The Illinois Supreme Court recently held that that the liquidated damages
provision of the federal Telephone Consumer Protection Act ("TCPA"), which
awards $500 per violation, is remedial rather than punitive, and therefore
is insurable under Illinois law.
The Illinois Supreme Court also held that an insurer is not estopped from
later relying on policy coverage defenses when the insurer either defends
against a sufficiently detailed reservation of rights or files a
declaratory judgment action.
A copy of the opinion is available at:
http://www.illinoiscourts.gov/Opinions/SupremeCourt/2013/114617.pdf
A real estate agency ("Agency") and a facsimile advertising company
("Company") entered into an agreement in which the Company allegedly
transmitted advertisement messages to approximately 5,000 fax numbers with
Illinois area codes. Unknown to the Agency, individuals and entities that
received these messages did not consent to receive fax advertisements. An
underlying class action was instituted, in which plaintiffs sought the
TCPA-prescribed damages of $500 per violation and injunctive relief.
Agency tendered defense to its insurer ("Insurer"). Insurer informed
Agency that the applicable policies may not cover the conduct alleged in
the class action, including, for example, that the TCPA may constitute a
penal statute, and that the applicable policies do not provide coverage
for willful violations of penal statutes.
Insurer agreed to defend Agency in the underlying class action under a
reservation of rights. Insurer informed Agency that Agency could waive a
conflict of interest and Insurer's possible coverage defenses and accept
counsel provided by Insurer ("Appointed Counsel"), or Agency could choose
their own attorney at Plaintiff's expense. Agency executed a waiver and
accepted the attorney selected by Insurer. Subsequently, Agency hired
their own personal counsel ("Personal Counsel"). Personal Counsel
explained the conflict of interest to Appointed Counsel, and asked
Appointed Counsel to withdraw. Subsequently, Agency and Personal Counsel
agreed to settlement of the underlying class action, which the district
court approved. Pursuant to the settlement agreement, the class action
plaintiff would only seek recovery from Agency's insurance policies.
Agency assigned its claims to class action plaintiff.
After Agency accepted representation by Appointed Counsel, Insurer
instituted a complaint for declaratory relief, seeking a declaration that
Insurer had no duty to defend or indemnify Agency. In their complaint,
Insurer alleged that the TCPA-prescribed damages of $500 per violation
constitute punitive damages, not insurable under Illinois law and public
policy.
The class action plaintiff filed an amended answer and counter-claim in
the declaratory judgment action, seeking a declaration that the policy at
issue required Insurer to defend and indemnify Agency for its conduct in
the underlying class action, and that the policy covered Agency for the
damages awarded in the underlying class action. Insurer and the
underlying class action plaintiff filed cross motions for summary
judgment. The circuit court granted summary judgment on Plaintiff's
complaint and denied summary judgment on the underlying class action
plaintiff's counterclaim. The appellate court affirmed, holding that
Insurer was not estopped from raising policy coverage defenses, and that
the TCPA-prescribed damages of $500 per violation constitute punitive
damages, which are not insurable as a matter of Illinois law and public
policy, and therefore not recoverable from Insurer.
The underlying class action plaintiff appealed to the Illinois Supreme
Court, arguing that Insurer is estopped from asserting defenses to the
insurance policy, and that TCPA-prescribed damages are insurable. The
Illinois Supreme Court affirmed in part and reversed in part, remanding
the case to the appellate court.
As you may recall, where a complaint against an insured alleges facts
within or potentially within coverage of the applicable policy, and when
the insurer takes the position that the policy does not provide coverage,
the insurer must: (1) defend the suit under a reservation of rights; or
(2) seek a declaratory judgment that there is no coverage. If the insurer
does not take either of these actions, it will be estopped from raising
policy coverage as a defense. State Farm Fire & Cas. Co. v. Martin, 186
Ill. 2d 367, 371 (1999); Clemmons v. Travelers Ins. Co., 88 Ill. 2d 469,
475 (1981).
In addition, a bare reservation of rights is insufficient. The
reservation of rights must refer specifically to the applicable policy
defense that may be asserted and that a potential conflict of interest may
exist. See Royal Ins. Co. v. Process Design Assoc., Inc., 221 Ill. App.
3d 966, 973 (1991). However, Insurers reservation of rights letter
specifically referred to the coverage defense and potential conflict of
interest regarding violation of penal statutes. Moreover, the reservation
letter included a list of policy defenses that Insurer intended to assert.
With this information, Agency knowingly accepted representation. The
Illinois Supreme Court therefore held that because Insurer agreed to
defend Agency through a detailed reservation of rights and filed a
declaratory judgment action, Insurer was not estopped from asserting
coverage defenses.
The Illinois Supreme Court next examined underlying class action
plaintiff's contention that TCPA-prescribed damages of $500 per violation
are insurable under Illinois law. The underlying class action plaintiff
asserted three alternative arguments. But the Illinois Supreme Court held
that, although punitive damages are uninsurable under Illinois law as a
matter of public policy, the TCPA is a remedial statute, and therefore,
the associated $500 penalty is not punitive and thus insurable.
Whether the TCPA is a penal statute is a matter of statutory
interpretation. As you may recall, in examining issues of statutory
interpretation, the court is "to give effect to the will of Congress, and
where its will has been expressed in reasonably plain terms, that language
must ordinarily be regarded as conclusive." Negonsott v. Samuels, 507
U.S. 99, 104 (1993) (quoting Griffin v. Oceanic Contractors, Inc., 458
U.S. 564, 570 (1982)). Further, the court may consider the justification
for the statute, the issues sought to be remedied, and the purposes to be
achieved. United States Nat'l Bank of Oregon v. Independent Ins. Agents
of America, Inc., 508 U.S. 439, 454-455 (1993).
In analyzing the TCPA within this context, the Illinois Supreme Court
acknowledged that Congress made several important findings, one of which
is that unrestricted telemarketing is intrusive. The purpose of the TCPA
is to protect the privacy of residents by restricting unsolicited
automated telephone calls to the home, and facilitating interstate
commerce by also restricting certain uses of fax machines.
The Illinois Supreme Court disagreed with the appellate court's holding -
the $500 penalty provision is penal because the actual damages incurred by
a TCPA violation are minimal; damages are predetermined, and are not meant
to compensate for actual harm. In reversing the appellate court's ruling,
the Illinois Supreme Court recognized the congressional purpose in
enacting the TCPA: to prevent advertisers from shifting the cost of
advertising to consumers, while preventing the use of facsimile machines
for legitimate purposes.
Also, the Court recognized that Congress intended the $500 penalty per
violation of the TCPA as incentive for private parties to enforce the
statute, because otherwise, enforcement would be unlikely given the actual
losses associated with TCPA violations are typically small. Also, the
individual violations of the TCPA, while small, are compensable and
represented by the liquidated sum of $500. Therefore, the $500 penalty
serves goals beyond punishment and deterrence. Lastly, the Illinois
Supreme Court acknowledged that Congress provided for treble damages under
the TCPA, but treble damages, which serve additional goals of deterrence
and punishment, are separate from the $500 penalty. Accordingly, the
Illinois Supreme Court held that the $500 penalty provision of the TCPA
are remedial and not punitive.
The Illinois Supreme Court thus affirmed in part and reversed in part the
judgment of the appellate court, and remanded to the appellate court for
further proceedings consistent with its ruling.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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Email: RWutscher@mwbllp.com
Admitted to practice law in Illinois
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FINANCIAL SERVICES LAW DEVELOPMENTS: An Industry Perspective
