The Illinois Supreme Court heard arguments this week in a case stemming from a class action lawsuit that originated in Madison County.

The case -- Standard Mutual Insurance Co. v. Norma Lay, et al. – came to the state high court from the Fourth District Appellate Court, which determined the $500 penalty under the Telephone Consumer Protection Act (TCPA) to be punitive damages and as such, not insurable.

In 2006, Ted Lay Real Estate Agency faxed an advertisement to Locklear Electric, Inc. The recipient did not give Lay permission to send the fax, which is a violation of the TCPA that imposes a $500 penalty for each unsolicited fax.

Lay was sued in 2009 in a class action suit that was filed in Madison County Circuit Court and later removed to the U.S. District Court for the Southern District of Illinois. Locklear served as class representative.

Defense of the claim was tendered to Standard, 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.

The class action suit, which alleged that Lay had sent 3,478 unsolicited faxes in June 2006, was settled in 2010 for about $1.7 million, plus costs.

In regards to whether Standard had a duty to defend the real estate agency, the circuit court ruled in favor of Standard and a panel of the Fourth District Appellate Court affirmed.

“We find that the $500 in liquidated damages provided in the TCPA is a penalty and is in the nature of punitive damages,” the appeals panel held in its opinion. “They are not insurable as a matter of Illinois law and public policy and are not recoverable from Standard.”

On Tuesday, the justices heard arguments from Ottawa attorney Michael Reagan, who argued on behalf of the appellants, and Chicago attorney Robert Chemers, who represents Standard.

Reagan told the justices that “the issue was framed incorrectly” at the appellate court level and “therefore, the court’s analysis never reached the true heart of the issue.”

While the appeals panel found that the penalties under the TCPA were punitive damages that were not insurable, Reagan told the justices the panel never examined the policies and “did not engage in a close reading” of Beaver v. Country Mutual Insurance Co. (1981) or any other cases on the topic.

The court in Beaver, he said, focused on the conduct of the insured. The Beaver court noted in its ruling that punitive damages act as a punishment and a deterrent, but that they would serve no useful purpose if an insured was allowed to shift the burden of paying these damages to its insurer.

As such, Reagan told the justices the issue before them isn’t whether punitive damages are insurable, but rather “whether the conduct of the insured, which gave rise to the damages, can be insured.”

He said the appellate court also didn’t take into account public policy in favor of honoring private contracts, such as the parties’ insurance policies.

Justice Rita Garman asked Reagan if he wants the court to use a “case-by-case, conduct-by-conduct analysis” when looking at these types of situations.

“Absolutely, your honor,” Reagan said.

On behalf of Standard, Chemers asked the court to affirm the appellate court, which he said “got it right” when it determined that the $500 penalty under the TCPA constitutes punitive damages.

He said “Lay can’t hide behind what the sender” of the faxes did and is still liable even if it did hire an outside company to send the faxes.

Reagan, however, said Lay “innocently hired” a company to fax its advertisement and under Beaver, did not represent conduct that was wanton or willful in nature.

Both attorneys told the justices that the lower court didn’t address some of the other issues in the case, such as the conduct of class counsel.

Chemers said Lay fired the attorney the insurance company hired to represent the real estate agency in the class action suit and then agreed to settle the matter.

“To call it a settlement is kind of questionable,” he said, adding that Standard did not raise the issue over class counsel conduct because “we didn’t know what their conduct was” and were simply “presented with their settlement.”

He said it’s not much a settlement “for an insured to fire its lawyer and then roll over and say ‘OK, enter a judgment against me’” with the idea that the insurance company would then cover the judgment.

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