Advertising Injury Requires a Fortuitous Loss

Defendant’s Business Saved by Brilliance of Insurer

I have over the last 1700 posts to this blog advised against entering into a stipulated judgment and granting a viable defendant a covenant not to execute in the hope of a windfall judgment from the insurer who refused to defend and indemnify the insured.

In Auto-Owners Insurance Company v. Stevens & Ricci…, — F.3d —-, United States Court of Appeals, Third Circuit, 2016 WL 4547641 (September 1, 2016), Auto-Owners Insurance Company (“Auto-Owners”) sought a declaration that it has no obligation to defend or indemnify its insured, Stevens & Ricci, Inc. (“Stevens & Ricci”), in connection with a $2,000,000 judgment entered against Stevens & Ricci as part of the settlement of a class action lawsuit.

In that class action, the Hymed Group Corporation (“Hymed”) alleged, as representative of the class, that Stevens & Ricci had violated the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. § 227, by sending unsolicited fax advertisements. While that class action was pending, Auto-Owners sought declaratory judgment against both Stevens & Ricci and Hymed. The District Court concluded that the sending of unsolicited fax advertisements in violation of the TCPA did not fall within the terms of the insurance policy, and thus granted Auto-Owners’s motion for summary judgment and denied Hymed’s cross-motion and, as to the class, the $2 million judgment was uncollectable.

BACKGROUND

This case began with the improper use of fax machines. Stevens & Ricci was solicited by an advertiser claiming to have a fax advertising program that complied with the TCPA. Relying on that representation, Stevens & Ricci allowed the advertiser to fax thousands of advertisements to potential customers on its behalf. The advertiser sent 18,879 unsolicited advertisements by fax.

Much later, on June 1, 2012, Hymed filed a class action lawsuit in the United States District Court claiming that the advertisements actually did violate the TCPA (the “Underlying Action”), which prohibits the “use [of] any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement….”  Given the volume of faxes sent, a finding of liability to the class under the TCPA, with statutory damages of $500 per fax, could have resulted in a damage award in the Underlying Action of $9,439,500, before trebling. Such a judgment could have bankrupted Stevens & Ricci and caused the dissolution of its business, allowing the class to only collect a pro-rata share of the judgment as one of many creditors in bankruptcy.

During the time that Stevens & Ricci had the unsolicited faxes sent to Hymed and other class members, it was covered by a “Businessowners Insurance Policy” (the “Policy”) issued by Auto-Owners. The Policy obligates Auto-Owners to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury,’ ‘property damage,’ ‘personal injury,’ or ‘advertising injury’ to which this insurance applies.”

To be covered, an “advertising injury” must also be inflicted “in the course of advertising [the insured’s] goods, products or services.”

Auto-Owners agreed to defend Stevens & Ricci in the Underlying Action, but reserved its right to later challenge whether the alleged misconduct (i.e., the sending of unsolicited faxes) fell within the terms of the insurance policy’s coverage. While the declaratory relief action was pending, Hymed, Stevens & Ricci, and Auto-Owners reached an agreement to compromise and settle the Underlying Action.

Among other things, the parties agreed to entry of judgment in favor of the class, and against Stevens & Ricci, in the amount of $2,000,000. Hymed and the class also agreed to seek recovery to satisfy the judgment only from Auto-Owners under the Policy. As a result Auto-Owners protected its insured and placed the gamble of an adverse judgment on itself.

The District Court concluded that the sending of unsolicited faxes to Hymed and other class members did not cause the sort of injury that falls within the Policy’s definition of either “property damage” or “advertising injury.” Accordingly, the Court granted Auto-Owners’s motion for summary judgment and denied Hymed’s cross-motion. Hymed promptly appealed.

DISCUSSION

Viewing this case from the perspective of the insurer at the time of filing of the declaratory judgment complaint, Auto-Owners’s quarrel was with Stevens & Ricci regarding its indemnity obligation under the Policy. The only “amount in controversy” that the insurer was then concerned with was its total indemnity and defense obligation; it presumably had no interest in the way the indemnity sum might later be divided among the various class members. Its dispute was thus with its insured, not the class.

ANALYSIS

A federal court sitting in diversity must apply state substantive law. As best we can tell, Hymed is using the “reasonable expectation” test to empower it to conduct a fifty-state legal survey and to advocate that Arizona’s law must be whatever the prevailing legal theory is across the country since that prevailing law is—given its popularity—inherently “reasonable.

The key term in the definition of the “accident” is “unexpected” which implies a degree of fortuity. An injury therefore is not “accidental” if the injury was the natural and expected result of the insured’s actions. Accident has been defined in the context of insurance contracts as an event or happening without human agency or, if happening through such agency, an event which, under circumstances, is unusual and not expected by the person to whom it happens. That definition comports with the basic purpose of insurance: “to cover only fortuitous losses.” United Servs. Auto. Ass’n v. Elitzky, 517 A.2d 982, 986 (Pa. Super. Ct. 1986).

Here Hymed’s claimed injury is the use of ink, toner, and time that was caused by the receipt of junk faxes. Those injuries are the natural and expected result of the intentional sending of faxes, a far cry from Pennsylvania’s definition of an “accident.” Though it did not intend injury, Stevens & Ricci clearly intended that the third-party advertiser send the fax advertisements to the members of the class.

The Supreme Court of Pennsylvania has not addressed whether unintended damages from faxes sent in violation of the TCPA constitute an “accident.”  The Third Circuit, as required, predicted that the court would reject coverage under the “property damage” provision of the Policy.

Whether an event is accidental is evaluated from the perspective of the insured. An accident is anything that happens or is the result of that which is unanticipated and takes place without the insured’s foresight or expectation or intention. The use of ink, toner, and time can be regarded as the natural result of the intentional sending of faxes.

The Policy defines “advertising injury” as, among other things: “Oral or written publication of material that violates a person’s right of privacy.” Congress took aim at unsolicited advertisements, not the content of those advertisements since to do so could be a violation of the First Amendment to the U.S. Constitution. An unsolicited fax intrudes upon the right to be free from nuisance, not a violation of the right of privacy. Accordingly, the TCPA seeks to protect privacy interests in seclusion, not secrecy. The underlying action, similarly, alleged that the sending of the faxes violated “class members’ privacy interests in being left alone.”

The Policy, therefore, does not cover the violation of the class members’ interests in being left alone. Read in context, the Policy provides coverage only for violations of the privacy interest in secrecy, and thus does not cover violations of a right to seclusion.

The Policy’s protection of the “right of privacy” is thus logically limited to a privacy interest, the infringement of which depends upon the content of the advertisements: in other words, the privacy right to secrecy.

None of the allegations in the Underlying Action relate in any way to the content of the faxed advertisements. The faxes caused the alleged damage because they were received without permission, not because of their content. At no point did Hymed allege that those unsolicited faxes included confidential or otherwise secret information about any of the class members. Because the Policy’s “advertising injury” deals only with the publication of private information, it strongly suggests that the injury alleged in the Underlying Action falls outside of the scope of that protection.

ZALMA OPINION

The TCPA law would destroy the sender even though the ads were sent innocently without intent to violate the statute. Auto-Owners knew there was no coverage and, rather than leave its insured destroyed, by defending its insured and then convincing the plaintiffs that rather than destroying Stevens & Ricci, it could take an assignment and collect everything from Auto-Owners if it could prove coverage. Auto Owners protected its insured and destroyed the case of the plaintiffs who were ready to destroy Stevens & Ricci and got nothing because insurance only provides defense and indemnity for a fortuitous act, not the intentional act of sending a fax.