Telephone Consumer Protection Act Damages Are Insurable, According To Illinois Supreme Court

Companies defending claims in Illinois that they violated the Telephone Consumer Protection Act (TCPA) can breathe a sigh of relief: damages under the Act are insurable, according to the Illinois Supreme Court. Interpreting Congress' intent in enacting the TCPA—which bans automated marketing phone calls and faxes, among other communications, without prior consent—the court held last week, on May 23, in Standard Mut. Ins. Co. v. Lay, 2013 IL 114617, that the $500 award for each violation of the Act is remedial, and not punitive, and thus is insurable under Illinois law. The court's ruling is a significant victory for policyholders, as courts in Illinois had issued varied decisions on the issue over the past two decades, and Illinois companies remain frequent targets of class action suits alleging violation of the TCPA.

The case arose out of a "blast fax" sent by Lay, an Illinois real estate agency, to approximately 5,000 fax numbers with Illinois area codes. Contrary to Lay's understanding at the time, the recipients of the fax had not consented to receive fax advertisements. In 2009, Locklear filed a class action suit against Lay alleging violation of the TCPA, and ultimately represented a putative class of approximately 3,500 plaintiffs. Lay's insurer, Standard Mutual, defended Lay in the class action but reserved its rights to deny coverage because, among other reasons, the TCPA "may constitute a penal statute." Lay ultimately settled the suit for approximately $1.7 million, and assigned to Locklear its rights for coverage from Standard Mutual.

In light of the settlement, Standard Mutual filed a declaratory judgment action against Lay and Locklear seeking a declaration that it was not required to provide coverage for the settlement. Among other arguments, Standard Mutual asserted that settlement represented damages that were punitive and not insurable under Illinois law. The circuit court agreed and denied coverage to Locklear. The appellate court affirmed, concluding that the settlement was not insurable because the TCPA is a penal statute: "The 'actual' damages incurred by a violation of the TCPA are more in the nature of an irksome nuisance ... and [are] not meant to compensate for any actual harm." 2012 IL App. (4th) 110527, ¶ 36.

The Illinois Supreme Court rejected the appellate court's interpretation of the TCPA as punitive. While recognizing that the monetary effect of an unsolicited communication is...