Monday, April 23, 2012

FYI: Ill App Ct Holds Penalties for TCPA Violations Not Insurable

The Appellate Court of Illinois, Fourth District, recently held that the damages provided for by the Telephone Consumer Protection Act ("TCPA") were punitive, and therefore not insurable under Illinois law. 
A copy of the opinion is available at:
Theodor W. Lay ("Lay") operated a real estate agency.  He faxed an advertisement regarding a real estate property to numerous recipients who had not previously consented to the receipt of such a communication, including Locklear Electric, Inc. ("Locklear").  Locklear initiated a class action against Lay, on the grounds that the latter's faxed advertisements violated the TCPA. 
Although Lay was insured by Standard Mutual Insurance Company ("standard"), he opted to engage independent counsel, and settled with Locklear.  Per the terms of the settlement, Lay assigned his rights against Standard to Locklear, and Locklear agreed not to otherwise pursue Lay's assets.
The federal district court approved the settlement.  Separately, Standard filed a declaratory action to determine its responsibility for coverage.  In that action, both Standard and Locklear filed cross motions for summary judgment, and the trial court granted Standard's motion, finding that Standard had no duty to defend, and no duty to indemnify.  Locklear appealed. 
As you may recall, the TCPA makes it unlawful to send unsolicited advertisements via fax machines, and creates a private right of action for recipients of such communications.  Plaintiffs may sue for actual damages, or $500 per violation, whichever is greater.  47 U.S.C. s. 227(b).  In Illinois, punitive damages are not insurable. 
On appeal, the case turned on whether the TCPA's damages provision constituted punitive damages. 
The Court observed that a statutory penalty must "(1) impose automatic liability for a violation of its terms;" (2) set forth a predetermined amount of damages; and (3) impose damages without regard to the actual damages suffered by the plaintiff."  McDonald's Corp. v. Levine, 108 Ill. App. 3d 732, 738, 439 N.E. 2d 475, 480 (1982). 
With that standard in place, the Court held that "the $500 in...damages provided in the TCPA is a penalty and is in the nature of punitive damages."  It reached that conclusion predominantly on the basis that the actual damages suffered by a plaintiff upon receipt of a single unwanted fax were likely to be quite small, and bore little relationship to the $500 in punitive damages provided for by statute.    
Therefore, the Court determined that TCPA damages are "not insurable as a matter of Illinois law and are not recoverable from Standard."  Accordingly, the Court affirmed the judgment of the lower court.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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