In Windmill Nursing Pavilion Ltd. v. Cincinnati Ins. Co., (No. 1-12-2431), the Illinois Court of Appeals concluded that under Ohio law, Cincinnati Insurance Company (“Cincinnati”) provided sufficient notice to its insured, Unitherm, Inc. (“Unitherm”), of renewal terms that added an exclusion for alleged violations of the Telephone Consumer Protection Act of 1991 (“TCPA”). Accordingly, the court affirmed the trial court’s decision granting partial summary judgment in favor of Cincinnati on the validity of the TCPA exclusion. As a result, Cincinnati did not have to pay $4 million out of a $7 million consent judgment.
Windmill Nursing Pavilion, Ltd. (“Windmill”) filed a class action complaint alleging that Unitherm violated the TCPA by sending unsolicited fax advertisements to it in November 2005 and in late April 2006. At the time Unitherm sent the faxes, it carried commercial general liability and umbrella liability coverage through Cincinnati. The original policy expired before the April 2006 faxes were sent. The renewal policy contained a modification that excluded coverage for “bodily injury,” “property damage,” or “personal and advertising injury” arising out of “any act or omission” that violated the TCPA.
Windmill, Unitherm, and Cincinnati entered into a settlement agreement resolving the class action. The parties agreed to a $7 million consent judgment against Unitherm, which was collectible from Cincinnati under the insurance policies. Cincinnati agreed to provide an initial settlement fund of $3 million, which represented the combined general aggregate and umbrella limits under the original policy. The settlement agreement also provided that Cincinnati’s obligation to pay any further portion of the judgment balance would depend on the outcome of two “carved-out” issues. One of those issues was whether Cincinnati’s notice of reduction in coverage to Unitherm regarding the TCPA exclusion (added to the renewal policy) was sufficient.
The appellate court agreed with the trial court’s ruling that Ohio law applied in the case, and Cincinnati’s notice of a coverage exclusion complied with that state’s insurance law, defeating Windmill’s request to have Cincinnati pay the remaining $4 million of the settlement.
The decision is instructive on several levels. First, when issues of coverage are involved at the time of settlement of the underlying litigation, a settlement may be negotiated which reserves the right to address certain “carved-out” issues as was done in this case. In Windmill, the court found that the release did not preclude the parties from litigating the “carved-out” issues. Second, insurers should be mindful of any differences in statutory requirements for “renewal” as compared to “nonrenewal” situations. In this case, the court held that the notice provided with the renewal policy complied with Ohio law: it was on a separate page, attached to the policy, and was clearly worded regarding the change in coverage. In addition, because the underlying and umbrella policies were “bound together and share[d] the same policy number, the notice was sufficient for both.”
Windmill serves as a reminder that, when limiting coverage on renewal, an insurer should confirm which state’s law will apply to policy interpretation and ensure that it is complying with those specific statutory renewal requirements. As the decision demonstrates, doing the right thing can result in significant savings.