TCPA Damages are not Punitive Damages
May 28, 2013
The Illinois Supreme Court has ruled that liquidated damages of $500 per violation of the TCPA are not punitive damages in that state. This case is Standard Mutual Insurance Company v. Lay, 2013 IL 114617. Note that this opinion has not as of this writing been released for publication in the permanent law reports.
Lay was a real estate agency and contacted Business to Business Solutions regarding facsimile message advertising. Business to Business offered a blast fax service and transmitted an ad for Lay to approximately 5,000 fax numbers Lay did not know that the people and entities contacted by Business to Business did not consent to receive fax advertisements. One of those contacted (Locklear) received an unsolicited fax and then filed a class action lawsuit against Lay alleging violation of the Telephone Consumer Protection Act (TCPA). Lay tendered its defense to its insurer, Standard Mutual Insurance Company.
Standard agreed to defend under a reservation of rights and told Lay that its general liability policies may not cover the conduct alleged in the class action lawsuit. Lay at first accepted the insurer's chosen counsel, but then subsequently retained its own counsel and decided to settle the case. Lay assigned to Locklear all of Lay's claims against and rights to payment from Standard.
Standard filed a motion for declaratory judgment and Locklear filed an answer. The trial court granted summary judgment to Standard, the appellate court agreed, and an appeal was taken to the Illinois Supreme Court.
Locklear contended that Standard is estopped from asserting defenses to its insurance policy coverage, arguing that the reservation of rights letter did not adequately inform Lay of potential coverages defenses and conflict of interest. The Supreme Court said that if the insurer adequately informs the insured that it is proceeding under a reservation of rights, identifying the policy provisions that may preclude coverage, and the insured accepts defense counsel provided by the insurer, then the insurer is not estopped from asserting policy defenses. In this case, Standard's reservation of rights letter specifically referred to the coverage defense and conflict of interest and Lay knowingly and intelligently chose to accept defense counsel provided by Standard. Lay was not prejudiced by the representation of Standard's retained attorney and despite this, Lay then retained his own counsel and negotiated the settlement in the underlying action.
The court declared that Standard availed itself of both of its only available options to ascertain its rights and responsibilities pursuant to the terms of the insurance policies. Standard agreed to defend Lay, subject to a thoroughly discussed reservation of rights, and it filed a declaratory judgment action. The court decided to uphold the appellate court's conclusion that Standard is not estopped from asserting coverage defenses.
Locklear next contended that the TCPA prescribed damages of $500 per violation are insurable under Illinois. The Supreme Court noted that the appellate court did not base its decision on the language of Lay's insurance policies, but rather on its conclusion that the TCPA prescribed damages of $500 per violation constituted punitive damages, which are uninsurable as a matter of Illinois public policy. The court noted that Congress enacted the TCPA to address telemarketing abuses attributable to the use of automated telephone calls to devices including telephones, cellular telephones, and fax machines. The purposes of the TCPA are to protect the privacy interests of residential telephone customers by restricting unsolicited automated telephone calls to the home, and facilitating interstate commerce by restricting certain uses of fax machines and automatic dialers. Therefore, the court said, the manifest purpose of the TCPS is remedial and not penal. The TCPA is clearly within the class of remedial statutes that are designed to grant remedies for the protection of rights, introduce regulation conducive to the public good, or cure public evils. Moreover, the damages prescribed by the law are not punitive damages, so the state law prohibiting insurance coverage for punitive damages is not applicable in this instance.
The ruling of the appellate court was affirmed in part and reversed in part. The Supreme Court upheld the ruling that Standard was not estopped from asserting policy defenses. The court reversed the ruling that the TCPA damages are punitive damages and remanded the case back to the appellate court for further proceedings consistent with this opinion.
Editor's Note: The Illinois Supreme Court emphasized two main points in this decision.
First, the reservation of rights letter must specifically refer to the policy defense that may be asserted by the insurer and to the potential conflict of interest. Standard's reservation of rights letter did this, and the appellate court was correct in its ruling in favor of the insurer on this point.
Second, the TCPA damages of $500 per violation are not punitive damages, so the appellate court's ruling on this point was reversed. The TCPA is remedial, not penal, and the appellate court was wrong to grant summary judgment to Standard based on the punitive damages rationale.