Insurance Coverage For Blast Faxes

The past few months have seen an explosion in the number of lawsuits filed under the Telephone Consumer Protection Act, 47 U.S.C. '227 (2003) (TCPA), a federal statute that prohibits transmittal of unsolicited advertisements by fax without first obtaining the prior express invitation or permission of the recipient. These lawsuits ' particularly when filed as class actions ' expose defendants to substantial defense costs and the potential for large liabilities.

These TCPA lawsuits cases are, in turn, spawning disputes between TCPA defendants and commercial general liability (CGL) insurers as to whether policyholders are entitled to a defense and/or indemnity for TCPA claims under standard-form CGL policy. This article briefly explores these insurance coverage issues. It concludes that, given recent case law, policyholders have a strong chance of recovering their defense costs and any settlements or judgments in TCPA lawsuits.

The Telephone Consumer Protection Act

The TCPA was enacted to provide citizens with protection against invasion of privacy by the advertising activities of fax advertisers and other telemarketers. See, U.S. House Rep. No. 102-317, at 5-6 (Nov. 15, 1991); U.S. Senate Rep. No. 102-178, at 1 (Oct. 8, 1991). The TCPA provides that no one is to be harassed with advertising faxes unless he or she specifically solicits them. Hooters of Augusta, Inc. v. American Global Ins. Co., 272 F. Supp. 2d 1365, 1373 (S.D. Ga. 2003).

Courts have recognized that individuals at work in private businesses are entitled to expect that they will not be disturbed except by the personnel of business invitee, and accordingly have held that the TCPA applies to both individuals and businesses. Van Bergen v. Minnesota, 59 F.3d 1541, 1554 (8th Cir. 1995).

A recipient of an unsolicited fax advertisement may have a claim under the TCPA for statutory damages and injunctive relief. Each unsolicited fax advertisement is an independently actionable tort. The TCPA provides for minimum statutory damages of $500 per violation, and it allows for treble damages if the fax advertisement was sent willfully. 47 U.S.C. '227(b)(3). Courts have held that, for purposes of the TCPA, “willfully” means that the defendant acted voluntarily, regardless of whether the defendant knew that it was acting in violation of the statute. Betor v. Quantalytics, Inc., No. 465693, 2004 WL 22407121, at 1 (Ohio Com. Pl. Oct. 3, 2003)

TCPA claims are more and more frequently being brought as class actions, which are referred to as “blast fax” cases because they arise out of the defendants' alleged “blasting” of hundreds or thousands of recipients with faxes. In blast fax class actions, the defendant's exposure can easily be in the millions of dollars.

Insurance Coverage Under CGL Policies for TCPA Claims

CGL insurance policies typically provide for coverage for both “property damage” and “advertising injury.” These policies require the insurer to indemnify the policyholder against covered losses, liabilities or claims. The policies also often require the insurer to undertake the defense of covered claims.

The threshold issue in blast fax insurance coverage disputes is whether an allegation of the violation of the TCPA is, or could be, a covered loss. The burden of making this showing is on the policyholder. If such a showing is made, the burden then shifts to the insurer to show that the TCPA claim falls within some exclusion to coverage. In short, there is coverage if the claims fall within the scope of coverage defined in the policy and is not within an enumerated exclusion. Id.; Nearor v. Davis, 118 Ohio App. 806, 810, 694 N.E.2d 120, 122 (Ohio App. 1st Dist. 1997).

In determining whether there is coverage for a blast fax claim, a court must look to the language in the insurance contract itself and interpret the language in conformance with the general principles of insurance contract interpretation. See, eg, Cincinnati Ins. Co. v. Anders, 99 Ohio St. 3d 156, 158, 789 N.E.2d 1094, 1097 (2003) (a court must determine whether the underlying claims fall within the scope of the insured's policies' coverage in order to ascertain the insurer's duties). These general principles include presumptions that:

• A policy should be interpreted broadly in favor of coverage;
• Exclusions should be interpreted narrowly (see, eg, Am. States Ins. Co. v. Guillermin, 108 Ohio App. 3d 547, 565, 671 N.E.2d 317, 329 (Ohio App. 2d Dist. 1996)); and
• Any ambiguity should be interpreted in favor of the policyholder.

In addition, in construing policy language, the court should not focus on what the insurer intended the words to mean, but rather on how a reasonable person in the position of the policyholder would have understood the words to mean. See, eg, Sturgeon v. Dubois, Nos. 00AP-1024, 00AP-1025, 2001 WL 803898, at 3 (Ohio App. 10th Dist. July 17, 2001); Brescoll v. Nationwide Mut. Ins. Co., 116 Ohio App. 537, 543, 189 N.E.2d 173, 175 (Ohio App. 6th Dist. 1961).

Finally, it is well established that an insurer's duty to defend is separate and distinct from its duty to indemnify. See Erie Ins. Exchange v. Colony Dev. Corp., 136 Ohio App. 3d 406, 412, 736 N.E.2d 941, 946 (Ohio App. 10th Dist. 1999). The duty to defend is broader than the duty to indemnify ' the insurer generally must undertake the defense if the “four corners” of the complaint could fall within the “four corners” of the policy.

Coverage for a TCPA Claim as an 'Advertising Injury'

For a claim to fall within the “advertising injury” coverage of a CGL policy, the insured must show that: 1) the insured was engaged in “advertising activities;” 2) the underlying action alleges an enumerated “advertising injury” offense within the meaning of insurance policy; and 3) the underlying “advertising injury” was caused by the insured's “advertising activities.” See Bank of West v. Superior Court, 2 Cal. 4th 1254, 10 Cal. Rptr. 2d 538, 833 P.2d (1992). If the policyholder makes this showing, the insurer may then attempt to show that the claim falls within an enumerated exclusion to coverage.

The Policyholder Should be Able to Carry its Burden, Particularly When the Policy Covers Violations of the Right to Privacy

Although insurers likely will still dispute coverage in blast fax cases, two recent decisions bode well for policyholders, particularly when the policy provides coverage for the “oral or written publication of material that violates a person's right to privacy.” Western Rim Investment Advisers, Inc. v. Gulf Insurance Co., 269 F. Supp. 2d 836 (N.D. Tex. 2003); Hooters of Augusta, 272 F. Supp. 2d at 1372.

In Western Rim, the court found that an insured real estate investment company's act of faxing unsolicited advertisements, allegedly in violation of the TCPA, was potentially within a CGL policy's “advertising injury” coverage, defined in part as “oral or written publication of material that violates a person's right of privacy.” Id. (applying Texas law). The court also held that the policy at issue was not limited to claims made in a defamation context, ie, where the content of the transmitted material was harmful to a third person. Id.

Similarly, in Hooters of Augusta, a federal court held that an insured restaurant's transmittal of unsolicited advertisements via facsimile to various businesses, allegedly in violation of the TCPA, was a covered “advertising injury” within the meaning of a CGL. Id. at 1373 (applying Georgia law). According to the court, the alleged violation constituted “advertising injury” as defined by insurance policies, ie, written publication of material that violated a person's right of privacy, and the alleged injury was caused by the insured's advertising activity. Id.

Exclusions and Other Insurer Arguments Against Coverage

A central issue in TCPA insurance coverage cases may be whether the TCPA claims fall within the standard exclusion for claims that arise out of the “willful violation of a penal statute or ordinance committed by or with the consent of an insured.” This dispute will arise when the underlying plaintiff, in an effort to qualify for treble damages, will allege a “willful” violation of the TCPA.

When this issue arises, policyholders will have a strong argument that the exclusion does not apply because the TCPA has repeatedly been found bt courts to be a remedial ' not a penal ' statute. See, eg, Hooters of Augusta at 1375 (holding that the TCPA is not a penal statute, and concluding that the policy's exclusion for injuries arising out of “the willful violations of a penal statute” did not apply); Western Rim at 849 (finding that the TCPA is not a penal statute, and concluding that the policy's exclusion for injuries arising out of “the willful violation of a penal statute” did not apply); Jemiola v. XYZ Corp., No. CV-411237, 2003 WL 23010146, at 3 (Ohio Comm. Pl. Dec. 11, 2003). A penal statute is usually one that imposes a penalty or creates a forfeiture. See, eg, Wright v. State, 69 Ohio App. 3d 775, 779, 591 N.E.2d 1279 (Ohio App. 10th Dist. 1990). Remedial legislation, on the other hand, is enacted to correct past defects, to redress an existing wrong, or to promote the public good.

Courts have found that the provisions of the TCPA that allow recipients of unsolicited advertisements by facsimile machine to recover the greater of actual monetary loss or $500 in damages for each violation were designed to provide adequate incentive for individual plaintiffs to bring suit of their own behalf. See, eg, Forman v. Data Transfer, Inc., 164 F.R.D. 400, 404 (E.D. Pa. 1995) (noting that in the absence of statutory damages, each individual member in a class action for violation of TCPA could probably recover only a very small amount, and finding that a class action would be inconsistent with the specific and personal remedy provided by Congress to address the minor nuisance of unsolicited fax advertisements).

In Hooters of Augusta, the court specifically concluded that the lack of correspondence between actual damages and the statutory damages under the TCPA does not convert a remedial statute into a penal once. Id. at 1375. In coming to its conclusion that TCPA is a remedial statute, the Hooters court applied a three-part test. The test has been set forth by the Eleventh Circuit in United States v. NEC Corp., 11 F.3d 136, 137 (11th Cir. 1993) (holding that the provisions of False Claims Act are remedial). Under this test, a court determining the character of a statute must ask:

• Whether the purpose of the statute is to redress individual wrongs, or more general wrongs to the public;
• Whether recovery under the statute issues to the harmed individual or to the public; and
• Whether the recovery authorized by the statute is wholly disproportionate to the harm suffered.

Hooters of Augusta at 137.

The first factor indicates that TCPA is a remedial statute. Several courts have held that one of the purposes of the statute is to redress harms to individuals who are forced to absorb the costs associated with receiving unsolicited faxes. See, eg, Destination Ventures Ltd. v. F.C.C., 844 F. Supp. 632, 637 (D. Or. 1994) (indicating that Congress intended to protect fax machine owners from the economic harm caused by unsolicited faxes); Kenro, Inc. v. Fax Daily, Inc., 962 F. Supp. 1162, 1167 (S.D. Ind. 1997) (noting that '227 of the TCPA was intended to prevent advertisers from unfairly shifting advertising costs to the individual consumer who receives faxes). The second factor also indicates that TCPA is remedial. Section 227 of the TCPA provides that any award of actual or statutory damages issues to the harmed individual or entity, not to a third party. 47 U.S.C. '227(b)(3). Furthermore, any award of treble damages also goes to the harmed fax machine owner, and to the public. Finally, although the statutory damages under the TCPA do not closely correspond to actual damages, this fact does not convert a remedial statute into a penal one. Hooters of Augusta at 1376; see also, In re Wood, 643 F.2d 188, 193 n.12 (5th Cir. 1980) (“The fact that the statute allows for accumulated recovery does not convert an otherwise remedial statutory scheme into a penal one.”).

Conclusion

Given recent case law, policyholders should notify their insurers if they are subjected to a blast fax case. Insurance coverage likely exists and can provide the policyholder with the resources to defend and settle this often-contentious litigation.

The past few months have seen an explosion in the number of lawsuits filed under the Telephone Consumer Protection Act, 47 U.S.C. '227 (2003) (TCPA), a federal statute that prohibits transmittal of unsolicited advertisements by fax without first obtaining the prior express invitation or permission of the recipient. These lawsuits ' particularly when filed as class actions ' expose defendants to substantial defense costs and the potential for large liabilities.

These TCPA lawsuits cases are, in turn, spawning disputes between TCPA defendants and commercial general liability (CGL) insurers as to whether policyholders are entitled to a defense and/or indemnity for TCPA claims under standard-form CGL policy. This article briefly explores these insurance coverage issues. It concludes that, given recent case law, policyholders have a strong chance of recovering their defense costs and any settlements or judgments in TCPA lawsuits.

The Telephone Consumer Protection Act

The TCPA was enacted to provide citizens with protection against invasion of privacy by the advertising activities of fax advertisers and other telemarketers. See, U.S. House Rep. No. 102-317, at 5-6 (Nov. 15, 1991); U.S. Senate Rep. No. 102-178, at 1 (Oct. 8, 1991). The TCPA provides that no one is to be harassed with advertising faxes unless he or she specifically solicits them. Hooters of Augusta, Inc. v. American Global Ins. Co. , 272 F. Supp. 2d 1365, 1373 (S.D. Ga. 2003).

Courts have recognized that individuals at work in private businesses are entitled to expect that they will not be disturbed except by the personnel of business invitee, and accordingly have held that the TCPA applies to both individuals and businesses. Van Bergen v. Minnesota , 59 F.3d 1541, 1554 (8th Cir. 1995).

A recipient of an unsolicited fax advertisement may have a claim under the TCPA for statutory damages and injunctive relief. Each unsolicited fax advertisement is an independently actionable tort. The TCPA provides for minimum statutory damages of $500 per violation, and it allows for treble damages if the fax advertisement was sent willfully. 47 U.S.C. '227(b)(3). Courts have held that, for purposes of the TCPA, “willfully” means that the defendant acted voluntarily, regardless of whether the defendant knew that it was acting in violation of the statute. Betor v. Quantalytics, Inc., No. 465693, 2004 WL 22407121, at 1 (Ohio Com. Pl. Oct. 3, 2003)

TCPA claims are more and more frequently being brought as class actions, which are referred to as “blast fax” cases because they arise out of the defendants' alleged “blasting” of hundreds or thousands of recipients with faxes. In blast fax class actions, the defendant's exposure can easily be in the millions of dollars.

Insurance Coverage Under CGL Policies for TCPA Claims

CGL insurance policies typically provide for coverage for both “property damage” and “advertising injury.” These policies require the insurer to indemnify the policyholder against covered losses, liabilities or claims. The policies also often require the insurer to undertake the defense of covered claims.

The threshold issue in blast fax insurance coverage disputes is whether an allegation of the violation of the TCPA is, or could be, a covered loss. The burden of making this showing is on the policyholder. If such a showing is made, the burden then shifts to the insurer to show that the TCPA claim falls within some exclusion to coverage. In short, there is coverage if the claims fall within the scope of coverage defined in the policy and is not within an enumerated exclusion. Id .; Nearor v. Davis , 118 Ohio App. 806, 810, 694 N.E.2d 120, 122 (Ohio App. 1st Dist. 1997).

In determining whether there is coverage for a blast fax claim, a court must look to the language in the insurance contract itself and interpret the language in conformance with the general principles of insurance contract interpretation. See , eg , Cincinnati Ins. Co. v. Anders , 99 Ohio St. 3d 156, 158, 789 N.E.2d 1094, 1097 (2003) (a court must determine whether the underlying claims fall within the scope of the insured's policies' coverage in order to ascertain the insurer's duties). These general principles include presumptions that:

• A policy should be interpreted broadly in favor of coverage;
• Exclusions should be interpreted narrowly ( see , eg , Am. States Ins. Co. v. Guillermin , 108 Ohio App. 3d 547, 565, 671 N.E.2d 317, 329 (Ohio App. 2d Dist. 1996)); and
• Any ambiguity should be interpreted in favor of the policyholder.

In addition, in construing policy language, the court should not focus on what the insurer intended the words to mean, but rather on how a reasonable person in the position of the policyholder would have understood the words to mean. See, eg, Sturgeon v. Dubois, Nos. 00AP-1024, 00AP-1025, 2001 WL 803898, at 3 (Ohio App. 10th Dist. July 17, 2001); Brescoll v. Nationwide Mut. Ins. Co ., 116 Ohio App. 537, 543, 189 N.E.2d 173, 175 (Ohio App. 6th Dist. 1961).

Finally, it is well established that an insurer's duty to defend is separate and distinct from its duty to indemnify. See Erie Ins. Exchange v. Colony Dev. Corp ., 136 Ohio App. 3d 406, 412, 736 N.E.2d 941, 946 (Ohio App. 10th Dist. 1999). The duty to defend is broader than the duty to indemnify ' the insurer generally must undertake the defense if the “four corners” of the complaint could fall within the “four corners” of the policy.

Coverage for a TCPA Claim as an 'Advertising Injury'

For a claim to fall within the “advertising injury” coverage of a CGL policy, the insured must show that: 1) the insured was engaged in “advertising activities;” 2) the underlying action alleges an enumerated “advertising injury” offense within the meaning of insurance policy; and 3) the underlying “advertising injury” was caused by the insured's “advertising activities.” See Bank of West v. Superior Court , 2 Cal. 4th 1254, 10 Cal. Rptr. 2d 538, 833 P.2d (1992). If the policyholder makes this showing, the insurer may then attempt to show that the claim falls within an enumerated exclusion to coverage.

The Policyholder Should be Able to Carry its Burden, Particularly When the Policy Covers Violations of the Right to Privacy

Although insurers likely will still dispute coverage in blast fax cases, two recent decisions bode well for policyholders, particularly when the policy provides coverage for the “oral or written publication of material that violates a person's right to privacy.” Western Rim Investment Advisers, Inc. v. Gulf Insurance Co ., 269 F. Supp. 2d 836 (N.D. Tex. 2003); Hooters of Augusta, 272 F. Supp. 2d at 1372.

In Western Rim, the court found that an insured real estate investment company's act of faxing unsolicited advertisements, allegedly in violation of the TCPA, was potentially within a CGL policy's “advertising injury” coverage, defined in part as “oral or written publication of material that violates a person's right of privacy.” Id. (applying Texas law). The court also held that the policy at issue was not limited to claims made in a defamation context, ie, where the content of the transmitted material was harmful to a third person. Id.

Similarly, in Hooters of Augusta, a federal court held that an insured restaurant's transmittal of unsolicited advertisements via facsimile to various businesses, allegedly in violation of the TCPA, was a covered “advertising injury” within the meaning of a CGL. Id. at 1373 (applying Georgia law). According to the court, the alleged violation constituted “advertising injury” as defined by insurance policies, ie, written publication of material that violated a person's right of privacy, and the alleged injury was caused by the insured's advertising activity. Id.

Exclusions and Other Insurer Arguments Against Coverage

A central issue in TCPA insurance coverage cases may be whether the TCPA claims fall within the standard exclusion for claims that arise out of the “willful violation of a penal statute or ordinance committed by or with the consent of an insured.” This dispute will arise when the underlying plaintiff, in an effort to qualify for treble damages, will allege a “willful” violation of the TCPA.

When this issue arises, policyholders will have a strong argument that the exclusion does not apply because the TCPA has repeatedly been found bt courts to be a remedial ' not a penal ' statute. See, eg, Hooters of Augusta at 1375 (holding that the TCPA is not a penal statute, and concluding that the policy's exclusion for injuries arising out of “the willful violations of a penal statute” did not apply); Western Rim at 849 (finding that the TCPA is not a penal statute, and concluding that the policy's exclusion for injuries arising out of “the willful violation of a penal statute” did not apply); Jemiola v. XYZ Corp., No. CV-411237, 2003 WL 23010146, at 3 (Ohio Comm. Pl. Dec. 11, 2003). A penal statute is usually one that imposes a penalty or creates a forfeiture. See , eg , Wright v. State , 69 Ohio App. 3d 775, 779, 591 N.E.2d 1279 (Ohio App. 10th Dist. 1990). Remedial legislation, on the other hand, is enacted to correct past defects, to redress an existing wrong, or to promote the public good.

Courts have found that the provisions of the TCPA that allow recipients of unsolicited advertisements by facsimile machine to recover the greater of actual monetary loss or $500 in damages for each violation were designed to provide adequate incentive for individual plaintiffs to bring suit of their own behalf. See , eg , Forman v. Data Transfer, Inc. , 164 F.R.D. 400, 404 (E.D. Pa. 1995) (noting that in the absence of statutory damages, each individual member in a class action for violation of TCPA could probably recover only a very small amount, and finding that a class action would be inconsistent with the specific and personal remedy provided by Congress to address the minor nuisance of unsolicited fax advertisements).

In Hooters of Augusta, the court specifically concluded that the lack of correspondence between actual damages and the statutory damages under the TCPA does not convert a remedial statute into a penal once. Id. at 1375. In coming to its conclusion that TCPA is a remedial statute, the Hooters court applied a three-part test. The test has been set forth by the Eleventh Circuit in United States v. NEC Corp., 11 F.3d 136, 137 (11th Cir. 1993) (holding that the provisions of False Claims Act are remedial). Under this test, a court determining the character of a statute must ask:

• Whether the purpose of the statute is to redress individual wrongs, or more general wrongs to the public;
• Whether recovery under the statute issues to the harmed individual or to the public; and
• Whether the recovery authorized by the statute is wholly disproportionate to the harm suffered.

Hooters of Augusta at 137.

The first factor indicates that TCPA is a remedial statute. Several courts have held that one of the purposes of the statute is to redress harms to individuals who are forced to absorb the costs associated with receiving unsolicited faxes. See , eg , Destination Ventures Ltd. v. F.C.C ., 844 F. Supp. 632, 637 (D. Or. 1994) (indicating that Congress intended to protect fax machine owners from the economic harm caused by unsolicited faxes); Kenro, Inc. v. Fax Daily, Inc ., 962 F. Supp. 1162, 1167 (S.D. Ind. 1997) (noting that '227 of the TCPA was intended to prevent advertisers from unfairly shifting advertising costs to the individual consumer who receives faxes). The second factor also indicates that TCPA is remedial. Section 227 of the TCPA provides that any award of actual or statutory damages issues to the harmed individual or entity, not to a third party. 47 U.S.C. '227(b)(3). Furthermore, any award of treble damages also goes to the harmed fax machine owner, and to the public. Finally, although the statutory damages under the TCPA do not closely correspond to actual damages, this fact does not convert a remedial statute into a penal one. Hooters of Augusta at 1376; see also, In re Wood, 643 F.2d 188, 193 n.12 (5th Cir. 1980) (“The fact that the statute allows for accumulated recovery does not convert an otherwise remedial statutory scheme into a penal one.”).

Conclusion

Given recent case law, policyholders should notify their insurers if they are subjected to a blast fax case. Insurance coverage likely exists and can provide the policyholder with the resources to defend and settle this often-contentious litigation.