Insurance PolicyBucking the prevailing trend of courts throughout the country, the Supreme Court of the State of Illinois recently held that damages under the Telephone Consumer Protection Act of 1991 (“TCPA”) are meant to be remedial in nature and not punitive.  The holding has clear implications for businesses that find themselves subject to TCPA litigation and the companies that insure those businesses.  Importantly, the Illinois State Supreme Court decision could mark a shift in how courts view TCPA damages and an insurer’s obligation to cover TCPA claims.

Standard Mutual Insurance Co. v. Lay

In Standard Mutual Insurance Co. v. Lay, the Illinois Supreme Court was asked to decide if the insurer was under any obligation to cover both litigation costs and the settlement achieved in a separate TCPA class action brought against the defendant, Ted Lay Real Estate Agency (“Lay”), by Locklear Electric, Inc. (“Locklear”).  Locklear alleged that Lay was guilty of “fax blasting” (a marketing mechanism by which thousands of facsimile advertisements are sent to people and/or businesses).  The class consisted of 3,478 members.  Ultimately, Locklear and Lay settled the class action for a sum total of $1,739,000.00.  Pursuant to the settlement, Locklear would seek satisfaction of the award only from Lay’s insurance policies.  The insurer, however, contested the assertion that the class action was covered by the policy because the TCPA “may constitute a penal statute” and Lay’s insurance policies (as many do) excluded coverage for willful violations of penal statutes.

The Illinois Supreme Court ultimately held “that the TCPA is a remedial and not a punitive statute, and that the $500 liquidated damages per violation are not punitive damages.”  Accordingly, to the extent the insurer attempted to avoid coverage of the TCPA class action claim because the statute is penal in nature, the Illinois Supreme Court ruled that it is not.  The court reasoned that the $500 fixed amount “clearly serves more than purely punitive or deterrent goals” and that the ability to obtain treble damages separate from $500 in liquidated damages “indicates that the liquidated damages serve additional goals than deterrence and punishment and were not designed to be punitive in nature.”

Prior Decisions Held TCPA Damages to be Punitive

The Illinois Supreme Court acknowledged that other courts previously ruled that the TCPA is a punitive statute.  The United States District Court for the District of Colorado, the United States Court of Appeals for the Tenth Circuit and the New York State Appellate Division, respectively, have all held that the TCPA-prescribed damages of $500 per violation constitute penal or punitive damages.  Those handful of courts, however, are in direct conflict with the United States Courts of Appeals for the Eleventh and Third Circuits, the United States District Court for the Eastern District of Pennsylvania and the Ohio State Court of Appeals, all of which have previously (and more recently) held that the TCPA is remedial in nature.

Be Aware

Most insurers deny coverage if the insured is accused of violating, or has been found liable under, a penal statute.  In light of this ruling, insurers will find it more difficult to deny coverage of TCPA claims on the basis of the penal or punitive nature of the statute.  To the extent that more courts find that the TCPA-prescribed damages are remedial in nature, insurers will be compelled to provide coverage in TCPA actions.  Remember that if your business is served with a complaint alleging a TCPA violation, it is important to immediately contact your insurer to submit a claim even if the insurer may deny coverage.

If you are interested in learning more about this topic or if you have been served with legal process relating to the TCPA, please e-mail us at info@kleinmoynihan.com or call us at (212) 246-0900.

The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney.  Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.

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