In the final days of its September term, the Illinois Supreme Court allowed a petition for review in Standard Mutual Insurance Co. v. Lay. [pdf] In Lay, the Court will decide whether the Federal statutory penalty for sending junk faxes is in the nature of punitive damages, and thus uninsurable under Illinois law.

The defendant in Lay is a small real estate agency. According to the complaint, the defendant hired a “fax broadcaster” in connection with advertising a particular property listing. “Fax broadcasters” offer a “blast fax” service, sending advertisements to thousands of fax machines cheaply.

According to the Federal Telephone Consumer Protection Act, it is unlawful to send unsolicited advertisements to a fax machine, whether by use of a fax machine, computer or any other device. 47 USC 227(b)(1)(C).  The TCPA creates a strict liability private right of action, with damages equal to actual monetary loss to the plaintiff or $500 per fax, whichever is greater. The penalty is trebled if the violation is willful or knowing.

The fax broadcaster in Lay allegedly represented to the defendant that only persons who had agreed to receive advertisements would get its blast fax. Allegedly this was not so. So not long after the defendant’s blast fax was sent, the underlying action was filed, seeking a trebled penalty of $1,500 for each of the 3,478 faxes purportedly sent.

The defendant tendered its defense to its insurer, which accepted under a reservation of rights. Ultimately, the defendant agreed to settle the underlying action, with the plaintiff class representative agreeing not to execute against the defendant’s assets, with the exception of its insurance policy.

Meanwhile, the insurer had filed a declaratory judgment action, seeking a declaration that the insured’s liability was not covered under the policy. Following the settlement of the underlying action, the class representative became actively involved in the dec action, and the insurer and the class representative filed cross motions for summary judgment. The Circuit Court granted the insurer’s motion, finding no duty to defend or indemnify.

The Appellate Court affirmed. After clearing away a preliminary issue, finding that the insurer’s reservation of rights letter had adequately disclosed the nature of its conflicts with the insured, the Court turned to the TCPA. The class representative argued that the damages from the TCPA action were covered under both the advertising injury and property damage provisions of the policies. The Appellate Court disagreed.

The purpose of the TCPA, according to the Court, is to deter sending of unwanted fax transmissions. The $500-per-fax penalty, the Court pointed out, is far in excess of any damages suffered by the recipient, which are limited to paper, toner and annoyance. If construed as compensatory damages, the penalty is clearly a windfall.

Illinois courts have written that the purposes of punitive damages are (1) retribution against a defendant; (2) deterrence of future wrongs by the defendant; and (3) general deterrence of others. The final two purposes apply equally to the TCPA penalty, the Court found. The Court conceded that at least some other jurisdictions have held that the TCPA is remedial rather than penal in nature, but declined to follow those decisions, pointing out that allowing defendants to get insurance coverage for the penalty would frustrate the purpose of deterring violations. The Court held that TCPA statutory damages are in the nature of punitive damages, and therefore uninsurable as a matter of law in Illinois.

The Supreme Court will likely decide Lay sometime in the first half of next year.