Insurance Coverage for "Unauthorized Recording" Privacy Lawsuits

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A California law against unauthorized recording is spawning consumer class action lawsuits against companies across the country. The statute provides for a $2,500 fine per violation and potential imprisonment for a "person who, without the consent of all parties to a communication, intercepts or receives and intentionally records…a communication…." Cal. Penal Code § 632.7(a).

General Liability insurers are fighting coverage for claims arising from the California unauthorized recording statute on the grounds that the act of recording does not meet the "publication" requirement for the Personal and Advertising Injury coverage in many policies, as well as the Criminal Act, Knowing Violation, and Unsolicited Communications/Violation of Statutes exclusions.

Supporting policyholders, a July 2013 decision of the U.S. District Court for the Southern District of Ohio denied an insurer's motion for summary judgment against coverage for California unauthorized recording claims. Encore Receivable Mgmt. v. Ace Prop. & Cas. Ins. Co., No. 12-cv-297, 2013 U.S. Dist. LEXIS 93513 (S.D. Ohio July 3, 2013). On the "publication" issue, the court held that it "need not find that the communications were actually disseminated to third parties, because the initial dissemination of the conversation constitutes a publication at the very moment that the conversation is disseminated or transmitted to the recording device." Id. at *31 (citing Lens Crafters, Inc. v. Liberty Mut. Fire Ins. Co., No. 04-1001, 2005 U.S. Dist. LEXIS 47185, at *35-36 (N.D. Cal. Jan. 20, 2005) (holding that secret information does not have to be widely disseminated in order to constitute "publication"), and Ribas v. Clark, 696 P.2d 637, 640–41 (1985) ("[S]uch secret monitoring denies the speaker an important aspect of privacy of communication—the right to control the nature and extent of the firsthand dissemination of his statements.")).

The Encore court also rejected the idea that the law's status as part of the Penal Code means that the Criminal Act exclusion must bar coverage. It explained that the Criminal Acts exclusion does not apply to negligent conduct that has been criminalized. Encore Receivable Mgmt., 2013 U.S. Dist. LEXIS 93513, at *45. Application of the Criminal Acts exclusion does not turn on whether the insured is convicted of a crime, but whether the insured's actions were criminal in nature. Id. Although the court did not directly address the Knowing Violation exclusion, its analysis that negligent acts may support liability under the California statute should mean that the Knowing Violation exclusion, which applies only to intentional and not negligent acts, does not automatically preclude coverage. The Encore court further held that the Unsolicited Communications/Violation of Statutes exclusion did not apply because, as in many policies, it did not expressly address "recording."

Beyond General Liability coverage, a recent decision in the U.S. District Court for the Northern District of Georgia found the duty to defend California unauthorized recording claims under the "media activities" coverage in the insured's Errors & Omissions ("E&O") policy. DS Waters of America Inc. v. Zurich American Ins. Co., No. 12-cv-03556, slip op. at 8 (N.D. Ga. Mar. 20, 2013).

Companies should have coverage counsel scrutinize both their General Liability and E&O policies for coverage if they have pending California unauthorized recording claims, and also utilize their coverage counsel to review their insurance policies at renewal if they operate in a service industry and sector that may be subject to the California statute.

Anthony P. Tatum, ttatum@kslaw.com; Robert D. Stonebraker, rstonebraker@kslaw.com

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