Insurance coverage and the Telephone Consumer Protection Act
March 2016 | SPECIAL REPORT: INSURANCE COVERAGE
Financier Worldwide Magazine
The past several years have seen an explosion in class action cases brought under the Telephone Consumer Protection Act (TCPA), 47 U.S.C 227. The TCPA generally restricts telemarketing phone calls and the use of automated telephone equipment. Most of the reported court opinions involve financial services companies which send numerous messages by fax machine or SMS texts to cell phones.
The TCPA provides a private right of action which allows wronged consumers to recover $500 per violation, or $1500 per violation if it is determined that the statute was knowingly or wilfully violated. The statute is made-to-order for class actions because defendants are often accused of engaging in blasts of faxes or texts, thereby creating the possibility of significant damages if claims are aggregated.
Prior express consent is a possible defence of alleged TCPA violations and is often an issue in these cases. Because consent is not defined in the TCPA, there remains a question as to how courts will interpret and extend a customer’s consent to be contacted. Another possible defence is that fax advertisements may be sent to recipients with whom the sender has an established business relationship as long as the fax number was provided voluntarily by the recipient or was made publicly available, as in a directory, advertisement or website. See Junk Fax Prevention Act of 2005, Section 2(a). An established business relationship is defined as “a voluntary two-way communication” between the sender and recipient in the context of an inquiry, application, purchase or transaction. See 47 U.S.C. Section 227(a) (2); 47 C.F.R. Section 64.1200(f) (4).
In our experience, unless prior consent is at issue or an established business relationship exists, cases brought under the TCPA often strategically settle because if a violation is apparent, the statute provides for damages in a sum certain. Not surprisingly, companies sued under the TCPA have sought insurance coverage for defence, judgment and settlement costs. In early settlement discussions, opposing counsel will often request copies of any insurance policies that may provide coverage. Commercial General Liability (CGL) policies have been invoked in the majority of coverage cases.
As several jurisdictions began upholding insurers’ denial of coverage under CGL policies, policyholders have started attempting to obtain coverage under Errors and Omissions (E&O), Directors and Officers (D&O), and cyber insurance policies. In light of this potentially costly and problematic statute, it is imperative that insureds carefully analyse their business operations for compliance with TCPA regulations and their insurance policies to ensure that adequate coverage exists.
Coverage for TCPA claims CGL policies
Most CGL policyholders have argued that TCPA claims typically involve either ‘advertising injury’ or ‘property damage’ such that the alleged injuries should fall within the scope of CGL policies. On the other hand, insurers have contended that TCPA claims are not covered because TCPA damages are ‘penalties’, which usually are not the subject of CGL coverage. At least one circuit has addressed this issue and determined that TCPA statutory damages are in fact damages and not a penalty. See Columbia Cas. Co. v. Hiar Holding, L.L.C., 411 S.W.3d 258, 268 (Mo. 2013). However, as this area of law is still developing, insurers will likely continue to make this argument, underscoring the importance of carefully reviewing policies in order to assess coverage for TCPA violations.
The advertising injury provision of CGL polices are frequently invoked in TCPA litigation. Advertising injury terms often include “oral or written publication, in any manner, of material that violates a person’s right to privacy”. Court decisions usually turn, therefore, on whether there is a finding that there has been a publication violating a person’s right to privacy.
There is a split in the case law as to whether a consumer’s right to privacy encompasses not only a right to secrecy but also a right to seclusion. Most courts have held that unsolicited faxes intrude on the recipient’s right to seclusion and insurers are, thereby, obligated to defend suits based on TCPA violations. Two recent cases found coverage is such circumstances. See Standard Mut. Ins. Co. v. Lay, No. 4-11-0527, 2014 WL 272773 (Ill; App. Ct. Jan. 23, 2014) and Penzer v. Transportation Insurance Co., 29 So. 3d 1000, 1007 (Fla. 2010).
A few courts have reached the opposite conclusion, finding that while the TCPA’s unsolicited fax prohibition protects seclusion, this is not a privacy right covered under certain policies. See Resource Bankshares Corp. v. St. Paul Mercury Insurance Co., 407 F.3d 631, 640–41 (4th Cir. 2005).
There is also a split in authority concerning whether TCPA claims can cause ‘property damage’ under CGL policies. The court in Prime TV, LLC v. Travelers Insurance Company, found coverage because unsolicited faxes wasted paper and ink and caused the recipient to lose the use of its fax machine during the transmissions. 223 F. Supp. 2d 744, 750 (M.D.N.C. 2002). However, a Seventh Circuit case 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. See Am. States Ins. Co. v. Capital Assocs. of Jackson County, Inc., 392 F.3d 939, 943 (7th Cir. 2004).
When professional service entities are the subject of an alleged TCPA violation, policyholders should to look to their E&O policy, however courts have been inconsistent in their E&O coverage determinations. In Landmark American Insurance Company. v. NIP Group, Inc, an insurance company successfully obtained coverage under its professional liability policy for a claim involving unsolicited fax advertisements. 962 N.E.2d 562, 567 (Ill. App. Ct. 2011).
The court noted that in Illinois, E&O policies “generally provide coverage only for those risks ‘inherent’ in the insured’s professional services”. It held the policy potentially covered the TCPA claims because it listed several specific types of advertising as excluded from coverage but did not explicitly exclude unsolicited faxes. See BCS Ins. Co. v. Big Thyme Enterprises, Inc., No. 3:12-CV-933-JFA, 2013 WL 594858 (D.S.C. Feb. 14, 2013) (sending fax advertisements did not qualify as professional services under the terms of the policy).
If a TCPA case alleges acts or omissions of directors, officers or other executives, coverage may very well be available under the D&O insurance policy. Recent cases, however, demonstrate that obtaining coverage for TCPA claims under D&O policies is far from certain.
For example, in LAC Basketball Club, Inc. v. Federal Insurance Company, the Los Angeles Clippers were sued in a class action arising out of text messages sent to fans which solicited the fans to send texts to be posted on a scoreboard for view by the live audience. 2014 WL 1623704 (C.D. Cal. Feb. 14, 2014). One fan sent the text, and subsequently received numerous texts containing advertisements. The fan sued under the TCPA, the basketball club sued under its D&O policy, and the court denied coverage because of the ‘invasion of privacy’ exclusion in the Clippers’ D&O policy. Notably, the court found a violation of the TCPA inherently amounts to an invasion of privacy.
Shortly after the LA Clippers decision, the LA Lakers brought a very similar coverage suit against Federal Insurance, and a different Central District Judge reached the same conclusion. L.A. Lakers, Inc. v. Fed. Ins. Co., No. CV 14-7743 DMG (SHx), 2015 U.S. Dist. LEXIS 62159, at *1 (C.D. Cal. Apr. 17, 2015). Judge Dolly M. Gee rejected the Lakers’ argument that the plaintiff’s claim did not involve a claim of invasion of privacy. The court considered the legislative history of the TCPA which states “[t]he purposes of the bill are to protect the privacy interests of residential telephone subscribers...” Judge Gee also cited to the US Supreme Court’s decision in Mims v. Arrow Fin. Servs., LLC, ___U.S.___ , ___, 132 S. Ct. 740, 744 (2012) which held “[t]he Act bans certain practices invasive of privacy”. Id.
The Lakers have filed an appeal of Judge Gee’s ruling. If the Ninth Circuit reverses the district court, the chances for coverage under D&O policies will be enhanced. Obviously, however, an affirmance of the district court ruling will make it that much more difficult for TCPA defendants to find coverage under the D&O insurance policies for the claims.
The TCPA has spawned a multitude of class action lawsuits and the attendant coverage cases have been fascinating. Courts have often found insurance coverage, but almost as many decisions have been against the policyholder insurance claims. Risk managers need to carefully evaluate their companies’ business plans to ensure compliance with the TCPA, educate their employees about the TCPA, and review their insurance policies to make sure the companies’ policies will provide adequate coverage if a TCPA class action is filed.
Steven R. Smith is a partner, Maria Vathis is of counsel and Joy Anderson is an associate at Bryan Cave LLP. Mr Smith can be contacted on +1 (312) 602 5040 or by email: firstname.lastname@example.org. Ms Vathis can be contacted on +1 (312) 602 5127 or by email: email@example.com. Ms Anderson can be contacted on +1 (312) 602 5147or by email: firstname.lastname@example.org.
© Financier Worldwide
Steven R. Smith, Maria Vathis and Joy Anderson
Bryan Cave LLP