I. Introduction
In the past several years, plaintiffs’ attorneys around the country have exploited a once-unknown 1991 law, the Telephone Consumer Protection Act (“TCPA”), to obtain headline-grabbing, multimillion-dollar judgments and settlements from some of the country’s largest financial services companies. Because financial services companies are often required to communicate with customers by telephone, these companies have attracted an undue amount of attention from the TCPA plaintiffs’ bar. Seemingly, each new day brings another lawsuit or settlement, and so, it is no surprise that the TCPA remains a hot topic in the financial services and related industries.  In this alert, we explore current trends in insurance coverage claims attendant to TCPA class action claims.

II. Background
Congress enacted the TCPA in 1991 to address what it perceived as the growing problem of unsolicited telemarketing that made use of emerging technologies such as fax machines and automatic dialing systems to reach greater numbers of people than was previously possible. In general, the TCPA’s restrictions on calls vary depending on whether (a) the call is made to a wireless or residential line and (b) the call is informational or conveys a telemarketing or advertising message.

With respect to informational calls made to wireless lines, the TCPA states that it is unlawful to make a call using “artificial or prerecorded voice;” or an “automatic telephone dialing system” (“ATDS”) without the called party’s prior express consent. Calls to wireless lines using an ATDS or artificial/prerecorded voice that introduce advertising or constitute telemarketing require the prior express written consent of the called party.

With respect to calls placed to residential telephone lines, the TCPA states that it is unlawful to make an artificial/prerecorded voice call without the prior express consent of the called party. In 2005, however, acting under its statutory authority, the Federal CommunicationsCommission (“FCC”) ruled that the restriction on artificial/prerecorded voice calls to residential lines applies only to “commercial purpose” calls. That is, an artificial/prerecorded voice call to a residential line does not violate the TCPA if, among other characteristics, the call “is not made for a commercial purpose” or “is made for a commercial purpose but does not include or introduce an advertisement or constitute telemarketing.”

A. ATDS
The statute defines an ATDS as “equipment which has the capacity to store or produce telephone numbers to be called, using a random or sequential number generator; and to dial such numbers.” The FCC has taken the position that a “predictive dialer” is an ATDS and, therefore, covered by TCPA to the extent that it has the capability of dialing numbers randomly or sequentially. The FCC defines a “predictive dialer” for these purposes as equipment that (a) dials numbers and, when certain computer software is attached, predicts when an agent will be available to take calls, and (b) consists of hardware that, when paired with certain software, has the capacity to store or produce numbers and dial those numbers at random, in sequential order, or from a database of numbers.

Whether a predictive dialing system qualifies as an ATDS is a fact-bound determination. Several courts have taken an expansive view of the FCC’s position, and have found that a dialing system may be considered an ATDS so long as there is a theoretical possibility that the system may have the capacity to dial numbers randomly or sequentially. Other decisions have taken a more pragmatic view, however, and have declined to find the existence of an ATDS where the relevant system would require significant modification to “have the capacity” to dial randomly, sequentially, or in a predictive fashion.

B. Prior Expess Consent
The TCPA does not define the term “prior express consent”; in its 1992 Order, however, the FCC ruled that “persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary.” And in a subsequent Declaratory Ruling, the FCC stated that “autodialed and prerecorded message calls to wireless numbers provided by the called party in connection with an existing debt are made with the ‘prior express consent’ of the called party” and, therefore, “such calls are permissible” under the TCPA. The FCC reasoned that “the provision of a cell phone number to a creditor, e.g., as part of a credit application, reasonably evidences prior express consent by the cell phone subscriber to be contacted at that number regarding the debt.” A number of federal courts have concluded, therefore, that where a consumer provides a cellular number to a creditor as a “home” number or as the only number, the consumer has provided prior express consent to be called on the cellular number for purposes of the TCPA.

In February 2012, the FCC issued rules with respect to telemarketing calls that are covered by the TCPA. In particular, as to any telemarketing communication covered by the TCPA made after October 16, 2013, the party making the call must first obtain “prior express written consent” from the called party.  The FCC regulations set forth the specific requirements for obtaining such consent and for providing required disclosures.

C. Private Right of Action under the TCPA
The TCPA provides a private right of action under which a plaintiff may recover the greater of actual monetary loss or $500 per violation. A court may treble the amount of damages upon a finding of a “willful or knowing” violation. The TCPA places no cap on damages for claims brought individually or as a class action, so the number of potential violations can mount quickly.

III. Insurance Coverage for TCPA Claims
Companies and individuals facing TCPA claims have sought insurance coverage for defense costs, as well as the costs of judgment or settlement, under at least three different kinds of insurance policies, commercial general liability (“CGL”) policies, errors and omissions (“E&O”) or professional liability policies, and Directors and Officers (“D&O”) liability policies. As discussed below, although policyholders have had some success securing coverage under these policies, insurers are increasingly challenging coverage for TCPA claims or outright excluding TCPA liability under their policies. In light of this changing landscape, policyholders should consider their risks and, where appropriate, consider securing policies that specifically cover TCPA liability. The key insurance coverage considerations for traditional policies are considered below, along with a brief discussion on alternative policies.

A. Coverage for TCPA Violation Claims under Commercial General Liability Policies
CGL policyholders have historically argued for coverage on the grounds that TCPA claims typically allege either “advertising injury” or “property damage,” which types of injury are generally within the scope of CGL policies. As to both types of injuries, insurers have argued that TCPA claims should not be covered because the damages available under the TCPA amount to penalties, which are not covered under most CGL policies.

1. Advertising Injury and Violations of Right to Privacy
Policyholders have often sought coverage for TCPA claims under the advertising injury provision in standard CGL policies. This provision usually provides that the insurer will cover damages the policyholder is legally obligated to pay as a result of any “personal and advertising injury.” Personal and advertising injury is typically defined to include “oral or written publication, in any manner, of material that violates a person’s right to privacy.” Most courts have found that fax and text fax transmissions amount to a “publication.” As a result, a court’s decision as to whether coverage exists frequently turns on whether the court finds that there has been a violation of a person’s “right to privacy.”

The majority of courts deciding this issue have found that a consumer’s right to privacy encompasses not only a right to secrecy but also a right to seclusion; these courts have, accordingly, ruled that because unsolicited faxes intrude on the recipient’s right to seclusion, insurers are obligated to defend suits based on TCPA violations. For instance, in Penzer v. Transportation Insurance Co., 29 So. 3d 1000, 1007 (Fla. 2010), the Florida Supreme Court held that the right to privacy included a right to seclusion, and that, therefore, a TCPA claim based on the sending of unsolicited faxes was covered as an advertising injury under the applicable policy. Id. Similarly, in a recent “fax-blast” case, the Illinois Court of Appeals found that there was advertising coverage under the policy’s “personal and advertising injury” provision because the faxes were sent without the permission of the recipients in violation of their right to privacy. Standard Mut. Ins. Co. v. Lay, No. 4-11-0527, 2014 WL 272773 (Ill; App. Ct. Jan. 23, 2014).

Other courts have disagreed. For instance, in American States Insurance Co. v. Capital Associates of Jackson County, Inc., 392 F.3d 939, 943 (7th Cir. 2004) (purporting to apply Illinois law), the Seventh Circuit held that a TCPA claim based on unsolicited faxes was not covered because it did not allege an advertising injury. Id. In that case, the policy defined “advertising injury” to include “[o]ral or written publication of material that violates a person’s right to privacy.” In denying coverage, the court reasoned that the inclusion of the term “publication” implied an intent to cover only acts that violated a person’s right to secrecy rather than a right to seclusion. Id. at 942. Employing that rationale, it found that the sending of faxes did not violate a person’s right to secrecy (i.e., no information of the recipient was “published to the outside world”) and, therefore, did not amount to a cognizable advertising injury under the policy. Id. Although the Seventh Circuit’s interpretation of Illinois law is no longer controlling, its rationale has been followed in other jurisdictions. See, e.g., Resource Bankshares Corp. v. St. Paul Mercury Insurance Co., 407 F.3d 631, 640–41 (4th Cir. 2005) (purporting to apply Virginia law).

2. Property Damage
Policyholders have also sought coverage for TCPA claims by arguing that unsolicited faxes cause “property damage,” which is covered under CGL policies.  For example, in Prime TV, LLC v. Travelers Insurance Co., 223 F. Supp. 2d 744, 750 (M.D.N.C. 2002), the court found that there was covered “property damage” because unsolicited faxes wasted paper and ink and caused the recipient to lose the use of its fax machine during the transmission of the offending faxes.

Other courts, while agreeing that loss of paper, ink, and the use of a fax machine constitute property damage, have denied coverage for TCPA claims, relying on an exclusion for intentional acts. This exclusion is found in most CGL policies, but there has been disagreement across jurisdictions as to whether the exclusion applies to the sending of unsolicited faxes. For instance, in American States Insurance Co., 392 F.3d at 943, the Seventh Circuit held that the policyholder’s transmission of unsolicited faxes was barred by the policy’s intentional conduct exclusion because the policyholder necessarily anticipated the consequences of their act, namely, that the faxes would use up the recipient’s ink and paper. Conversely, in Prime TV, the court found that the insured did not know that the recipient had not solicited the fax advertisement.  223 F. Supp. 2d at 752. Therefore, it held that sending the fax was not an intentional act under the policy, and the TCPA claims were not excluded from coverage. Id.

3. Penal Statute Exclusion
In some jurisdictions, courts have denied coverage for TCPA claims under common provisions which exclude coverage for claims amounting to willful violation of a penal statute or claims for civil penalties, fines, or assessments. As grounds for these decisions, courts have determined that the TCPA should be considered a penal statute because it imposes per-fax fines and the threat of treble damages. Other courts have held that these provisions do not exclude TCPA claims on the grounds that the TCPA is a remedial rather than penal statute. For instance, in Terra Nova Insurance Co. v. Fray-Witzer, 869 N.E.2d 565, 420 (2007) (applying New Jersey law), the court emphasized that the purpose of the TCPA is to protect the privacy interests of consumers, and that the statutory remedy goes directly to the fax machine owner who suffered the injury, rather than to the government. Id. For this reason, it held that the statute was “remedial” in nature, even though the damages for violations can grossly exceed the consumer’s actual harm. Id. The Illinois Supreme Court recently agreed with this decision, holding that “[t]he manifest purpose of the TCPA is remedial and not penal[,]” based on congressional intent. Standard Mut. Ins. Co. v. Lay, 989 N.E.2d 591, 599 (Ill. 2013). [1] The court further explained that the possible imposition of treble damages did not transform the TCPA into a penal statute, because damages under the TCPA were “intended as a supplemental aid to enforcement rather than as a punitive measure.” Id. at 600.

4. Current CGL Policies
Some newly issued CGL policies now routinely contain a specific exclusion for claims under the TCPA. This exclusion typically contains language such as: “This insurance does not apply to ‘bodily injury,’ ‘property damage,’ ‘advertising injury,’ or ‘personal injury’ arising directly or indirectly out of any action [or] omission that violates or is alleged to violate the Telephone Consumer Protection Act (TCPA), including any amendment of or addition to such law.” Although insurers likely will argue that a TCPA-specific exclusion voids coverage for any lawsuit that includes TCPA claims, policyholders should scrutinize carefully not only the wording of the particular exclusion at issue, but also the underlying complaint against the insured. If a complaint includes common law claims in addition to TCPA claims, the insurer’s duty to defend may well extend to the entire suit. Further, even if the exclusion has some applicability, defense costs (and settlement costs) may well be covered at least in part. 

B. Coverage under E&O and D&O Policies
In addition to challenging the scope of TCPA specific exclusions in newer CGL policies, policyholders facing TCPA claims are increasingly seeking coverage under other lines of coverage. If the TCPA violation was carried out as part of the provision of professional services, for example, claims arising from that violation could be covered under the policyholder’s E&O policy. Similarly, if the TCPA claim at issue is directed at the conduct of directors, officers, or other executives, coverage could be available under the entity’s D&O insurance policy. Of course, in formulating their overall coverage strategies, policyholders should take care to analyze their coverage positions through the prism of each potentially-applicable line of coverage.

Few TCPA coverage disputes under these other types of policies have made their way through the courts since TCPA-related exclusions began to appear in CGL policies. In those that have, policyholders have found some success in securing coverage, particularly under their E&O policies. For instance, in Landmark American Insurance Co. v. NIP Group, Inc., 962 N.E.2d 562, 567 (Ill. App. Ct. 2011), the policyholder, an insurance corporation, sought coverage under its professional liability policy for defense of a TCPA class action for sending unsolicited fax advertisements.  Id. at 566. The insurer argued that the language of the policy unambiguously established that this practice was not a covered professional service.  Id. at 568. The court noted that under Illinois law, these types of policies “generally provide coverage only for those risks ‘inherent’ in the insured’s professional services.” Id. at 574. It nevertheless found that because the policy listed several specific types of advertising as excluded from coverage but did not explicitly exclude the transmission of unsolicited faxes, the policy must “at least potentially cover[]” the TCPA claims in the underlying action. Id. at 576.

A court in a different jurisdiction came to the opposite conclusion.  See BCS Ins. Co. v. Big Thyme Enterprises, Inc., No. 3:12-CV-933-JFA, 2013 WL 594858, at *3 (D.S.C. Feb. 14, 2013). In that case, agents of Blue Cross and Blue Shield of South Carolina sought coverage under their agents’ and brokers’ professional liability policy for TCPA violations arising from distribution of unsolicited fax advertisements. Id. at *1. The policy limited coverage to claims for “Wrongful Act[s] involving Professional Services.” Id. at * 2. The policyholders argued that “advertising is an integral component of an insurance agent’s livelihood” and that sending fax advertisements “requires the professional to design and/or approve an advertisement that complies with laws and rules governing his or her profession and further to determine how to best disseminate the information to the targeted audience.” Id. at *4. The insurer argued, and the court agreed, that the act of sending fax advertisements did not qualify as professional services under the terms of the policy. Id. at *3.

Coverage under D&O policies for TCPA violations remains a largely untested question. In one notable fax-blast case, Resource Bank v. Progressive Casualty Insurance Co., 503 F. Supp. 2d 789, 797 (E.D. Va. 2007), the court denied coverage. The D&O policy at issue in that case included a property damage exclusion and specifically barred coverage for claims based on “invasions of privacy.” Id. at 793. Relying on the exclusion, the court found that there was no coverage for TCPA claims under the D&O policy. Id. at 795.

In another recent case, LAC Basketball Club, Inc. v. Federal Insurance Co., 2014 WL 1623704 (C.D. Cal. Feb. 14, 2014), a different federal court came to the same conclusion. Id. at *2. The LAC Basketball Club case concerned a putative class action filed by a patron of the Los Angeles Clippers. Id. During its basketball games, the Clippers solicited patrons to send text messages that would then be posted on a scoreboard for view by the live audience. Id. The patron took the Clippers up on their solicitation, and afterward he allegedly was bombarded with text message spam advertisements. Id. In denying coverage, the court held that the “invasion of privacy” exclusion in the Clippers’ D&O policy barred coverage. Id. at *4-5. In coming to its decision, the court found that it did not matter that the patron’s complaint did not allege an invasion of privacy on the Clippers’ part, because a violation of the TCPA in of itself inherently amounts to an invasion of privacy. Id.

C. Conclusion
The TCPA continues to represent significant risk for companies that solicit business or communicate with customers and potential customers by telephone, fax, or text message. Although recent decisions suggest that CGL policies provide coverage for TCPA claims, insurers have successfully pushed for language in many recent CGL policies expressly excluding coverage for TCPA claims. Similarly, insurers have shown a willingness to dispute coverage under E&O and D&O policies and have found a certain degree of success on this front, especially by relying on “invasions of privacy” exclusions in D&O policies.  Nevertheless, in light of possible substantial exposure under the TCPA and the substantial costs associated with defending TCPA class actions, policyholders should carefully consider their potential coverage rights when faced with TCPA claims and not accept blindly an insurer’s denial of coverage. Further, policyholders should work closely with their brokers and insurers to secure coverage broad enough to encompass future TCPA claims. By way of example, in certain circumstances, insurers will take on at least of portion of the risks associated with TCPA claims through media liability policies or other specialty policies, including cyber-liability policies, which can be designed to cover communications that result from a breach of the insured’s computer system. Of course, policyholders should closely review these new policies and, where appropriate, seek the assistance of coverage counsel to maximize potentially-available coverage for TCPA claims and the significant damages that can flow from TCPA violations.

Notes:
[1] The Illinois Supreme Court remanded Standard Mut. Ins. v. Lay to the intermediate appellate court for further review of additional coverage defenses asserted by the insurer, which resulted in the appellate court decision discussed above finding coverage for TCPA claims under the “advertising injury” provision of CGL policies. The appellate court’s subsequent decision, which is addressed above in the context of advertising injury, and the Illinois Supreme Court decision, are the subject of another K&L Gates client alert. See Thomas M. Reiter, R. Bruce Allensworth, Brian M. Forbes & Sara N. Brown, “Laying Down the Law: Illinois Appellate Courts Confirm Insurance Coverage in TCPA Cases,” K&L Gates (Feb. 18, 2014), http://www.klgates.com/laying-down-the-law-illinois-appellate-courts-confirm-insurance-coverage-in-tcpa-cases-02-18-2014/.