On May 18, 2016, in First Mercury Insurance Company v. Nationwide Security Services, Inc. et al., the First District of the Illinois Appellate Court affirmed the Circuit Court of Cook County’s ruling of no coverage after the insured settled a “Blast-Fax” class action lawsuit brought under the Telephone Consumer Protection Act. The TCPA provides for a $500 statutory award per violation of the Act. Significantly, the court found that a $500 “per claim” deductible applied for each recipient of the unsolicited fax and that the CGL policy did not cover “punitive or exemplary damages,” which included any amounts above the statutory award.
The underlying suit involved Nationwide Security Services, Inc., a private detective agency focusing on family-related matters. Nationwide sent an unsolicited fax advertisement to 3,671 recipients stating that Nationwide could help “track your spouse or significant other’s daily activities” or “locate anyone, anywhere.” A recipient of the fax, CE Design Ltd., brought a class action lawsuit against Nationwide under the TCPA. Nationwide provided timely notice of the suit to its Commercial General Liability insurer, First Mercury Insurance Company. First Mercury issued a reservation of rights and assisted in obtaining independent counsel for Nationwide due to a conflict of interest.
CE Design demanded $1.8 million to settle, a number apparently derived from multiplying the number of fax recipients (3,671) by the statutory award authorized by the TCPA ($500). First Mercury maintained that it had no duty to indemnify Nationwide and only authorized Nationwide’s counsel to settle for $10,000. Nonetheless, Nationwide settled for approximately $4.1 million, enforceable only against First Mercury, and assigned its rights under the Policy to CE Design. First Mercury filed a declaratory judgment action against CE Design as assignee of the policy seeking a declaration of no coverage.
In the coverage action, the trial court ruled in favor of First Mercury on cross-motions for summary judgment. CE Design appealed to the First District seeking coverage for the $4.1 million settlement. The Policy covered property damage and advertising injury with a “per claim” deductible of $500. The court agreed with First Mercury that the insured had to cover the deductible for each individual fax received stating “to the extent any property damage or advertising injury was incurred, it was incurred when each individual received an unwanted fax on an individual basis.” Accordingly, the court found that no coverage existed for the portion of the settlement reflecting the $1.8 million in damages authorized under the TCPA. To justify the remainder of the settlement, the Settlement Agreement noted that full treble damages could be awarded under the TCPA but then opted for double damages, awarding $1,000 for each of the 3,671 unsolicited messages. The settlement also included approximately $450,000 in pre-judgment interest. In addition to a determination that policy’s limit did not exceed $1 million for advertising injury, the court also denied coverage for the portion of the settlement above the statutory award provided by the TCPA as the policy excluded “[a]ny claim for punitive or exemplary damages.”
Finally, the court expressed its concern with the “proliferation of TCPA class actions,” which are “not about…compensating members of the class” but rather “have everything to do with compensating the lawyers of the class.” The court criticized a calculation of damages which does not consider the low amount of potential class members who actually join and benefit from the litigation. As a remedy, the court suggested that class counsel’s fee should be determined after the total amount of participating class members is known so that the fee award is reduced to reflect the defendant’s actual liability.