Liability under the Telephone Consumer Protection Act (TCPA) is a growing risk for many businesses. The TCPA restricts telephone solicitations and limits the use of automatic dialing systems, prerecorded voice messages, SMS text messages and faxes. The TCPA provides consumers with a private right of action that enables them to recover up to $500 for each violation and up to $1,500 for each willful violation. When damages are aggregated in class action lawsuits, defendants face significant, sometimes staggering, financial exposure.
Although standard commercial general liability (CGL), directors’ and officers’ (D&O) and professional liability/errors and omissions (E&O) policies may cover TCPA liability, insurance providers frequently deny coverage. Insurance coverage for TCPA liability, as with virtually all property and casualty insurance claims, is a function of three variables — the facts and allegations of the suit against the policyholder, the language of the applicable insurance policy, and the state law governing that policy. As TCPA class action litigation grows, it is important for companies to understand the factors that influence coverage determinations, consult with experienced policyholders’ insurance recovery counsel to ensure that their contractual rights are enforced fully, and ensure that recoveries from their insurers are maximized.
Because TCPA allegations are predicated upon the violation of a right to privacy, coverage may be available under the “personal and advertising injury” sections of standard CGL policies. These sections generally cover any “oral or written publication that violates a person’s right to privacy.” Most policies, however, do not define the “right to privacy,” thus subjecting the coverage determination to courts’ interpretation.
Some courts — primarily those in the 7th Circuit — have held that the right to privacy in this context means the right to keep private information from others. These courts hold that a publication violates a person’s right to privacy only when the content of the published material reveals private information about that person, and that TCPA violations do not implicate this right. Other courts, however, including the Illinois, Missouri and Florida Supreme Courts, the 5th, 10th and 11th Circuits, and the Supreme Judicial Court of Massachusetts, have rejected this “content-based privacy” approach. These courts interpret the right to privacy as the right to seclusion (i.e., the right to be left alone), and hold that standard CGL policies should, therefore, cover injuries arising from the type of intrusive activity that the TCPA prohibits.
Even where policyholders meet the definition of “privacy,” however, insurers may be able to assert various exclusions. For example, some insurers have successfully argued that their policies’ exclusions for “willful violations of penal statutes” preclude coverage for TCPA liability. In a highly-anticipated decision in 2013, however, the Illinois Supreme Court held in Standard Mutual Insurance Company v. Lay that the TCPA is a remedial, not penal, statute. The intermediate appellate court in Lay concluded that the TCPA is penal in nature because the “actual” damages incurred by a TCPA violation “are more in the nature of an irksome nuisance, and liability is not predicated on proving them.” Moreover, the $500-per-violation statutory award is “a predetermined amount of damages [that] is clearly not meant to compensate for any actual harm.” The Illinois Supreme Court reversed this decision, holding that, although the monetary impact of a single TCPA violation is minor, “it is nevertheless a cost borne by the recipient and recognized by Congress as compensable harm.” The court also concluded that “[w]hether we view the $500 statutory award as a liquidated sum for actual harm, or as an incentive for aggrieved parties to enforce the statute, or both, the $500 fixed amount clearly serves more than purely punitive or deterrent goals.”
The Lay decision provides strong support for policyholders’ seeking to recover payments for TCPA claims under CGL policies. However, given the variety and force of exclusionary language, policyholders are well-advised to understand the implications of their policies’ exclusions and, where possible, how to circumvent them.
D&O and E&O policies
In addition to CGL policies, companies — especially privately held companies — may be able to rely on their D&O and E&O policies to cover defense costs and/or liability from TCPA claims.
D&O policies typically include three “sides.” Side A covers individual directors and officers when they are not indemnified by the company; Side B covers the company for the costs of indemnifying its directors and officers; and Side C covers the company itself for claims arising out of a “wrongful act.” While Side C coverage for publicly traded companies is generally limited to securities suits, Side C coverage for privately held companies will typically extend to a wide variety of commercial claims, including TCPA claims. In addition, if the suit names an individual director or “officer” — often defined broadly to include any senior level employee — Sides A and B may apply as well. E&O policies may also be a source of coverage for TCPA liability, particularly where they provide broad coverage for claims based on “wrongful acts” in the provision of services.
As with CGL policies, D&O and E&O policies may contain various exclusions, and companies must understand how to successfully manage insurers’ claims.
An increasing number of insurance policies explicitly exclude TCPA liability from coverage. For example, a Kentucky federal court recently examined a policyholder’s claim for coverage under a CGL policy that excluded any loss “arising out of or resulting from . . . any act that violates any statute, ordinance or regulation . . . that includes, addresses or applies to the sending, transmitting or communicating of any material or information, by any means whatsoever.” The court held that, although the policy’s “personal and advertising injury” provision was sufficiently broad to include violations of a person’s right to seclusion, the policy’s statutory exclusion precluded coverage for TCPA liability.
Because the language of a TCPA exclusion will likely control, companies must scrutinize their policies at the time of purchase and renewal. If an insurer adds a TCPA exclusion upon the policy’s renewal, the company may be able to dispute the process by which it was added. States’ insurance codes commonly set forth strict requirements with which an insurer must comply in order to alter the coverage offered by a policy at renewal materially. Violation of these requirements may place the insurer at risk of foregoing the proffered exclusion, and being held to an automatic renewal of the prior policy. Companies should understand the insurer’s responsibilities during the renewal period, and the implications of any exclusions on their potential for TCPA liability coverage.
While TCPA exclusions are difficult to circumvent, the silver lining is that they enhance claims for coverage under policies not containing such exclusions. Depending on the relevant facts, companies may be able to argue that the insurer’s addition of TCPA exclusions to certain policies reflects the insurer’s admission that, in the absence of such exclusions, its policies afford coverage.
Given the wide divergence in state law, the need for case-by-case analysis of coverage determinations, and the growing use of TCPA exclusions, policyholders must act strategically to maximize their TCPA liability coverage. At the purchasing stage, it is crucial that companies understand the coverage offered by insurers. Once a TCPA claim is filed or anticipated, given the potentially high damages and often substantial defense costs, it then becomes imperative to analyze the potential coverage promptly and accurately in order to maximize value.