Archive for the ‘TCPA’ Category

Just the Fax: Illinois Appellate Court Concerned That TCPA Settlement Between Insured and Class Action Plaintiffs May Be Collusive

Thursday, October 16th, 2014

By Michael J. McNaughton, Sedgwick Chicago

An all too familiar scenario: an insurer believes there is no coverage for a claim, but has a duty to defend its insured. In these situations, an insurer often pays for the insured’s independently-selected defense counsel and seeks declaratory judgment regarding coverage. But after the insurer surrenders control of the defense, it may also surrender the right to control a subsequent settlement. What happens if the insured seeks coverage for the settlement, but the insurer considers it unreasonable?

The Illinois Appellate Court recently addressed this scenario in Central Mutual Ins. Co. v. Tracy’s Treasures, Inc., 2014 IL App (1st Dist.) 123339 (September 2014). The Court considered whether coverage existed for the Idlas Telephone Consumer Protection Act (“TCPA”) class action settlement, and if the insurer could challenge the reasonableness of the settlement negotiated by the insured’s independent counsel.

In Idlas, Tracy’s Treasures, Inc. allegedly advertized its business services through unsolicited fax advertisements to a class of plaintiffs in violation of the TCPA. Central Mutual insured Tracy’s Treasures through primary and excess liability policies which contained $14 million in available limits. Central Mutual declined coverage in Idlas but provided the insured a “courtesy” defense. Central Mutual also filed a timely declaratory judgment against the insured seeking a determination of coverage. The insured obtained its own independent counsel in Idlas in light of the conflict with Central Mutual. Central Mutual consented to the substitution of counsel and agreed to pay a reasonable fee for his services.

The insured’s independent counsel did not disclose to Central Mutual that he had started settlement negotiations in Idlas a month before identifying himself to the insurer. Shortly thereafter, the insured filed a motion for preliminary approval of a settlement agreement in Idlas on behalf of the class, and participated in the subsequent fairness hearing. The insured’s counsel did not notify Central Mutual of these events. In the proposed Idlas settlement, the insured agreed to pay $14 million, collectible only against Central Mutual. Although the Idlas complaint defined the putative class to include persons who allegedly received unsolicited faxes from March 5, 2003 through March 5, 2007, the proposed settlement defined the class for the period from September 1, 2002 through July 22, 2003. Although no class members prior to July 22, 2003 came forward, the revised class definition triggered an additional $5 million excess policy issued by Central Mutual. Only 5,561 putative class members – roughly 4% of the total class – received the class settlement notice.

The circuit court approved the $14 million Idlas settlement. Plaintiff’s counsel would receive one-third of the amount collected from Central Mutual, plus costs. Each class member who submitted a claim would receive a pro rata share of the collected amount, not to exceed $500 pursuant to the TCPA. The plaintiff (and only class representative) would receive $9,500, nineteen times more than the potential recovery of every other class member. Unclaimed funds would be given to charitable organizations approved by the Court.

On Central Mutual’s motion for summary judgment in the coverage action, the court held amounts awarded to claimants under the TCPA were punitive in nature and not insurable as a matter of public policy based on the precedent set in Standard Mutual Ins. Co. v. Lay, 2012 IL App (4th) 110527. The insured appealed when Lay was subsequently reversed by the Illinois Supreme Court, which held sums recovered by TCPA claimants were liquidated rather than punitive damages.

Central Mutual raised the following issues on appeal to the Court: (1) although it conceded the applicability of the Illinois Supreme Court’s reversal in Lay, liquidated damages were not covered as a matter of law under its policies; (2) there was no coverage for the Idlas settlement because Central Mutual and the insured had already carved out personal and advertising injury from the relevant policies as part of a settlement for a prior TCPA lawsuit against the insured; and (3) the $14 million settlement was collusive and unreasonable as a matter of law.

The Court ruled in favor of the insured on the first two issues. First, it held the insurer should have included policy language that excluded sums for statutory penalties if it had wanted to avoid coverage for liquidated damages. Next, the Court noted that the confidential carve-out agreement between Central Mutual and the insured was not included as part of the appellate record. Even if available, the Court could not determine as a matter of law that the amount paid by Central Mutual was adequate consideration for the carve-out of personal and advertising injury coverage in its policies. The Court remanded for further consideration.

The primary focus of the Central Mutual decision was the issue of whether the Idlas settlement was collusive and unreasonable. The Court first addressed whether Central Mutual could challenge the settlement. Because Central Mutual “surrendered control of the defense,” the Court determined it also surrendered the right to rely on policy provisions which required its consent to settle. The Court indicated, however, that Central Mutual could still challenge the Idlas settlement because it had filed a declaratory judgment against the insured to preserve its coverage positions and provided a defense by paying reasonable fees for the insured’s independent counsel. Moreover, the Court recognized Central Mutual had been denied the opportunity to be heard on the reasonableness of the Idlas settlement. Although the Court could not hold the settlement collusive and unreasonable as a matter of law, it agreed with the trial court that the facts and circumstances regarding the settlement were “very troubling.” It remanded for further findings on whether the insured’s decision to settle and the settlement amount were both reasonable. The Court also provided guidance on the standard of reasonableness.

To determine if the insured’s decision to settle was reasonable, the trial court must examine the totality of the circumstances and whether the decision conformed to the standards of a prudent uninsured. The Court indicated that the trial court should consider whether a prudent uninsured would have: (1) foregone the opportunity to litigate potential defenses in light of the potential cost and chance of success; (2) sought contribution or indemnification from third-parties; (3) agreed to settle on terms which allowed unclaimed funds to be donated to charity; and (4) considered whether it truly faced “staggering” liability in Idlas from a “practical perspective” in light of the limited number of people notified of the class action and the trial court’s discretion to fashion a class action reward deterring future violations without destroying the insured’s business.

To determine if the amount of the settlement was reasonable, the trial court must examine what a reasonably prudent person in the position of the insured would have settled for on the merits of Idlas’ claim. The Court also stated this test was guided by a “commonsense consideration of the total facts bearing on liability and damage aspects of the plaintiff’s claim.” The Court stated the trial court should consider many of the same factors in its analysis to determine whether the Idlas settlement was reasonable, and further consider: (1) whether the settlement was the product of arm’s length negotiations; (2) what facts were available to the insured’s independent counsel which allowed him, in relatively short time, to value the Idlas claims at over $60 million with only a single class representative; (3) how the parties arrived at a $14 million settlement figure; and (4) any evidence showing there was bad faith, collusion or fraud.

An important takeaway from Central Mutual is to be mindful that the independent counsel’s sole obligation is to the insured. In its arguments, Central Mutual criticized the insured’s independent counsel for misrepresenting plans regarding the defense and settlement of Idlas. Although the Court recognized the insured’s counsel had attempted to “short circuit” Central Mutual’s ability to learn of or challenge the settlement, it also affirmed independent counsel had no duty to the insurer. Accordingly, an insurer should consider retaining monitoring counsel to protect its own interests after providing independent counsel for the insured.

Click here for additional posts on TCPA coverage actions.

TCPA Exclusion Upheld: No Ambiguity, No Duty to Defend or Indemnify for a $10 Million Judgment

Tuesday, September 23rd, 2014

By Stephanie Sauvé and Carol Gerner, Sedgwick Chicago

In James River Insurance Company v. Med Waste Management LLC, et al., Case No. 1:13-cv-23608-KMM, (U.S. Dist. S. D. Fla., September 22, 2014), the U.S. District Court for the Southern District of Florida upheld a Telephone Consumer Protection Act (“TCPA”) exclusion in a commercial general liability policy (“CGL”)  when it determined that there was no duty to defend or indemnify an insured for a $10 million judgment arising out of the settlement of an underlying class action lawsuit (the “underlying lawsuit”).  Because the result would be the same under both Florida and New York law, the court concluded there was a “false conflict” regarding the interpretation of the policy and the exclusions in the case. 

 James River Insurance Company’s (“James River”) insured, Med Waste Management LLC (“Med Waste”), had contracted with another company to send a large number of unsolicited faxes advertising its services.  The recipient of one of the unsolicited fax advertisements filed a two-count complaint against Med Waste:  Count I alleged violations of  the TCPA and Count II alleged a claim for conversion.  The parties in the underlying lawsuit entered into a settlement agreement; a settlement class was certified and a judgment of $10 million was entered against Med Waste.

After receiving notice of the underlying lawsuit from Med Waste, James River denied coverage explaining that the TCPA claims and the conversion claims in the underlying lawsuit were excluded from coverage.  The CGL policy issued by James River provided coverage for “Bodily Injury and Property Damage” and “Personal and Advertising Injury Liability” but precluded coverage for “Property Damage” and “Personal and Advertising Liability” arising directly or indirectly out of any action or omission that violates or is alleged to violate the TCPA (“TCPA Exclusion”).  The policy also precluded coverage for any claim arising out of the conversion, or misappropriation, of others’ funds or property (“Conversion Exclusion”).

After James River denied coverage, it subsequently filed the declaratory judgment action seeking a ruling that it owed no duty to defend or indemnify Med Waste, as the policy’s TCPA Exclusion and Conversion Exclusion precluded coverage.  James River and Med Waste filed cross-motions for summary judgment.

After foregoing a choice of law analysis and finding no conflict between New York law and Florida law (Med Waste is a New York Company and the policy was issued in New York; the declaratory judgment action was filed in the Southern District of Florida), the court ruled that the TCPA Exclusion unambiguously excluded coverage for both the TCPA claims and the conversion claims and, therefore, James River owed no duty to defend or indemnify Med Waste for the $10 million judgment under New York law or Florida law.  The court found that, “[t]here is nothing ambiguous about the TCPA exclusion.” The court also found that, even if the conversion claims were not excluded from coverage by the TCPA Exclusion, they would be excluded under the “unambiguous” Conversion Exclusion. 

Click here for additional Insurance Law Blog articles related to insurance coverage for violations of the TCPA.

Could an Insurer’s Declaratory Judgment Action Waive the Right to Participate in Settlement in Illinois?

Friday, February 21st, 2014

By Kirk C. Jenkins, Sedgwick Chicago

An insurer offers its insured a defense under a reservation of rights and files a complaint seeking a declaratory judgment determining coverage.  This is not an uncommon sequence of events, either in Illinois or anywhere else.  But does the insured then have the right to settle the case on its own, without the insurer’s consent?

Until recently, the answer under Illinois law has been clear: No.  But in a decision published in the last days of January, the Appellate Court for the Fourth District cast doubt on that conclusion.

Standard Mutual Insurance Company v. Lay was one of the Illinois Supreme Court’s major decisions of last year.  Our coverage of the decision is here.  Our report on the oral argument before the Supreme Court is here.

The defendant was a small real estate agency in Girard, Illinois.  The defendant hired a fax broadcaster to send a “blast fax” advertising a particular listing to thousands of fax machines.  The broadcaster claimed that each potential recipient had consented to receiving the faxes, and the defendant trusted the broadcaster’s word.  The problem was apparently it wasn’t true.

Enter the Telephone Consumer Protection Act of 1991, 47 U.S.C. § 227.  The statute imposes a penalty of $500 for each unsolicited fax sent, which is trebled for willful violations.  So the defendant was hit with a putative class action complaint, alleging willful violations of the TCPA, conversion and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2.

The defendant tendered to its insurer, which accepted under a reservation of rights.  The insurer offered the defendant a defense (while noting its potential coverage defenses and the arguable conflict of interest).  The defendant signed the waiver of the conflict proferred by the insurer and accepted the attorney.

In mid-July 2009, the putative class action was removed to Federal court.  Not long after, the owner of the defendant real estate agency died, and his widow received letters of office.  In late October, at the widow’s behest, a new lawyer wrote to the lawyer hired by the insurer, explaining in great detail the conflict between the insurer and the insured (which the insured had waived) and asking the lawyer to withdraw.  The lawyer hired by the insurer never withdrew, but a few weeks later, the new attorney and the insured signed a settlement agreement.

In 2010, the settlement agreement was filed and ultimately approved.  It provided for a payment of $1,739,000: $500 per fax for each and every one of alleged 3,478 recipients.  Given that a finding of willful conduct – the necessary prerequisite to trebling – would have vitiated insurance coverage, this “settlement” amounted to the insured voluntarily paying 100 cents on the dollar on the case.  In return, the class representative agreed not to execute on any of the defendant’s assets, and seek to recover solely from the insurer (the covenant not to execute remained valid whether or not the insurer’s policy was adjudicated to cover the policy).

In mid-2011, the trial court granted the insurer summary judgment in the declaratory judgment action, finding that TCPA damages were in the nature of punitive damages and thus uninsurable.  The Supreme Court allowed a petition for leave to appeal and reversed on that point.  The Court remanded back to the Fourth District for consideration of the remaining issues – including whether the insured had breached the policy by settling without the insurer’s consent.

The Fourth District originally issued its opinion reversing the Circuit Court in late November 2013, but later granted a motion for publication.  The published opinion appeared January 25, 2013.

The court found that all three policies at issue covered the defendant’s “settlement.”  One expressly related to the real estate business.  The two remaining policies related to rental premises or vacant lots owned by the insured, but neither included “designated premises” limitations.

The insurer argued that the settlement was excluded from coverage by the professional services exclusion, but the Appellate Court disagreed.  The real estate agency was not a professional advertiser, the court pointed out.  The court specifically held that the TCPA damages were covered by both the property damage coverage and the advertising injury coverage.

But the most important part of the ruling came in two paragraphs on the final page of the opinion.  The court noted that where an insurer had provided an attorney pursuant to a reservation of rights, noting the potential conflict of interest, “the insured is entitled to assume control of the defense.”  At that point, the court held, the insurer lost the right to prevent the insured from unilaterally settling: “When an insurer surrenders control of the defense, it also surrenders its right to control the settlement of the action and to rely on a policy provision requiring consent to settle.”  The court cited Myoda Computer Center v. American Family Mutual Insurance Co. in support of its holding.  The insured’s liability was “clear,” the court commented, the settlement amount “was supported by simple math,” and “[a]bsent the settlement, the result would have been the same.”  Therefore, the court held, the insurer was liable for the full amount.

The insurer has petitioned the Supreme Court for leave to appeal the case once again.  A copy of the insurer’s petition is here.  There, the insurer pointed out the grave implications of the Appellate Court’s holding approving of the insured’s behavior: “The Appellate Court’s decision sanctions an insured rolling over on its insurer anytime a defending insurer reserves its rights and files a declaratory judgment action.”  The Appellate Court had simply gotten the law wrong, the insurer argues.  Myoda involved an entirely different situation, where the insurer had allowed the insured to choose its own counsel from the outset, merely reimbursing costs.  The insurer had been told of a prospective settlement and flatly refused to participate – something which never happened in Standard Mutual.  The insurer argued that pursuant to long-settled Illinois law, absent a breach of the duty to defend, an insurer has every right to insist on the right to approve of and participate in settlement.

The insurer offers this powerful argument for the potential for abuse of TCPA litigation inherent in the Fourth District’s decision:

[T]arget a defendant, ensure that it carries insurance coverage, offer the defendant a deal where it can walk away unscathed and in the process obviate the need for any proof that offending faxes were ever received, and cash in on the defendant’s insurance policies.  This game of ‘gotcha’ prejudices insurers which seek to honor their obligations while at the same time exercising their right to walk into court and seek a judicial declaration of their coverage.

The Fourth District’s holding on remand in Standard Mutual is a significant potential threat to insurers operating in Illinois.  The insurer in Standard Mutual appears to have done everything right pursuant to a policy which expressly barred settlement without its consent: it provided (and paid for) counsel, carefully noted and reserved its coverage defenses and explained the potential conflict of interest, and offered the insured the opportunity to waive the conflict – which it did.  The insurer then exercised its clear right to seek a judicial determination of coverage.  As a result, the insurer was held liable for a 100-cents-on-the-dollar “settlement” entered into unilaterally by the insured.

The Supreme Court should allow this new petition for leave to appeal in Standard Mutual Insurance Co. v. Lay and hold that insurers do not authorize collusive settlements by their insured simply by virtue of proceeding pursuant to their rights under the policy.

 

It’s All in the Delivery – Proper Renewal Saves Millions

Friday, February 14th, 2014

By Carol Gerner, Sedgwick Chicago

In Windmill Nursing Pavilion Ltd. v. Cincinnati Ins. Co., (No. 1-12-2431), the Illinois Court of Appeals concluded that under Ohio law, Cincinnati Insurance Company (“Cincinnati”) provided sufficient notice to its insured, Unitherm, Inc. (“Unitherm”), of renewal terms that added an exclusion for alleged violations of the Telephone Consumer Protection Act of 1991 (“TCPA”). Accordingly, the court affirmed the trial court’s decision granting partial summary judgment in favor of Cincinnati on the validity of the TCPA exclusion. As a result, Cincinnati did not have to pay $4 million out of a $7 million consent judgment.

Windmill Nursing Pavilion, Ltd. (“Windmill”) filed a class action complaint alleging that Unitherm violated the TCPA by sending unsolicited fax advertisements to it in November 2005 and in late April 2006. At the time Unitherm sent the faxes, it carried commercial general liability and umbrella liability coverage through Cincinnati. The original policy expired before the April 2006 faxes were sent. The renewal policy contained a modification that excluded coverage for “bodily injury,” “property damage,” or “personal and advertising injury” arising out of “any act or omission” that violated the TCPA.

Windmill, Unitherm, and Cincinnati entered into a settlement agreement resolving the class action. The parties agreed to a $7 million consent judgment against Unitherm, which was collectible from Cincinnati under the insurance policies. Cincinnati agreed to provide an initial settlement fund of $3 million, which represented the combined general aggregate and umbrella limits under the original policy. The settlement agreement also provided that Cincinnati’s obligation to pay any further portion of the judgment balance would depend on the outcome of two “carved-out” issues. One of those issues was whether Cincinnati’s notice of reduction in coverage to Unitherm regarding the TCPA exclusion (added to the renewal policy) was sufficient.

The appellate court agreed with the trial court’s ruling that Ohio law applied in the case, and Cincinnati’s notice of a coverage exclusion complied with that state’s insurance law, defeating Windmill’s request to have Cincinnati pay the remaining $4 million of the settlement.

The decision is instructive on several levels. First, when issues of coverage are involved at the time of settlement of the underlying litigation, a settlement may be negotiated which reserves the right to address certain “carved-out” issues as was done in this case. In Windmill, the court found that the release did not preclude the parties from litigating the “carved-out” issues. Second, insurers should be mindful of any differences in statutory requirements for “renewal” as compared to “nonrenewal” situations. In this case, the court held that the notice provided with the renewal policy complied with Ohio law: it was on a separate page, attached to the policy, and was clearly worded regarding the change in coverage. In addition, because the underlying and umbrella policies were “bound together and share[d] the same policy number, the notice was sufficient for both.”

Windmill serves as a reminder that, when limiting coverage on renewal, an insurer should confirm which state’s law will apply to policy interpretation and ensure that it is complying with those specific statutory renewal requirements. As the decision demonstrates, doing the right thing can result in significant savings.

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