If It Walks Like a Duck and Talks Like a Duck … IL Appellate Court Applies Violation of Statutes Exclusion To Preclude Coverage for Non-TCPA Counts in Blast Fax Suit

On May 2, 2014, the Illinois Appellate Court, Second District enforced the Violation of Statutes Exclusion to preclude coverage entirely for a $4.9 million settlement arising out a blast fax suit.  The case, G.M. Sign, Inc. v. State Farm Fire & Casualty Company, 2014 IL App (2d) 130593, is the first published appellate decision interpreting this standard ISO exclusion to conversion and consumer fraud causes of action.

In G.M. Sign, the underlying lawsuit contained causes of action for violations of the Telephone Consumer Protection Act (TCPA) (47 U.S.C. § 227) and the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1), as well as common law conversion.  State Farm insured the fax sender, Michael Schane and Academy Engraving Co.  State Farm disclaimed any duty to defend, and the insureds entered into a settlement agreement with the class plaintiffs, which included a covenant not to execute.

G.M. Sign filed a declaratory judgment action against State Farm.  State Farm contended, in pertinent part, that the policy’s Violation of Statutes Exclusion precluded coverage for the underlying lawsuit.  The Exclusion states, that there is no coverage for, in pertinent part, “property damage,” “personal injury,” and “advertising injury” “arising directly or indirectly out of any action that violates or is alleged violate” the TCPA.  In spite of the exclusion, the trial court found that State Farm had a duty to defend and was estopped from asserting “policy-based defenses to coverage.”

The Appellate Court correctly reversed the trial court, holding that the Exclusion applied because the acts that formed the basis of the TCPA count of the underlying complaint were the same as those that formed the basis for the conversion and Consumer Fraud Act counts.  The Appellate Court further recognized that:  (1) the phrase “arising out of” is broad, (2) G.M. Sign would not be able to prove that the insureds were liable without also proving that they violated the TCPA, and (3) but for the sending of the faxes, the plaintiff class could not have suffered any injury.  Notably, the Appellate Court rejected Nationwide Mutual Insurance Co. v. Harris Medical Associates, LLC, No. 4:13-cv-7CAAS, 2013 WL 5341498 (E.D. Mo. Sept. 23, 2013), and instead relied on G.M. Sign, Inc. v. Auto-Owners Insurance Co., No. 301742, 2012 WL 4840592 (Mich. Ct. App. Oct. 11, 2012).

This ruling should signify a trend whereby courts apply the Violation of Statutes Exclusion and similarly worded exclusions broadly and in light of the purpose for which they were intended—to eliminate insurers’ exposure, once and for all, for blast fax suits.