In a May 23, 2013 opinion in Standard Mutual Insurance Co. v. Lay, the Supreme Court of Illinois held that the Telephone Consumer Protection Act (TCPA) is a remedial, not a penal, statute. Consequently, the statutory damages of $500 per violation were found insurable under a commercial general liability policy, as they are not considered to be punitive damages in the state of Illinois.

Locklear Electric (Locklear) filed a class action lawsuit against the Ted Lay Real Estate Agency (Lay), in Illinois state court, for violations of the TCPA’s provisions against sending unsolicited advertisements to consumers’ fax machines. The action was later removed to the Federal District Court for the Southern District of Illinois.

Lay tendered its defense to Standard Mutual Insurance Company (Standard), which had issued Lay a commercial general liability insurance policy. Standard informed Lay that it would defend Lay in the underlying action, subject to a reservation of rights. Among other defenses, the reservation of rights letter notified Lay that the TCPA may constitute a penal statute levying punitive damages, which were excluded from coverage by the policy and Illinois law.

Standard informed Lay that because the reservation of rights letter notified Lay of a disclaimer of coverage, there was a potential conflict of interest between the insurer and insured. Lay was further informed that it could either:

Initially, Lay waived the conflict interest and proceeded in its defense with counsel selected by Standard. Later, Lay retained new counsel, eventually signing a settlement agreement with Locklear. The settlement agreement provided for $1,739,000 in damages, based on the $500 TCPA prescribed statutory damages for each of the 3,478 class members. The district court approved the settlement.

In a separate action, Standard filed for declaratory relief in Illinois state court against Lay and Locklear, claiming it owed no duty to defend, insure or indemnify Lay against the underlying action. The state trial court granted summary judgment in favor of the insurer, holding the TCPA statutory damages as penal and uninsurable. The grant of summary judgment was affirmed by the state intermediate appellate court and appealed, by Lay, to the Illinois Supreme Court.

On appeal, the Illinois Supreme Court considered whether the TCPA imposes punitive damages as a penal statute, rendering damages uninsurable under Illinois law as violative of public policy.

Similar to the law of several other US states, punitive damages are uninsurable in Illinois. However, the Illinois Supreme Court found the TCPA to be a remedial, not a penal, statute. Since the statutory damages were not punitive, they were found insurable under Illinois law. In making this determination, the Court noted that:

The Supreme Court also held that because Lay's defense in the underlying class action lawsuit was not prejudiced by Standard's reservation of rights letter, principles of estoppel did not prevent Standard from asserting policy coverage defenses in the declaratory action.

Commercial general liability insurance policy holders, and potential policy holders, should be aware of the growing split among authority as to whether the TCPA is a remedial statute plainly assessing statutory damages or a penal statute assessing punitive damages. Companies should look to state law to determine whether potential TCPA violations will be covered under their commercial general liability insurance policies in order to manage coverage expectations.

For more information about insurance policies and coverage generally, see:

For more information about direct marketing through fax machines, see Practice Notes: