Earlier this week, the New York Supreme Court issued an opinion finding that an insurer has a duty to defend and indemnify a national background screening company in two Fair Credit Reporting Act actions despite the policy’s exclusions of fines and penalties.   

In the two underlying actions at issue (Scott Ernst v. Dish Network, LLC, et al., Civil Action No. 12-cv-8794 (S.D.-N.Y.) (class action) and Joshua J. Eisner v. Teletech Services Corp., Civil Action No. 6:13-cv-03273 (W.D.-Mo.)), the plaintiffs sought statutory damages and alleged that a national background screening company willfully violated the FCRA.  The central issue was whether the background screening company’s errors and omissions insurance policy required its insurer to defend and indemnify it.  The errors and omissions policy at issue defined damages as “any compensatory sum” including “a judgment, award, or settlement, provided any settlement is negotiated with the Company’s written consent,” including punitive amounts “to the extent such amounts are insurable under applicable law.”  The policy expressly excluded “[f]ines, penalties, forfeitures or sanctions.”   

On summary judgment, the insurer argued it had no obligation to defend or indemnify because the policy excluded penalties from coverage, and the underlying FCRA claims alleging willfulness only involved penalties.  In its cross motion for summary judgment, the background screening company argued that under the policy, the insurer was required to defend and indemnify because the underlying claims constituted compensatory damages covered by the policy.  Relying on the statutory language that “any person who willfully fails to comply” is liable for any actual damages “or damages of not less than $100 and not more than $1,000,” the Court found that FCRA statutory damages function primarily as compensation — not as penalties.  The Court reasoned that: (1) statutory damages that substitute only for actual damages are compensatory; (2) FCRA statutory damages serve to facilitate litigation in instances where actual damages are difficult or impossible to calculate; and (3) because the FCRA separately provides for punitive damages, interpreting the FCRA statutory damages as punitive statutory damages would force an illogical result where punitive damages can be added onto punitive statutory damages.  

This decision provides guidance on the interplay of insurance policies and claims under the FCRA.  A copy of the opinion can be found here.