Bethany Krajelis May 23, 2013, 6:23pm

The Telephone Consumer Protection Act (TCPA) is a penal statute and the damages it imposes for sending unsolicited faxes are not punitive, the Illinois Supreme Court held Thursday.

As such, the state court high court reversed the portion of the Fourth District Appellate Court’s ruling in Standard Mutual Insurance Co. v. Norma Lay et al. that deemed these damages as uninsurable.

The Supreme Court, however, upheld the other part of the appellate court ruling that determined the insurance company is not estopped from asserting coverage defenses and remanded the matter for the Fourth District to consider the remaining arguments made on appeal.

Justice Charles Freeman delivered the court’s unanimous 12-page opinion in the case that stems from a class action suit filed in Madison County Circuit Court.

In 2009, Locklear Electric Inc. sued Ted Lay Real Estate Agency for sending it unsolicited fax advertisements in violation of the TCPA, which provides for $500 in damages for each unsolicited fax. Locklear represented a putative class of 3,478 people and entities in the suit.

Lay tendered defense of the claim to Standard Mutual Insurance Co., which undertook the defense under a reservation of rights and filed a declaratory judgment action in Macoupin County Circuit Court to find out its coverage under its policies.

Standard in a 2009 letter informed Lay that its insurance policies might not cover the conduct alleged in the suit because the TCPA “may constitute a penal statute” and the policies excluded coverage for violations of penal statutes.

The suit, which was removed to the U.S. District Court for the Southern District of Illinois in 2009, settled the following year for about $1.7 million, plus costs

In regards to the declaratory judgment action Standard filed in Macoupin County, the circuit court held that Standard didn’t have a duty to defend Lay. The appellate court affirmed, finding that the damages provided in the TCPA are punitive and as such, not insurable.

The Supreme Court heard arguments in the case in March.

On behalf of the appellants, Ottawa attorney Michael Reagan told the justices that “the issue was framed incorrectly” at the appellate court level and the question before them wasn’t whether punitive damages are insurable, but rather “whether the conduct of the insured, which gave rise to the damages, can be insured.”

Arguing on Standard’s behalf before the court in March, Chicago attorney Robert Chemers said the appellate court “got it right” when it determined that the $500 penalty under the TCPA constitutes punitive damages.

Both attorneys, however, told the justices that the lower courts didn’t address some of the other issues in the case, such as the conduct of class counsel and questions pertaining to coverage under Lay’s insurance policies.

In the Supreme Court’s opinion, Freeman wrote that the appellate court only addressed two issues in its analysis of the case: whether Standard was estopped from raising policy coverage defenses and if the TCPA prescribed damages constitute punitive damages.

As for the first issue, the justices agreed with the lower courts and rejected Locklear’s contention that Standard couldn’t assert defenses to its policy coverage. Locklear argued that Standard’s 2009 letter didn’t adequately inform Lay of policy defenses and conflicts of interest related to counsel.

Freeman explained for the court that Standard’s reservation of rights letter specifically referred to the conflict of interest issue and included a list of defenses it planned to assert.

In regards to the question over whether TCPA’s damages constitute punitive damages, the state high court disagreed with the lower courts and found that “the manifest purpose of the TCPA is remedial and not penal.”

“Whether 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,” Freeman wrote.

He added, “the fact that Congress provided for treble damages separate from the $500 liquidated damages indicates that the liquidated damages serve additional goals than deterrence and punishment and were not designed to be punitive damages.”

Since the appellate court didn’t address all of the issues Locklear raised on appeal based on its determination that TCPA’s damages were uninsurable punitive damages, the Supreme Court remanded the case back to the appellate for consideration of the remaining arguments.

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