After vacating its prior decision pursuant to an order by the Illinois Supreme Court, the Appellate Court of Illinois, Second District, in G.M. Sign, Inc. v. Pennswood Partners, Inc. 2015 IL App (2d) 121276-B, determined that the insurers, Maryland Casualty Company and Assurance Company of America (collectively “Zurich”), had no duty to defend or indemnify Pennswood Partners, Inc., with respect to a blast fax case filed by G.M. Sign, Inc. The crux of the Appellate Court’s decision was how to properly analyze a potential conflict of laws.
The underlying case involved a blast fax class action lawsuit against Pennswood, an executive placement services provider, alleging that Pennswood sent thousands of fax advertisements to numerous recipients. Specifically, the underlying complaint alleged that Pennswood “knew or should have known that” it did not have permission to send the fax advertisements. The three count complaint alleged a violation of the Telephone Consumer Protection Act (TCPA); common law conversion of the plaintiff class’ toner, paper, memory, and employee time; and a violation of the Illinois Consumer Fraud and Deceptive Practices Act. Zurich denied Pennswood’s tender of defense. The underlying suit was settled for $8 million and it was agreed that the amount would be enforceable only against the proceeds of the Zurich policies. Additionally, Pennswood assigned its rights under the policies to the class.
Zurich then filed a declaratory judgment against G.M. Sign and Pennswood, seeking a declaration that there was no coverage under the policies issued by Zurich. On cross-motions for summary judgment, the trial court concluded that Pennsylvania and Illinois law conflicted as to whether fax blasting constituted “property damage” caused by an “occurrence.” The trial court noted that Illinois law provides coverage for blast-fax cases while Pennsylvania law does not. After conducting a choice of law analysis, the trial court determined that Pennsylvania law would apply and, therefore, ruled that Zurich did not have the duty to defend or indemnify Pennswood.
Pennswood and G.M. Sign filed a motion to reconsider, arguing the trial court erred in relying on a Pennsylvania federal court’s decision that predicted the outcome under Pennsylvania law. The court granted the motion to reconsider and entered summary judgment in favor of Pennswood and G.M. Sign. Zurich appealed, and the Appellate Court found that Zurich did not have a duty to defend Pennswood. However, that decision was vacated in light of Bridgeview Health Care Center, Ltd. v. State Farm Fire & Casualty Co., 2014 IL 116389, 10 N.E.3d 902, which held that federal cases that make an Erie prediction do not, by themselves, give rise to a conflict of laws.
On the most recent appeal, Zurich contended that there is indeed a conflict between Pennsylvania and Illinois law and, therefore, judgment should be entered in its favor. In exploring whether a conflict existed, the Appellate Court cited Bridgeview for the notion that a federal district court’s Erie prediction does not constitute state law and cannot be used to establish a conflict of laws. This was highly relevant because a Pennsylvania federal district court clearly held that an insurer did not have a duty to defend a class action blast-fax suit. Melrose Hotel Co. v. St. Paul Fire & Marine Ins. Co., 432 F. Supp. 2d 488 (E.D. Pa. 2006). Nevertheless, the Appellate Court recognized an exception to the general rule that the district court’s decision may be considered if the holding is based on the state’s appellate precedent. In other words, the district court’s analysis of the underlying state law may give rise to a conflict of laws, but the Erie prediction, itself, would not. Thus, the Appellate Court considered the Melrose court’s analysis of the holdings of Pennsylvania’s intermediate appellate courts.
After analyzing Pennsylvania law, which controlled in the event of a conflict of laws, the Appellate Court concluded that the underlying complaint did not allege an “accident.” Notably, the complaint did not allege that Pennswood accidentally sent faxes to those who did not consent to receive them. Further, even if negligence was alleged, there would be no coverage since the damage caused by the faxes, i.e., the loss of ink, paper, and toner, was foreseeable. As a result, the Appellate Court held that Zurich did not owe Pennswood a duty to defend with respect to the policies issued by Zurich.