The Federal Telephone Consumer Protection Act provides that it’s unlawful to send unsolicited advertisements to a fax machine. 47 USC 227(b)(1)(C). The statute creates a private right of action, with damages equal to actual losses or $500 per fax, whichever is greater. If the violation is willful and knowing, then it’s $1,500 per fax.

So are TCPA statutory penalties insurable under Illinois law? Earlier this month, the Illinois Supreme Court handed down its unanimous decision in Standard Mutual Insurance Co. v. Lay. The answer, the Court held in an opinion by Justice Charles E. Freeman, was "yes." Our detailed summary of the facts and lower court decisions in Lay is here. Our report on the oral argument is here.

The defendant in Lay hired a "fax broadcaster" who sent a "blast fax" advertisement to 3,478 fax machines. The problem was, allegedly few if any of the targets had given permission to receive advertisements by fax. So the defendant got hit with a TCPA lawsuit seeking $1,500 for each of the faxes sent. The defendant tendered the complaint to its insurer, who agreed to defend under a reservation of rights; but the defendant then filed a declaratory judgment action, seeking a finding of no coverage on the grounds that the statutory penalty was akin to punitive damages, and therefore uninsurable. The Circuit Court granted the insurer’s motion for summary judgment and the Appellate Court affirmed.

The Court quickly disposed of a preliminary issue, rejecting the insured’s claim that the insurer was estopped from raising any policy defenses. The insured’s reservation of rights letter specifically referred to coverage defenses, including an "extensive list" of the possible candidates, and described a possible conflict of interest. The insured wasn’t prejudiced by the representation of the attorney chosen by the insurer. Therefore, there could be no estoppel.

Turning to the coverage question, the Court described the problem of junk faxes which the Congress intended to address in passing the TCPA. The statute is "clearly within the class of remedial statutes which are designed to grant remedies for the protection of rights, introduce regulation conducive to the public good, or cure public evils," the Court found. In other words, the penalty wasn’t intended to punish senders of junk faxes; it was intended to stop the practice entirely. The penalty had the additional purpose of giving private plaintiffs an incentive to sue under the statute, the Court noted. The Court specifically acknowledged that in finding that the TCPA penalty was remedial and thus insurable, it was widening the split in the lower courts on the question. So don’t be surprised if this issue winds up before the U.S. Supreme Court in the next three to five years.