In First Mercury Ins. Co. v. CE Design, Ltd., 2016 IL App (1st) 143924-U (March 30, 2016), an Illinois appellate court held an insurer owed no coverage for a class settlement consisting of TCPA statutory damages falling within a $500 per claim deductible, TCPA treble damages falling within a policy exclusion for punitive or multiple damages and interest on uncovered amounts. The court harshly criticized TCPA class settlements, which it found have “everything to do with compensating the lawyers of the class,” and suggested trial courts base class action attorneys’ recovery on the actual amounts paid to class members, not on “disingenuous” estimates of an insured’s actual exposure.

The case arose out of a TCPA class action lawsuit filed by CE Design against Nationwide, which sought coverage under a commercial general liability insurance policy issued by First Mercury Insurance Company (FMIC). FMIC defended Nationwide under a reservation of rights and filed a separate declaratory judgment action. While the declaratory judgment action was pending, CE Design and Nationwide settled the case for more than $4 million ($1,000 per fax plus interest) and Nationwide assigned its rights to CE Design in exchange for a covenant not to execute.

The trial court held FMIC owed no coverage for the settlement based on the FMIC policy’s deductible liability provision and an exclusion that applied to punitive damages, penalties and multiple damages. The appellate court affirmed. Before doing so, the appellate court rejected CE Design’s argument that FMIC committed bad faith by refusing to settle the action. The court noted a claimant must plead a cause of action for bad faith failure to settle, and rejected CE Design’s attempt to pursue this unpled argument at the summary judgment. The court also rejected CE Design’s argument that FMIC was estopped from denying coverage and/or had breached the insurance contract, where FMIC defended its insured fully pursuant to a reservation of rights.

Turning to the coverage issues, the court found the settlement clearly consisted of $500 in TCPA statutory damages for each class member, $500 per fax in TCPA treble damages for each class member and prejudgment interest. While CE Design sought property damage coverage and advertising injury coverage, the FMIC policy provided a $500 “per claim” property damage deductible and a $500 “per claim” advertising injury deductible.

The court rejected CE Design’s argument that the phrase “per claim” was inherently ambiguous or was ambiguous in the context of a class action lawsuit. “Claim” clearly meant “a demand for money or legal remedy by a third party against the insured for damages caused by the insured’s conduct.” Moreover, a class action was not one claim, but many claims of many class members.

The court also noted the FMIC policy’s deductible endorsement explained that “per claim” meant a separate deductible applied for “each injured person or organization.” Each class member’s right to recovery was a separate claim, a separate deductible applied for each class member and the total deductible was therefore $1,835,500.

The court rejected CE Design’s argument that the settlement potentially triggered both advertising injury and property damage coverage. Based on the underlying factual record, the court concluded that the insured expected or intended the injury resulting from the fax. Noting that the deductible reduced the advertising injury limit and the amount of the deductible ($1,835,500) exceeded the applicable advertising injury limit ($1,000,000), the court held FMIC owed no coverage.

The court concluded that, even if it set aside the issue of the policy’s limits, there would still be no coverage. The FMIC policy included an exclusion for “punitive or exemplary damages, fines or penalties imposed by law, restitution or any damages which are a multiple of, or in addition to, compensatory damages….” The court noted that the Illinois Supreme Court in Standard Mutual Ins. Co. v. Lay suggested that TCPA treble damages were “a punitive measure.” The court further found TCPA treble damages (punitive or not) clearly fell within the exclusion in the FMIC policy because they constituted multiple damages. Therefore, the court held the exclusion barred coverage for the $1,835,500 in TCPA treble damages, the deductible applied to the $1,835,500 in TCPA treble damages, and the prejudgment interest was not covered.

While the court did not find it necessary to address FMIC’s argument that the settlement was unreasonable, it noted CE Design “made contradictory arguments, factual assertions that lack record support, and in general fails to provide explanation for why it raises certain points in argument.”

The court also expressed concern with the proliferation of TCPA class actions, which are “not about how the insureds face ruinous liability…or compensating members of the class. Rather, they have everything to do with compensating the lawyers of the class.” Echoing the same court’s sentiments in Central Mutual Ins. Co. v. Tracy’s Treasures, the court found the attorneys’ calculation of damages (the number of faxes times $500 or $1,500 per fax), was disingenuous because it did not take into account the low response rate from class members, which “can also perhaps be attributed to the method of reaching these class members which is yet another unsolicited fax or mailing which they will in all likelihood disregard as ‘junk.’”

The court described this process as a “charade,” directing trial courts to “insist that class attorneys fulfill their obligations to absent class members by going forward with the claims process, with the caveat that allowed claims will only be satisfied from the proceeds of insurance, if and when such proceeds are available.” After the claims process, a trial court could then “more realistically address the fee to which class counsel is entitled.”

NOTE: James A. Pinderski and Michael DiSantis represented First Mercury Insurance Company in this case.