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Alleged Violations of Laws Protecting Privacy--Will Your General Liability Insurance Pay?

By Timothy P. Law and John N. Ellison

Our nation has enacted many laws to protect the privacy rights of individuals and businesses. Privacy from unwanted calls and faxes, for example, is protected by federal law under the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, et seq. Courts have regularly found insurance coverage for alleged violations of the TCPA, ruling that standard language in general liability insurance policies provides coverage for invasions of privacy that are implicit in claims under the TCPA.

The reasoning of these courts can and should be applied to ensure coverage for all claims alleging violations of any statute that protects privacy rights. A recent decision by the Illinois Supreme Court not only found coverage but also undermined the authority of the primary precedent used by insurance companies to deny coverage for TCPA claims--the American States decision from the Seventh Circuit Court of Appeals, which had attempted, incorrectly, to predict Illinois law on the subject.

The TCPA: Protecting the Right of Privacy

The TCPA was enacted to protect the privacy of individuals and businesses who were being inundated with unwanted faxes. The TCPA makes it unlawful "to use any telephone facsimile machine, computer or other device to send an unsolicited advertisement to a telephone facsimile machine." The statute expressly declares that the intent of the statute is to protect "privacy rights." 47 U.S.C. § 227(b)(2)(B)(ii)(I).

The term "unsolicited advertisement" is defined as "any material advertising the commercial availability or quality of any property, goods, or services which is transmitted to any person without that person's prior express invitation or permission, in writing or otherwise." 47 U.S.C. § 227(a)(5). The TCPA imposes damages of $500 for each violation, which can be trebled if the defendant willfully or knowingly violated the statute.

Other statutes are similar to the TCPA in their protection of privacy interests, such as the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the CAN-SPAM Act of 2003, and the Driver's Privacy Protection Act.

The CGL Policy: Covering Violations of the Right of Privacy

Personal and advertising injury coverage in the comprehensive general liability insurance policy covers violations of the right of privacy. When a complaint implicitly or explicitly alleges, or could be construed to allege, or could be amended to allege, a violation of the right of privacy, an insurance company has a duty to defend. In addition, the CGL (commercial general liability) policy provides an obligation for an insurance company to pay damages that the policyholder becomes legally obligated to pay.

Because the TCPA provides damages for the invasion of privacy in advertising, an insurance company's coverage obligation to defend and pay TCPA claims should be clear. The vast majority of courts to have considered the question have found coverage for allegations of a violation of the TCPA, including the federal Courts of Appeals for the Eighth, 10th, and 11th Circuits.

In addition to the CGL policy, both professional liability and directors and officers insurance, including the entity coverage contained in most D&O liability policies, may be required to respond to allegations of violations of statutes that protect the right of privacy.

The Illinois Supreme Court: Enforcing the Promise of the Policy

On November 30, 2006, the Illinois Supreme Court affirmed coverage for TCPA claims in Valley Forge Insurance Company v. Swiderski Electronics, Inc. The Illinois Supreme Court considered insurance policy language defining personal and advertising injury as, among other things, "oral or written publication, in any manner, of material that violates a person's right of privacy" and "oral, written, televised or videotaped publication of material that violates a right of privacy." The insurance companies argued that this language applied only where the content of the published material revealed private information about a person.

The Illinois Supreme Court disagreed, finding that "[t]he receipt of an unsolicited fax advertisement implicates a person's right of privacy insofar as it violates a person's seclusion, and such a violation is one of the injuries that a TCPA fax-ad claim is intended to vindicate." The Illinois Supreme Court found it "unproblematic" that the Complaint contained no mention of the right to privacy because "a violation of privacy in the sense of a violation of seclusion is implicit in a TCPA faxad claim." Referring to dictionary definitions, the court confirmed "that 'right of privacy' connotes both an interest in seclusion and an interest in the secrecy of personal information."

Importantly, the Illinois Supreme Court explicitly rejected the United States Court of Appeals for the Seventh Circuit's prior effort to predict Illinois law in American States Insurance Company v. Capital Associates of Jackson County, Inc., 392 F.3d 939 (7th Cir. 2004), as well as the subsequent federal decisions that relied upon American States in denying coverage. The court critiqued and distinguished several cases, including the Resource Bankshares case from the Court of Appeals for the Fourth Circuit, because the policy language in those cases contained the term "making known" written or spoken material that violates a person's right to privacy. The Fourth Circuit had dubiously interpreted this language to provide coverage only for injury arising from the violation of the right of privacy by unwarranted disclosure; i.e., a violation of a right of secrecy.

Typically, insurance policies provide coverage for the "oral or written publication, in any manner, of material that violates a person's right of privacy." The Fourth Circuit's decision, which is based upon a detailed analysis of the term "making known," can therefore be easily distinguished from the overwhelming majority of cases that find coverage. Indeed, as the Illinois Supreme Court pointed out, when the cases decided under the unusual "making known" language are eliminated, the only cases remaining that do not find coverage are American States and an unreported case from federal court in Indiana. Because the American States decision incorrectly predicted Illinois law, it is of no precedential value. Similarly, unreported decisions from federal district courts carry no precedential weight.

Accordingly, where the standard form language has been used, it is fair to say that the judicial precedent universally supports a finding of coverage. Any denials of coverage for TCPA claims under insurance policies that contain the standard wording should be considered acts of bad faith for which punitive damages are warranted.

The Insurance Industry: Reacting By Excluding

As a final note, the insurance industry has responded to the spate of TCPA claims and the resulting coverage disputes not by clarifying their insurance policies to ensure unambiguous coverage, but instead by issuing new exclusions. ISO form exclusion CG00 67 03 05 and AAIS form exclusion GL 0225 10 05 are examples. When insurance companies do not utilize explicit language to exclude TCPA liabilities, especially when such language is available in the marketplace, as it has been now for some time, there can be no question that the intent of the parties was for the liability to be covered.

If a TCPA exclusion is added without the policyholder's knowledge or consent, coverage for TCPA claims may remain, despite the presence of such exclusions in the policy. Policyholders and brokers should be aware of this recent effort by insurance companies to restrict coverage and resist that effort whenever possible. Exclusions for TCPA liabilities seem to be even less common in directors & officers liability policies and professional liability policies, so those insurance policies should be reviewed for potential coverage whenever a policyholder is faced with a TCPA claim.

ABOUT THE AUTHORS

John N. Ellison is the managing shareholder and Timothy P. Law is a shareholder in the Philadelphia office of Anderson Kill & Olick, P.C. Both Mr. Ellison and Mr. Law regularly represent policyholders in insurance coverage, insurance insolvency, and premium disputes with their insurance companies. Mr. Law has represented a number of policyholders in coverage disputes involving TCPA liabilities. Mr. Ellison can be reached at 267-216-2710 and jellison@andersonkill.com. Mr. Law can be reached at 267-216-2762 and tlaw@andersonkill.com.

Reprinted with permission from the January/February 2007 issue of AKO Policyholder Advisory, published by Anderson Kill & Olick, P.C.

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October 2007