Illinois Court Holds Duty to Defend Telemarketing Sales Rule Lawsuit

In its recent decision in North River Ins. Co. v. Guar. Trust Life Ins. Co., 2014 Ill. App. Unpub. LEXIS 736 (Apr. 14, 2014), the Appellate Court of Illinois, First District, had occasion to consider whether an exclusion for losses related to violations of the Federal Trade Commission Act applied to losses arising from violations of the Telemarketing Sales Rule.

Guarantee Trust Life Insurance (“Guarantee Trust”) was allegedly involved in a fraudulent scheme in which its representatives advertised and sold to prospective customers a product that they claimed was health insurance, but that was in fact a medical-discount plan. The FTC filed a six count complaint against Guarantee Trust alleging violations of the Federal Trade Commission Act and violations of the Telemarketing Sales Rule. The FTC sought a permanent injunction and other remedies for the affected customers. Guarantee Trust tendered the suit to its insurer, North River Insurance Company (“North River”). North River refused to defend Guarantee Trust in the FTC lawsuit, and at the same time filed a lawsuit that sought, among other things, a declaration that North River was not obligated to defend Guarantee Trust in the FTC lawsuit.

It was North River’s position that there was no potential for a duty to defend or indemnify, as its policy excluded coverage for “any payment for Lossresulting from any Claims”that were based on an actual or alleged violation of the Federal Trade Commission Act of 1914. The circuit court agreed with North River and granted summary judgment in favor of North River and against Guarantee Trust. Guarantee Trust appealed.

Although the Appellate Court agreed that Count I of the FTC complaint (alleging violations of the Federal Trade Commission Act) was likely excluded from coverage under the North River policy, the Court held that Count II through Count VI (alleging violations of the Telemarketing Sales Rule) were potentially covered because it was not clear from the policy whether the exclusion applied to violations of the Telemarketing Sales Rule. The court explained that violations of the Telemarketing Sales Rule could be characterized as indirect violations of the FTC Act because violations of the Telemarketing Sales Rule are enforced by the FTC pursuant to the powers granted to it by the FTC Act. The court further reasoned, however, that the exclusion did not make specific mention of the Telemarketing Sales Rule, which it should have done if coverage was to be precluded for such claims. Further, because the Telemarketing Sales Rule was not designed to “prevent monopoly, preclude price fixing, or otherwise protect competition,” alleged violations of the Telemarketing Sales Rule did not fall within the exclusion’s catch-all provision. Thus, because the claims asserted under the Telemarketing Sales Rule survived application of the exclusion for purposes of determining the insurer’s duty to defend, the court reversed the judgment of the circuit court.

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In its recent decision in North River Ins. Co. v. Guar. Trust Life Ins. Co., 2014 Ill. App. Unpub. LEXIS 736 (Apr. 14, 2014), the Appellate Court of Illinois, First District, had occasion to consider whether an exclusion for losses related to violations of the Federal Trade Commission Act applied to losses arising from violations of the Telemarketing Sales Rule.

Guarantee Trust Life Insurance (“Guarantee Trust”) was allegedly involved in a fraudulent scheme in which its representatives advertised and sold to prospective customers a product that they claimed was health insurance, but that was in fact a medical-discount plan. The FTC filed a six count complaint against Guarantee Trust alleging violations of the Federal Trade Commission Act and violations of the Telemarketing Sales Rule. The FTC sought a permanent injunction and other remedies for the affected customers. Guarantee Trust tendered the suit to its insurer, North River Insurance Company (“North River”). North River refused to defend Guarantee Trust in the FTC lawsuit, and at the same time filed a lawsuit that sought, among other things, a declaration that North River was not obligated to defend Guarantee Trust in the FTC lawsuit.

It was North River’s position that there was no potential for a duty to defend or indemnify, as its policy excluded coverage for “any payment for Lossresulting from any Claims”that were based on an actual or alleged violation of the Federal Trade Commission Act of 1914. The circuit court agreed with North River and granted summary judgment in favor of North River and against Guarantee Trust. Guarantee Trust appealed.

Although the Appellate Court agreed that Count I of the FTC complaint (alleging violations of the Federal Trade Commission Act) was likely excluded from coverage under the North River policy, the Court held that Count II through Count VI (alleging violations of the Telemarketing Sales Rule) were potentially covered because it was not clear from the policy whether the exclusion applied to violations of the Telemarketing Sales Rule. The court explained that violations of the Telemarketing Sales Rule could be characterized as indirect violations of the FTC Act because violations of the Telemarketing Sales Rule are enforced by the FTC pursuant to the powers granted to it by the FTC Act. The court further reasoned, however, that the exclusion did not make specific mention of the Telemarketing Sales Rule, which it should have done if coverage was to be precluded for such claims. Further, because the Telemarketing Sales Rule was not designed to “prevent monopoly, preclude price fixing, or otherwise protect competition,” alleged violations of the Telemarketing Sales Rule did not fall within the exclusion’s catch-all provision. Thus, because the claims asserted under the Telemarketing Sales Rule survived application of the exclusion for purposes of determining the insurer’s duty to defend, the court reversed the judgment of the circuit court.

 

Topics:  Duty to Defend, Exclusions, FTC, Insurers, Telemarketing, Telemarketing Sales Rule

Published In: Antitrust & Trade Regulation Updates, Civil Procedure Updates, Communications & Media Updates, Consumer Protection Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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