Bird in Hand Is Worth More than $1.8 Million on the Come
There is a strange assumption in the world of litigation that if an insurer refuses to defend its insured it has automatically committed the tort of bad faith. Plaintiffs, with a large judgment some of which could be collected from the defendant, agree to take an assignment of the defendants rights against its insurer, and give up the right to collect from the defendant.
Of course, insurers do not cover everything. Often, when they refuse to defend a suit against their insured, that they did so based on clear and unambiguous language of the policy. In Fayezi v. Illinois Cas. Co., — N.E.3d —-, Appellate Court of Illinois, 2016 IL App (1st) 150873 (June 30, 2016) the Appellate Court of Illinois, was asked to require an insurer to pay a judgment stipulated to by its insured.
Mortesa “Marty” Fayezi and American Awning & Window Co., Inc. (collectively, plaintiffs), appeal from the circuit court’s order dismissing their amended complaint with prejudice in this insurance coverage declaratory judgment action.
The plaintiffs initiated a declaratory judgment action to determine whether Illinois Casualty Company (ICC), was obligated to defend a class action against ICC’s insured, and to indemnify the eventual settlement of that underlying action. ICC was the insurer for Pat’s Pizzeria, Inc. (Pat’s), the defendant in the underlying class action. ICC issued a “Businessowners Policy” to Pat’s effective September 2, 2005, through September 2, 2006 (the 2005–06 policy). Among other categories of coverage, the 2005–06 policy provides coverage for “Bodily Injury and Property Damage.”
That coverage was subject to certain exclusions, including an exclusion for: “Any liability or legal obligation of any insured with respect to ‘bodily injury’ or ‘property damage’ arising out of any of the following: ¶ g) The Telephone Consumer Protection Act (TCPA); or ¶ (h) Any amendments to these other laws or by any other similar statutes, ordinances, orders, directives or regulations.”
On or about March 31, 2006, Pat’s transmitted unsolicited advertisements by facsimile (fax) to 3636 recipients. In April 2009, one of the recipients, Fayezi, filed a class action complaint (the underlying complaint) in the circuit court of Cook County on behalf of himself “and all other persons similarly situated” who had received such faxes.
The underlying complaint began with a “preliminary statement” that “[t]his case challenges [Pat’s] practice of faxing unsolicited advertisements.” The preliminary statement recites that the TCPA “provides a private right of action and provides statutory damages of $500 per violation” and states that the case was initiated “as a class action asserting claims against [Pat’s] under the TCPA, the common law of conversion, and the consumer protection statutes forbidding and compensating unfair business practices.” The preliminary statement specified that “[p]laintiff seeks an award of statutory damages for each violation of the TCPA.”
ICC refused to defend the action, apparently on the basis of the 2005–06 policy’s exclusions for “[a]ny liability or legal obligation” for bodily injury, property damage, or personal and advertising injury “arising out of” the TCPA (the TCPA exclusions).
Pat’s and Fayezi subsequently entered into a settlement agreement of the underlying action, by which the parties agreed to an amount of liability that the class would seek to recover only from Pat’s insurers, including ICC.
The parties agreed to seek court approval of a judgment against Pat’s in the amount of $1,818,000. However, the settlement agreement specified that the plaintiffs would not seek recovery from Pat’s but instead would proceed against Pat’s insurers. Thus, Pat’s agreed to assign to the class its rights under the 2005–06 policy, and the class “agree[d] to seek recovery to satisfy the Judgment only against [Pat’s] insurers,” including ICC.
ICC filed a motion to dismiss. Relying on the TCPA exclusions in the 2005–06 policy, ICC argued that it had no duty to defend the underlying class action or to indemnify the resulting judgment.
The trial court granted ICC’s motion to dismiss the plaintiffs’ amended complaint. The court dismissed the plaintiff’s amended complaint in its entirety and with prejudice.
First, the appellate court concluded that the motion to dismiss filed by ICC properly argued that the plaintiffs’ action was barred by other affirmative matter avoiding the legal effect of or defeating the claim and did not improperly dispute an essential issue regarding liability.
The appellate court agreed with the trial court that the submission of an affidavit in support of ICC’s motion to dismiss was procedurally proper. Notably, in a recent case involving ICC and the same exclusion language at issue in this appeal, the Second District relied on precedent that ICC did not have a duty to defend a nearly identical underlying complaint.
When the allegations in the lawsuit fail to state facts that either actually or potentially bring the case within, or potentially within, the policy’s coverage the appellate court held that the allegations of the underlying complaint in this case did not trigger ICC’s duty to defend in light of the TCPA exclusions.
First, to the extent the plaintiffs assert that the TCPA exclusions “say nothing about common law claims premised on different facts,” that argument fails, because the underlying complaint simply failed to plead any claims premised on any facts other than the March 31, 2006 fax advertisements that formed the basis for all three counts. Both the exclusion at issue in earlier precedent the TCPA exclusions in this case used unambiguously broad language to indicate that liability “arising” from the TCPA would not be covered. The phrases “any liability or legal obligation,” “with respect to,” and “arising out of” are plainly of broad meaning.
In this case the underlying complaint failed to plead any specific facts that would support liability for counts II and III but which would not also violate the TCPA under count I. The counts for conversion and violation of the Act do not attempt to allege any other particular offending conduct other than the sending of unsolicited fax advertisements on or about March 31, 2006, the very same conduct underlying count I for violation of the TCPA. Indeed, counts II and III specifically incorporated the allegations in count I, the TCPA count, as well as the allegations in the complaint’s “preliminary statement” referencing the TCPA. All three counts of the underlying complaint in this case assert liability “arising out of” the TCPA.
The allegations in the underlying complaint in this case were not vague or ambiguous. Rather, all three counts were clearly predicated on the same facts, i.e., Pat’s transmission of unsolicited fax advertisements on or about March 31, 2006. All of the allegations clearly sought liability “arising out of” the TCPA, implicating the TCPA exclusions.
The appellate court recognized that the applicability of a policy exclusion must be clear and free from doubt in order to relieve ICC of the duty to defend. The appellate court found that the TCPA exclusions unambiguously applied to the underlying complaint and found the language at issue in this case to be clear on its face. Similarly, in this case, we find that the application of the TCPA exclusions is clear.
Moreover, the terms of the settlement agreement and judgment entered in the underlying action indicate that the action was resolved on the basis of TCPA liability alone. It is apparent that the amount of the underlying settlement, $1,818,000, was calculated by multiplying the amount of $500 in statutory damages per TCPA violation by the number of fax advertisements (3636) transmitted by Pat’s on or about March 31, 2006.
The allegations of the underlying complaint clearly implicated the TCPA exclusions. As a result, ICC did not have a duty to defend the underlying action.
In turn, because ICC did not have a duty to defend, the argument that having breached the duty to defend, ICC is estopped to contest indemnity of the judgment following the settlement of the underlying action. An insurer’s duty to indemnify is narrower than its duty to defend its insured. Clearly, where there is no duty to defend, there will be no duty to indemnify. Since ICC had no duty to defend the underlying action, it had no duty to indemnify the resulting judgment.
What this case teaches is that before entering into a settlement with a covenant not to execute the plaintiffs’ counsel should first consult with experienced coverage counsel to determine whether the insurer wrongfully refused to defend its insured. In this case the plaintiffs gambled and lost.
Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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