether the "personal injury" requirement that a "person's right of privacy be invaded precludes CGL coverage for business interests that receive junk faxes. In Maxum Ind. Co. v. Eclipse Mfg. Co., No. 06 C 4946 (N.D. Ill. June 13, 2011) Judge Lefkow ruled that businesses have no right of privacy and therefore cannot claim coverage, Swiderski notwithstanding. By contrast, the First Division of the Appellate Court ruled a few months later in Pekin Ins. Co. v. Xdata Solutions, Inc., 958 N.E.2d 397 (Ill. App. Ct. 2011) that a corporation can be a "person" whether the issue is presented under Illinois or Indiana law.
In Massachusetts, where the Supreme Judicial Court followed the Swiderski court's lead in finding CGL coverage for TCPA claims presented under ISO forms in Terra Nova Ins. Co. v. Evan Fray-Witzer, 869 N.E.2d 565 (Mass. 2007), the First Circuit took a different view under different language in the St. Paul general liability policies which required that the insured "make known" material that invades privacy interests. In Cynosure, Inc. v. St. Paul Fire & Marine Ins. Co., 645 F.3d 1 (1st Cir. 2011), the First the reference to "makes known" clearly requires that the privacy interest be invaded by the content of the communicated materials, not the means of communication consistent with the holdings of the U.S. Courts of Appeal for the Third and Fourth Circuits construing similar wordings. Writing for the court, former U.S. Supreme Court Justice David Souter declared that "what logic and definition require, syntax confirms."
Finally, disputes persist with respect to the scope of TCPA exclusions that have been a mandatory endorsement to CGL forms since 2007. This exclusion was upheld by a federal district in a recent Houston case.
A federal judge in Houston ruled in Rick's Cabaret International, Inc. v. Indemnity Ins. Co., No. H-11-3716 (S.D. Tex. January 24, 2012)(insurer was relieved of any duty to defend TCPA claims against its insured by reason of an exclusion in its policy for claims arising out of or relating to "actual or alleged violation of United States Federal Communications Commission rules, regulations, interpretations, policies, statutes, laws or codes"). Even so, insureds and garnishment claimants are succeeding to avoid these exclusions by claiming recovery on common law grounds.
Additionally, the ubiquity of TCPA exclusions in CGL policies is forcing claimants to broaden the scope of their coverage search, exploring claims under E&O or D&O policy that may lack such exclusions. For instance, in Landmark American Ins. Co. v. NIP Group, Inc., No. 1-10-1155 (Ill. App. December 5, 2011), the Illinois Appellate Court ruled that that an insurance agency's use of junk faxes to market its services potentially involve the rendering of or failure to render "professional services" so as to trigger its E&O policy. The First Division noted that as the Landmark policy provided coverage for "advertising liability," the insurer could not argue that advertising could never involve a professional service.
Apart from these coverage issues, the key factor driving insurer exposures to TCPA claims is the risk of class certification. It remains to be seen how much the U.S. Supreme Court's 2011 Walmart opinion and other opinions addressing Rule 26 certification will create larger roadblocks to class certification of these claims. In the interim, the Georgia Supreme Court is now considering an appeal that present the novel issue of how such damages should be calculated.
In A Fast Sign v. American Home Services Co., a Georgia trial court determined that the insured had intentionally violated the TCPA by issuing 306,000 junk faxes. Accordingly, the court awarded damages to the certified class totaling $459 million. The Georgia Court of Appeals ruled on May 29, 2011 that TCPA liability hinged on a consumer's receipt of a fax and that it was therefore error to award damages based on the number of faxes issued. The plaintiff's appeal was argued before the Georgia Supreme Court on May 21, 2012.