Earlier this month, on the final day of arguments for the March term, the Illinois Supreme Court heard oral argument in Standard Mutual Insurance Co. v. Lay. Lay presents the question of whether the penalty imposed by Federal law for sending unsolicited junk faxes is uninsurable as a matter of Illinois public policy. Our detailed preview of the facts and lower court opinions in Lay is here. The video and audio of the argument is available here.
The Federal Telephone Consumer Protection Act provides that it is unlawful to send unsolicited advertisements to a fax machine. The TCPA creates a strict liability private right of action, with damages equal to actual monetary loss to the plaintiff or $500 per fax, whichever is greater. The penalty is trebled if the violation is willful or knowing. In Lay, the defendant real estate agency hired a "fax broadcaster," allegedly based on its assurances that only persons who had agreed to receive advertisements would get its blast fax. This proved to be false, and the resulting class complaint sought trebled penalties of $1,500 for each of 3,478 faxes purportedly sent. The defendant real estate agency ultimately settled the class action for more than $1.7 million.
Meanwhile, the insurer had filed a declaratory judgment action, seeking a declaration of no coverage. Following the settlement of the underlying action, the class representative became actively involved in the dec action. The insurer and the class representative filed cross motions for summary judgment, and the Circuit Court held that the insurer had no duty to defend or indemnify. The Appellate Court affirmed, holding that TCPA penalties could not be insured as a matter of public policy in Illinois, since they were in the nature of punitive damages.
Counsel for the appellant, the class representative in the underlying action, began his presentation by arguing that the Appellate Court had framed the issue incorrectly, and had therefore never reached the heart of the issue. A proper reading of Beaver v. Country Mutual Insurance Co., counsel argued, is not that the existence of coverage depends on the nature of damages or penalties. Rather, the question of coverage turns, counsel argued, on the nature of the insured's alleged conduct. Thus, the statement that punitive damages are not insurable actually derives from the proposition that the kind of conduct for which punitive damages are imposed is not insurable. Justice Thomas pointed out that in the same section of the TCPA which provides for the penalty, Congress provided for treble damages for willful and wanton conduct. He asked whether that impacted the question of whether the TCPA penalty was punitive. Counsel responded that willful and wanton conduct was an example of the sort of bad conduct which could not be insured. Because the appropriate question, according to counsel, was the nature of the conduct rather than the nature of the penalty, analysis should turn to Illinois law of punitive damages and the TCPA to see when punitive damages and penalties are applied. The insured's conduct didn't come close to the kind of conduct which triggers a finding of no coverage under the Beaver rule, counsel insisted. Justice Thomas asked counsel to comment on the appellee's allegations of collusion between defendants and plaintiffs' class action attorneys, and its concern that allowing coverage would mean that insurers are often left "holding the bag." Counsel responded that there was no indication of such a thing in the record, and the appellee's concerns were mere argument. Justice Garman asked counsel whether he was urging a point by point, "conduct by conduct" analysis to determine whether conduct is insurable as a matter of public policy, and counsel agreed that he was. Justice Freeman asked counsel whether he relied on Valley Forge Insurance Co. v. Swiderski Electronics, and if so, for what proposition? Counsel responded that Swiderski decided that TCPA damages are potentially covered under an advertising injury policy, which according to counsel is what was involved in the case at hand. Justice Freeman asked whether Swiderski was a duty to defend, not a duty to indemnify case like Lay, and counsel agree that it was. Counsel concluded by asking the Court to reverse the Court of Appeal, and invited the Justices to consider defining the nature of conduct which triggers the rule of non-insurability.
As counsel for the insurer began his presentation, Justice Thomas asked whether, if the Court agreed that the penalties were potentially insurable, there were any issues left for the Appellate Court on remand? Counsel responded that the Court could either decide the additional issues itself, or remand to the Appellate Court. Counsel argued that there was a pending question of possible breaches by the insured of the policy. The insurer defended under a reservation of rights letter. Approximately four months after the case was filed, the attorney retained by the insurer had been fired by the insured, and a month or two after that, the insured had agreed to a $1.739 million settlement with a covenant not to execute against any of the insured's assets. Calling the settlement a "roll-over," in a case the insurer was still defending, counsel suggested that there were questions of a breach of the cooperation clause and a voluntary payment undertaken. Justice Thomas repeated the question asked of appellant's counsel earlier, asking what impact the reference in the statute to treble damages for willful and wanton conduct had on the analysis. Counsel responded that the first half of the statute provided for either actual damages or $500, "whichever is more," but in practice, $500 would always be far more than actual damages from a single junk fax. Justice Burke asked counsel how that damages clause could be simultaneously remedial and punitive? Counsel responded that penal punishments are intended to deter both the defendant and others from similar conduct, and that was the purpose of the TCPA penalties. Chief Justice Kilbride asked whether the insurer knew about and objected to the insured's settlement. Counsel responded that the insurer had not been aware of the settlement. Justice Burke asked whether, if there is a duty to defend a TCPA claim under Swiderski, that necessarily means there is a potential duty to indemnify - and that the Appellate Court decision therefore conflicts with Swiderski. Counsel responded that Swiderski had dealt with the duty to defend, whereas only the duty to indemnify was at issue here. Justice Garman asked what difference it makes for the analysis whether the conduct at issue is that of an agent - here, the "fax broadcaster." Counsel responded that the fax broadcaster was not the agent of the insured, and even if it was, the statute places liability on the insured as the "sender."
In rebuttal, counsel for the class representative argued that the liability involved in the case below was certainly vicarious, flowing through an agent, and that as such, it should be insurable. Counsel claimed that the insured had the right to settle under the circumstances, and insisted that the insurer had known about the settlement.
We expect Lay
to be decided by the Supreme Court in the fall.