State Farm Fire & Casualty Co. is not responsible for a $4.9 million settlement stemming from a 2010 junk fax lawsuit against one of its commercial policyholders, an Illinois appellate court has ruled.
Citing an exclusion in State Farm's standardized business liability policy that bars coverage for alleged violations of the federal Telephone Consumer Protection Act and related state and local laws, a three-judge panel of the 2nd District Appellate Court ruled unanimously last week that the Bloomington, Illinois-based insurer had no duty to defend or indemnify its policyholder against allegations of “blast faxing” hundreds of unsolicited advertisements to more than 30 companies.
Michael Schane, owner and president of Bloomingdale, Illinois-based Academy Engraving Co., was sued in August 2010 by a group of companies led by G.M. Sign Inc., a family-owned signage manufacturer in Round Lake, Illinois. The lawsuit accused Mr. Schane of violating federal telephone consumer law and the Illinois Consumer Fraud and Deceptive Business Practices Act.
According to court documents, State Farm denied Mr. Schane's initial claim for reimbursement of his defense costs, citing the federal law and related-statutes exclusion in its business liability policy.
A month after his claim was denied, Mr. Schane settled the initial lawsuit with G.M. Sign and the other plaintiff companies for $4.9 million, which the plaintiff companies agreed to collect from Mr. Schane's insurer.
However, State Farm refused to pay the settlement, arguing that the same exclusion that barred Mr. Schane from defense cost coverage in the underlying lawsuit also applied to any settlement payments on his behalf resulting from the litigation.
Federal law exclusion upheld
The appellate court panel ultimately concurred with State Farm's argument in its May 2 ruling, which overturned a February 2013 decision by a Lake County Circuit Court judge.
“Fundamentally, the court agreed that the policy exclusion for claims arising directly or indirectly out of actions which violate the TCPA extended to alternative theories premised on the same facts,” Michael Borders, a Chicago-based managing member at Dykema Gossett P.L.L.C. and one of State Farm's lead attorneys in the case, said Wednesday in a statement.
Mr. Borders said the appellate court's ruling is the first opinion published in Illinois — and among the first nationwide — to interpret the Telephone Consumer Protection Act and related statutes exclusion that State Farm and other insurers began adding to their standardized business liability insurance policies in 2006.
“We are very pleased with this outcome and believe that this decision may have nationwide ramifications for the insurance industry and for similarly styled TCPA class action cases moving forward,” Mr. Borders said in the statement.