March 3, 2015
Practice Groups:
A Primer on Insurance Coverage Issues
under the Telephone Consumer Protection Act
Consumer Financial
Services;
U.S. Consumer Financial Services Alert
Insurance Coverage;
By: Steven P. Wright, Gregory N. Blase, and Samantha A. Miko
Financial Institutions
and Services
Litigation;
I. Introduction
Global Government
Solutions
In the past several years, plaintiffs’ attorneys around the country have exploited a onceunknown 1991 law, the Telephone Consumer Protection Act (“TCPA”), to obtain headlinegrabbing, multimillion-dollar judgments and settlements from some of the country’s largest
financial services companies. Because financial services companies are often required to
communicate with customers by telephone, these companies have attracted an undue
amount of attention from the TCPA plaintiffs’ bar. Seemingly, each new day brings another
lawsuit or settlement, and so, it is no surprise that the TCPA remains a hot topic in the
financial services and related industries. In this alert, we explore current trends in insurance
coverage claims attendant to TCPA class action claims.
II. Background
Congress enacted the TCPA in 1991 to address what it perceived as the growing problem of
unsolicited telemarketing that made use of emerging technologies such as fax machines and
automatic dialing systems to reach greater numbers of people than was previously possible.
In general, the TCPA’s restrictions on calls vary depending on whether (a) the call is made to
a wireless or residential line and (b) the call is informational or conveys a telemarketing or
advertising message.
With respect to informational calls made to wireless lines, the TCPA states that it is unlawful
to make a call using “artificial or prerecorded voice;” or an “automatic telephone dialing
system” (“ATDS”) without the called party’s prior express consent. Calls to wireless lines
using an ATDS or artificial/prerecorded voice that introduce advertising or constitute
telemarketing require the prior express written consent of the called party.
With respect to calls placed to residential telephone lines, the TCPA states that it is unlawful
to make an artificial/prerecorded voice call without the prior express consent of the called
party. In 2005, however, acting under its statutory authority, the Federal Communications
Commission (“FCC”) ruled that the restriction on artificial/prerecorded voice calls to
residential lines applies only to “commercial purpose” calls. That is, an artificial/prerecorded
voice call to a residential line does not violate the TCPA if, among other characteristics, the
call “is not made for a commercial purpose” or “is made for a commercial purpose but does
not include or introduce an advertisement or constitute telemarketing.”
A. ATDS
The statute defines an ATDS as “equipment which has the capacity to store or produce
telephone numbers to be called, using a random or sequential number generator; and to dial
A Primer on Insurance Coverage Issues
under the Telephone Consumer Protection Act
such numbers.” The FCC has taken the position that a “predictive dialer” is an ATDS and,
therefore, covered by TCPA to the extent that it has the capability of dialing numbers
randomly or sequentially. The FCC defines a “predictive dialer” for these purposes as
equipment that (a) dials numbers and, when certain computer software is attached, predicts
when an agent will be available to take calls, and (b) consists of hardware that, when paired
with certain software, has the capacity to store or produce numbers and dial those numbers
at random, in sequential order, or from a database of numbers.
Whether a predictive dialing system qualifies as an ATDS is a fact-bound determination.
Several courts have taken an expansive view of the FCC’s position, and have found that a
dialing system may be considered an ATDS so long as there is a theoretical possibility that
the system may have the capacity to dial numbers randomly or sequentially. Other decisions
have taken a more pragmatic view, however, and have declined to find the existence of an
ATDS where the relevant system would require significant modification to “have the capacity”
to dial randomly, sequentially, or in a predictive fashion.
B. Prior Expess Consent
The TCPA does not define the term “prior express consent”; in its 1992 Order, however, the
FCC ruled that “persons who knowingly release their phone numbers have in effect given
their invitation or permission to be called at the number which they have given, absent
instructions to the contrary.” And in a subsequent Declaratory Ruling, the FCC stated that
“autodialed and prerecorded message calls to wireless numbers provided by the called party
in connection with an existing debt are made with the ‘prior express consent’ of the called
party” and, therefore, “such calls are permissible” under the TCPA. The FCC reasoned that
“the provision of a cell phone number to a creditor, e.g., as part of a credit application,
reasonably evidences prior express consent by the cell phone subscriber to be contacted at
that number regarding the debt.” A number of federal courts have concluded, therefore, that
where a consumer provides a cellular number to a creditor as a “home” number or as the
only number, the consumer has provided prior express consent to be called on the cellular
number for purposes of the TCPA.
In February 2012, the FCC issued rules with respect to telemarketing calls that are covered
by the TCPA. In particular, as to any telemarketing communication covered by the TCPA
made on or after October 16, 2013, the party making the call must first obtain “prior express
written consent” from the called party. The FCC regulations set forth the specific
requirements for obtaining such consent and for providing required disclosures.
C. Private Right of Action under the TCPA
The TCPA provides a private right of action under which a plaintiff may recover the greater of
actual monetary loss or $500 per violation. A court may treble the amount of damages upon
a finding of a “willful or knowing” violation. The TCPA places no cap on damages for claims
brought individually or as a class action, so the number of potential violations can mount
quickly.
III. Insurance Coverage for TCPA Claims
Companies and individuals facing TCPA claims have sought insurance coverage for defense
costs, as well as the costs of judgment or settlement, under at least three different kinds of
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A Primer on Insurance Coverage Issues
under the Telephone Consumer Protection Act
insurance policies, commercial general liability (“CGL”) policies, errors and omissions
(“E&O”) or professional liability policies, and Directors and Officers (“D&O”) liability policies.
As discussed below, although policyholders have had some success securing coverage
under these policies, insurers are increasingly challenging coverage for TCPA claims or
outright excluding TCPA liability under their policies. In light of this changing landscape,
policyholders should consider their risks and, where appropriate, consider securing policies
that specifically cover TCPA liability. The key insurance coverage considerations for
traditional policies are considered below, along with a brief discussion on alternative policies.
A. Coverage for TCPA Violation Claims under Commercial General Liability
Policies
CGL policyholders have historically argued for coverage on the grounds that TCPA claims
typically allege either “advertising injury” or “property damage,” which types of injury are
generally within the scope of CGL policies. As to both types of injuries, insurers have argued
that TCPA claims should not be covered because the damages available under the TCPA
amount to penalties, which are not covered under most CGL policies.
1. Advertising Injury and Violations of Right to Privacy
Policyholders have often sought coverage for TCPA claims under the advertising injury
provision in standard CGL policies. This provision usually provides that the insurer will cover
damages the policyholder is legally obligated to pay as a result of any “personal and
advertising injury.” Personal and advertising injury is typically defined to include “oral or
written publication, in any manner, of material that violates a person’s right to privacy.” Most
courts have found that fax and text fax transmissions amount to a “publication.” As a result,
a court’s decision as to whether coverage exists frequently turns on whether the court finds
that there has been a violation of a person’s “right to privacy.”
The majority of courts deciding this issue have found that a consumer’s right to privacy
encompasses not only a right to secrecy but also a right to seclusion; these courts have,
accordingly, ruled that because unsolicited faxes intrude on the recipient’s right to seclusion,
insurers are obligated to defend suits based on TCPA violations. For instance, in Penzer v.
Transportation Insurance Co., 29 So. 3d 1000, 1007 (Fla. 2010), the Florida Supreme Court
held that the right to privacy included a right to seclusion, and that, therefore, a TCPA claim
based on the sending of unsolicited faxes was covered as an advertising injury under the
applicable policy. Id. Similarly, in a recent “fax-blast” case, the Illinois Court of Appeals
found that there was advertising coverage under the policy’s “personal and advertising injury”
provision because the faxes were sent without the permission of the recipients in violation of
their right to privacy. Standard Mut. Ins. Co. v. Lay, No. 4-11-0527, 2014 WL 272773 (Ill;
App. Ct. Jan. 23, 2014).
Other courts have disagreed. For instance, in American States Insurance Co. v. Capital
Associates of Jackson County, Inc., 392 F.3d 939, 943 (7th Cir. 2004) (purporting to apply
Illinois law), the Seventh Circuit held that a TCPA claim based on unsolicited faxes was not
covered because it did not allege an advertising injury. Id. In that case, the policy defined
“advertising injury” to include “[o]ral or written publication of material that violates a person’s
right to privacy.” In denying coverage, the court reasoned that the inclusion of the term
“publication” implied an intent to cover only acts that violated a person’s right to secrecy
rather than a right to seclusion. Id. at 942. Employing that rationale, it found that the
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A Primer on Insurance Coverage Issues
under the Telephone Consumer Protection Act
sending of faxes did not violate a person’s right to secrecy (i.e., no information of the
recipient was “published to the outside world”) and, therefore, did not amount to a cognizable
advertising injury under the policy. Id. Although the Seventh Circuit’s interpretation of Illinois
law is no longer controlling, its rationale has been followed in other jurisdictions. See, e.g.,
Resource Bankshares Corp. v. St. Paul Mercury Insurance Co., 407 F.3d 631, 640–41 (4th
Cir. 2005) (purporting to apply Virginia law).
2. Property Damage
Policyholders have also sought coverage for TCPA claims by arguing that unsolicited faxes
cause “property damage,” which is covered under CGL policies. For example, in Prime TV,
LLC v. Travelers Insurance Co., 223 F. Supp. 2d 744, 750 (M.D.N.C. 2002), the court found
that there was covered “property damage” because unsolicited faxes wasted paper and ink
and caused the recipient to lose the use of its fax machine during the transmission of the
offending faxes.
Other courts, while agreeing that loss of paper, ink, and the use of a fax machine constitute
property damage, have denied coverage for TCPA claims, relying on an exclusion for
intentional acts. This exclusion is found in most CGL policies, but there has been
disagreement across jurisdictions as to whether the exclusion applies to the sending of
unsolicited faxes. For instance, in American States Insurance Co., 392 F.3d at 943, the
Seventh Circuit 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. Conversely, in Prime TV, the court found that the insured did not know that the
recipient had not solicited the fax advertisement. 223 F. Supp. 2d at 752. Therefore, it held
that sending the fax was not an intentional act under the policy, and the TCPA claims were
not excluded from coverage. Id.
3. Penal Statute Exclusion
In some jurisdictions, courts have denied coverage for TCPA claims under common
provisions which exclude coverage for claims amounting to willful violation of a penal statute
or claims for civil penalties, fines, or assessments. As grounds for these decisions, courts
have determined that the TCPA should be considered a penal statute because it imposes
per-fax fines and the threat of treble damages. Other courts have held that these provisions
do not exclude TCPA claims on the grounds that the TCPA is a remedial rather than penal
statute. For instance, in Terra Nova Insurance Co. v. Fray-Witzer, 869 N.E.2d 565, 420
(2007) (applying New Jersey law), the court emphasized that the purpose of the TCPA is to
protect the privacy interests of consumers, and that the statutory remedy goes directly to the
fax machine owner who suffered the injury, rather than to the government. Id. For this
reason, it held that the statute was “remedial” in nature, even though the damages for
violations can grossly exceed the consumer’s actual harm. Id. The Illinois Supreme Court
recently agreed with this decision, holding that “[t]he manifest purpose of the TCPA is
remedial and not penal[,]” based on congressional intent. Standard Mut. Ins. Co. v. Lay, 989
N.E.2d 591, 599 (Ill. 2013).1 The court further explained that the possible imposition of treble
damages did not transform the TCPA into a penal statute, because damages under the
TCPA were “intended as a supplemental aid to enforcement rather than as a punitive
measure.” Id. at 600.
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A Primer on Insurance Coverage Issues
under the Telephone Consumer Protection Act
4. Current CGL Policies
Some newly issued CGL policies now routinely contain a specific exclusion for claims under
the TCPA. This exclusion typically contains language such as: “This insurance does not
apply to ‘bodily injury,’ ‘property damage,’ ‘advertising injury,’ or ‘personal injury’ arising
directly or indirectly out of any action [or] omission that violates or is alleged to violate the
Telephone Consumer Protection Act (TCPA), including any amendment of or addition to
such law.” Although insurers likely will argue that a TCPA-specific exclusion voids coverage
for any lawsuit that includes TCPA claims, policyholders should scrutinize carefully not only
the wording of the particular exclusion at issue, but also the underlying complaint against the
insured. If a complaint includes common law claims in addition to TCPA claims, the insurer’s
duty to defend may well extend to the entire suit. Further, even if the exclusion has some
applicability, defense costs (and settlement costs) may well be covered at least in part.
B. Coverage under E&O and D&O Policies
In addition to challenging the scope of TCPA specific exclusions in newer CGL policies,
policyholders facing TCPA claims are increasingly seeking coverage under other lines of
coverage. If the TCPA violation was carried out as part of the provision of professional
services, for example, claims arising from that violation could be covered under the
policyholder’s E&O policy. Similarly, if the TCPA claim at issue is directed at the conduct of
directors, officers, or other executives, coverage could be available under the entity’s D&O
insurance policy. Of course, in formulating their overall coverage strategies, policyholders
should take care to analyze their coverage positions through the prism of each potentiallyapplicable line of coverage.
Few TCPA coverage disputes under these other types of policies have made their way
through the courts since TCPA-related exclusions began to appear in CGL policies. In those
that have, policyholders have found some success in securing coverage, particularly under
their E&O policies. For instance, in Landmark American Insurance Co. v. NIP Group, Inc.,
962 N.E.2d 562, 567 (Ill. App. Ct. 2011), the policyholder, an insurance corporation, sought
coverage under its professional liability policy for defense of a TCPA class action for sending
unsolicited fax advertisements. Id. at 566. The insurer argued that the language of the
policy unambiguously established that this practice was not a covered professional service.
Id. at 568. The court noted that under Illinois law, these types of policies “generally provide
coverage only for those risks ‘inherent’ in the insured’s professional services.” Id. at 574. It
nevertheless found that because the policy listed several specific types of advertising as
excluded from coverage but did not explicitly exclude the transmission of unsolicited faxes,
the policy must “at least potentially cover[]” the TCPA claims in the underlying action. Id. at
576.
A court in a different jurisdiction came to the opposite conclusion. See BCS Ins. Co. v. Big
Thyme Enterprises, Inc., No. 3:12-CV-933-JFA, 2013 WL 594858, at *3 (D.S.C. Feb. 14,
2013). In that case, agents of Blue Cross and Blue Shield of South Carolina sought
coverage under their agents’ and brokers’ professional liability policy for TCPA violations
arising from distribution of unsolicited fax advertisements. Id. at *1. The policy limited
coverage to claims for “Wrongful Act[s] involving Professional Services.” Id. at * 2. The
policyholders argued that “advertising is an integral component of an insurance agent’s
livelihood” and that sending fax advertisements “requires the professional to design and/or
approve an advertisement that complies with laws and rules governing his or her profession
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A Primer on Insurance Coverage Issues
under the Telephone Consumer Protection Act
and further to determine how to best disseminate the information to the targeted audience.”
Id. at *4. The insurer argued, and the court agreed, that the act of sending fax
advertisements did not qualify as professional services under the terms of the policy. Id. at
*3.
Coverage under D&O policies for TCPA violations remains a largely untested question. In
one notable fax-blast case, Resource Bank v. Progressive Casualty Insurance Co., 503 F.
Supp. 2d 789, 797 (E.D. Va. 2007), the court denied coverage. The D&O policy at issue in
that case included a property damage exclusion and specifically barred coverage for claims
based on “invasions of privacy.” Id. at 793. Relying on the exclusion, the court found that
there was no coverage for TCPA claims under the D&O policy. Id. at 795.
In another recent case, LAC Basketball Club, Inc. v. Federal Insurance Co., 2014 WL
1623704 (C.D. Cal. Feb. 14, 2014), a different federal court came to the same conclusion.
Id. at *2. The LAC Basketball Club case concerned a putative class action filed by a patron
of the Los Angeles Clippers. Id. During its basketball games, the Clippers solicited patrons
to send text messages that would then be posted on a scoreboard for view by the live
audience. Id. The patron took the Clippers up on their solicitation, and afterward he
allegedly was bombarded with text message spam advertisements. Id. In denying
coverage, the court held that the “invasion of privacy” exclusion in the Clippers’ D&O policy
barred coverage. Id. at *4-5. In coming to its decision, the court found that it did not matter
that the patron’s complaint did not allege an invasion of privacy on the Clippers’ part,
because a violation of the TCPA in of itself inherently amounts to an invasion of privacy. Id.
C. Conclusion
The TCPA continues to represent significant risk for companies that solicit business or
communicate with customers and potential customers by telephone, fax, or text message.
Although recent decisions suggest that CGL policies provide coverage for TCPA claims,
insurers have successfully pushed for language in many recent CGL policies expressly
excluding coverage for TCPA claims. Similarly, insurers have shown a willingness to dispute
coverage under E&O and D&O policies and have found a certain degree of success on this
front, especially by relying on “invasions of privacy” exclusions in D&O policies.
Nevertheless, in light of possible substantial exposure under the TCPA and the substantial
costs associated with defending TCPA class actions, policyholders should carefully consider
their potential coverage rights when faced with TCPA claims and not accept blindly an
insurer’s denial of coverage. Further, policyholders should work closely with their brokers
and insurers to secure coverage broad enough to encompass future TCPA claims. By way
of example, in certain circumstances, insurers will take on at least of portion of the risks
associated with TCPA claims through media liability policies or other specialty policies,
including cyber-liability policies, which can be designed to cover communications that result
from a breach of the insured’s computer system. Of course, policyholders should closely
review these new policies and, where appropriate, seek the assistance of coverage counsel
to maximize potentially-available coverage for TCPA claims and the significant damages that
can flow from TCPA violations.
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A Primer on Insurance Coverage Issues
under the Telephone Consumer Protection Act
Authors:
Steven P. Wright
steven.wright@klgates.com
+1.617.261.3164
Gregory N. Blase
gregory.blase@klgates.com
+1.617.951.9059
Samantha A. Miko
samantha.miko@klgates.com
+1.617.951.9246
1
The Illinois Supreme Court remanded Standard Mut. Ins. v. Lay to the intermediate appellate
court for further review of additional coverage defenses asserted by the insurer, which resulted in
the appellate court decision discussed above finding coverage for TCPA claims under the
“advertising injury” provision of CGL policies. The appellate court’s subsequent decision, which is
addressed above in the context of advertising injury, and the Illinois Supreme Court decision, are
the subject of another K&L Gates client alert. See Thomas M. Reiter, R. Bruce Allensworth, Brian
M. Forbes & Sara N. Brown, “Laying Down the Law: Illinois Appellate Courts Confirm Insurance
Coverage in TCPA Cases,” K&L Gates (Feb. 18, 2014), http://www.klgates.com/laying-down-thelaw-illinois-appellate-courts-confirm-insurance-coverage-in-tcpa-cases-02-18-2014/.
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Consumer Financial Services Practice Contact List
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