Fax Blast From the Past: Third Circuit Denies Coverage in TCPA Action

The Third Circuit denied coverage for alleged violations of the Telephone Consumer Protection Act (TCPA), while also ruling on a jurisdictional question regarding the amount in controversy applicable to declaratory judgment actions when they emanate from a class action lawsuit. This case reminds that even without a TCPA exclusion, blast fax suits may not present covered property damage or advertising injury claims.

In Auto-Owners Insurance Co. v. Stevens & Ricci, Inc., No. 15-2080, 2016 U.S. App. LEXIS 16182, (3d Cir. Sep. 1, 2016), the three judge panel issued a split ruling upholding a district court’s decision that none of the injuries alleged by the plaintiff class were covered losses under the subject business owners insurance policy. The underlying lawsuit alleged, in essence, that the class of purported victims of the insured’s 2006 “blast fax” advertising scheme were injured by their seclusion rights having been violated and by their loss of paper, ink, and toner as a result of the printing of the unauthorized fax advertisements. Prior to the settlement of the underlying lawsuit, the insurer, who was defending the case under a reservation of rights, brought this declaratory judgment action to determine its obligations under the policy.

Because there was no “blast fax” exclusion in the policy that would, by itself, completely bar coverage, the Third Circuit had to analyze whether the losses alleged by the plaintiff class fell under the policy’s coverage for “advertising injury” or “property damage” caused by an “occurrence.” First, with regard to the “property damage” coverage, the court determined that the claimed losses, namely the loss of paper, ink, toner, and use of the fax line, were natural and expected results of intentionally sending faxes and, therefore, were neither an accident nor an “occurrence.” Then, with regard to the “advertising injury” coverage, the Third Circuit held there was no coverage because the Privacy Offense under the policy definition of “advertising injury” covers violations of secrecy-based privacy rights, which protect private information, but does not cover seclusion-based privacy rights, the right to be free from nuisance. Because unsolicited faxes infringe on seclusion and not on secrecy, the Third Circuit concluded the policy did not afford coverage under this part. Thus, even in the absence of a TCPA exclusion, all hope is not lost for insurers.

Notably, the Third Circuit also considered whether the amount in controversy requirement for diversity jurisdiction was satisfied. The plaintiff class argued that it was not because no single class member’s claim exceeded $75,000.00, and pursuant to the anti-aggregation rule, the claims could not be aggregated to meet the requirement. The insurer countered that the dispute at issue was actually between itself and its insured, not the aggregate class members; in turn, the dispute encompassed the insurer’s total indemnity and defense obligation under the policy. Adopting persuasive authority from the Seventh Circuit, the Third Circuit ruled that when the insurer filed its declaratory judgment complaint, its dispute was, indeed, with the insured regarding its indemnity obligations under the policy. The dispute did not require an aggregation of the class members’ claims, as they had not yet entered into the subject settlement with the insured. Since the insurer’s potential duty to indemnify the insured at the time it initiated this declaratory judgment action exceeded $75,000, jurisdiction was proper.

This portion of the decision reminds insurers of the importance of filing declaratory judgment actions sooner rather than later with respect to class action lawsuits likely to settle. Otherwise, insurers risk being shut out of federal court, which in some jurisdictions might be preferable to state court.