On October 31, 2013, the Northern District of Illinois forced two insurers to cover a $6 million settlement of a TCPA class action despite claims that their insured, M&M Retail Center, Inc., settled for an inflated amount it knew it would never have to pay. Maxum Indemnity Co. v. Eclipse Manufacturing Co., 1:06-cv-04946 (N.D. Ill. Oct. 31, 2013)
In a previous ruling, the Court held that the two insurers, Maxum Indemnity Co. and Security Insurance Co. of Hartford, had the duty to defend M&M in the underlying class action lawsuit. In that case, the class plaintiffs alleged that they received five blast faxes in violation of the TCPA. Copies of the fourth and fifth faxes were produced in the litigation, but no one could locate copies of the first, second, and third faxes and their contents were unknown. So, the court awarded summary judgment to M&M on the first through third faxes and summary judgment to the class plaintiffs on the fourth and fifth faxes for a total of $3,862,500. This amount equals $500 per fax, the liquidated damages amount provided for under the TCPA. The class then filed a motion for reconsideration, asking the court to reconsider its award of summary judgment to M&M for the first, second, and third faxes.
While that motion for reconsideration was pending, the parties participated in a settlement conference and determined that M&M could not pay the $3.86 million judgment and would have to enter bankruptcy if the class pursued it. At that point, both parties understood that the only way the class could collect on a judgment was through M&M’s insurance policies. At later a settlement conference before a Magistrate Judge, M&M consented to entry of a judgment for $5,817,150, allocated as $150 per fax for faxes one through three and the full $500 per fax for faxes four and five. The insurers were invited to that settlement conference, but declined to participate. Following this conference, the District Judge held a fairness hearing and found that the settlement was a “result of good faith arm’s length negotiations by the parties” and “made in reasonable anticipation of liability.” The District Judge also vacated the summary judgment ruling, which was a condition of settlement.
Then, in the coverage case, the insurers claimed that M&M only agreed to such a high judgment because it colluded with the class plaintiffs and knew it would never have to pay. Specifically, the insurers argued that since the District Court already awarded M&M summary judgment for faxes one, two, and three, M&M would never have agreed to pay $150 per fax for those faxes if it would have had to satisfy the judgment itself. M&M responded that it entered into the settlement in reasonable anticipation of its liability and did nothing wrong. The Court first noted that M&M’s decision must be viewed through the lens of a prudent uninsured. It was not persuaded by M&M’s argument that the settlement for $150 per fax for faxes one, two, and three was reasonable because the Court’s summary judgment award on those faxes could have been overturned on the class plaintiff’s motion for reconsideration or a subsequent appeal, finding those possibilities remote. Nonetheless, the Court held that in M&M’s favor for other reasons, finding no collusion because an experienced Magistrate Judge guided negotiations, the insurers who did not participate were invited to do so, the value of the faxes for faxes 1-3 was discounted from $500 per fax to $150 per fax, and the District Judge in the underlying class action determined the settlement to be fair.
The Court also held that TCPA blast fax claims fall within advertising injury coverage and are not uninsurable punitive damages, following the Illinois Supreme Court’s decision in Std. Mut. Ins. Co. v. Lay, 2013 IL 114617 (IL 2013) (For a longer discussion of insurance coverage for TCPA class actions, see our previous article “Call Me, Maybe? A Nationwide Survey of Insurance Coverage for TCPA Class Actions,” available here: https://www.classactionlawsuitdefense.com/2013/10/21/call-me-maybe-a-nationwide-survey-of-insurance-coverage-for-tcpa-class-actions/).
Given this ruling, insurers should consider active participation in settlement talks in underlying litigation and, if necessary, object early to terms they find unreasonable. And, parties settling TCPA claims should evaluate disagreements with their insurers early and often in this new frontier of class litigation.