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Third Circuit holds liability for sending junk faxes not covered by insurance
Last month, the Third Circuit affirmed a decision by the Eastern District of Pennsylvania that a law firm's Commercial General Liability insurance policy, which covered “property damage” and “advertising injury,” did not extend to claims brought by a class of consumers looking to recoup their damages stemming from a law firm’s violation of the Telephone Consumer Protection Act (“the TCPA”).[1]  In Auto-Owners Insurance Company v. Stevens & Ricci, Inc.,[2]  the appellate court held that the district court correctly exercised diversity jurisdiction over the declaratory judgment action brought by the plaintiff insurance company, and that its grant of summary judgment, in which it held that the insurance company was not responsible for paying the TCPA plaintiffs pursuant to an insurance policy, was also correct.[3]
Previous to the lawsuit’s filing, a putative class sued the law firm of Stevens & Ricci, Inc. (“Stevens & Ricci”) for sending them unsolicited faxes in violation of the TCPA. The class plaintiffs alleged that more than 39 consumers had received such offending faxes during 2016.[4]  Stevens & Ricci alerted the issuer of its business owners insurance policy, Auto-Owners Insurance Company (“Auto-Owners”), seeking coverage for defense of the action, as well as any damages resulting from a finding of liability. The class plaintiffs, Stevens & Ricci, and Auto-Owners reached a settlement agreement under which the parties agreed to entry of judgment in favor of the class, with a specific finding that Stevens & Ricci did not willingly or knowingly violate the TCPA.[5] Also, as a part of the settlement agreement, the class plaintiffs agreed to seek payment of $2 million only from Auto-Owners. The gamble was this: Auto-Owners had already filed a lawsuit for declaratory judgment seeking a ruling that the class plaintiffs’ claims fell within policy coverage. Thus, Stevens & Ricci tendered defense of that action to the class plaintiffs to stand in its shoes in the lawsuit.[6]
The district court found in favor of Auto-Owners on its motion for summary judgment, and the class plaintiffs appealed. Before the Third Circuit were two questions—first, did federal court jurisdiction exist over the dispute, and secondly, had the issue of coverage been decided correctly? With respect to the first question, the class plaintiffs argued that the district court had wrongfully exercised diversity jurisdiction over the dispute because, though complete diversity existed between the parties, the jurisdictional limit of $75,000 had not been met. The class plaintiffs argued that the value of each of their claims was statutorily capped at $500 per occurrence, which had to each be regarded as a separate amount in controversy per class plaintiff under the anti-aggregation rule.[7]
The Third Circuit rejected this argument, as the controversy in question before it was the determination of 39 claims for $500 each, but one claim by an insured against its insurer for the potential exposure of the underlying TCPA lawsuit. This number was determined by examining, not the $2 million settlement, but the potential exposure Auto-Insurers anticipated at the time the operative complaint in the declaratory judgment action was filed. The court held that this number was reasonably above the $75,000 limit—the class plaintiffs alleged that their ranks were “more than” 40 fax recipients.[8]  It would only take eleven more plaintiffs than the more than 40 alleged to reach the damage threshold of $75,000, as the class plaintiffs had asserted that treble damages should be added to the statutory award of $500 per class plaintiff. Furthermore, Stevens & Ricci had sought costs of defending the action from Auto-Insurers as well, which put the potential amount reasonably above the $75,000 threshold.[9]
Next, the Third Circuit addressed whether the class plaintiffs would be able to recoup the $2 million they sought from Auto-Insurers. Applying Pennsylvania law, the court observed that Auto-Insurer’s policy covered “property damage,” defined as “[p]hysical injury to tangible property, including all resulting loss of use of that property” stemming from an “accident.” The court held that the TCPA property damage alleged (wasted paper, toner, ink) was not accidental—though the violation of the law may not have been intentional, “[t]hose injuries are the natural and expected result of the intentional sending of faxes, a far cry from Pennsylvania’s definition of an ‘accident.’”[10]  Thus the property damage coverage did not apply.
Nor were the class plaintiffs’ claims covered by the “advertising injury” coverage outlined in the policy. The policy defined advertising injury as, among other things, “[o]ral or written publication of material that violates a person’s right of privacy.” The class plaintiffs urged that, as TCPA violations are a violation of privacy through the sending of unwanted faxes, this clause covered their injury.[11]   The Third Circuit disagreed, holding that the right to privacy can be broken down into two broad categories: the privacy interest in secrecy and the privacy interest in seclusion. In other words, the right to keep one’s confidential information confidential is one right to privacy, which is separate and apart from the right to be left alone. The TCPA, the court held, only protects the secrecy-based private right, not the seclusion-based right that this lawsuit alleged had been violated. Noting that “read in context, the Policy provides coverage only for violations of the privacy interest in secrecy, and thus does not cover violations of a right to seclusion” and that none of the allegations in the underlying TCPA suit related to the content of the faxed advertisements, the court held the advertising injury clause did not provide coverage for the class claims.[12]
This decision, which was reaffirmed a few weeks later by the denial for a motion for rehearing,[13] has important implications for business owners hoping that their insurance policies will shield them from TCPA liability. Unless they enter into policies that have specific riders carefully designed to cover unintentional violations of the TCPA and similar statutes, they must beware that standard commercial general liability policies are unlikely to cover damages incurred in TCPA lawsuits.
[1]The TCPA prohibits the “use [of] any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement. . . .” 47 U.S.C. § 227(b)(1)(C). The TCPA provides penalties in the form of statutory damages in the amount of $500 per fax. 47 U.S.C. § 227(b)(3)(B). Additionally, if it can be proven the defendant violated the TCPA “willfully or knowingly,” treble damages are permitted. 47 U.S.C. § 227(b)(3).
[2] No. 15-2080, 2016 U.S. App. LEXIS 16182 (3d Cir. Sept. 1, 2016).
[3] Id. at *3.
[4] Id. at *4.
[5] Id. at *7.
[6] Id. at *7-8.
[7] Id. at *11.
[8] Id. at *14.
[9] Id. at *30.
[10] Id. at *43.
[11] Id. at *48.
[12] Id. at *49.
[13] No. 15-2080, (3d. Cir. Sept. 30, 2016).


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