State Farm’s Relentless Pursuit to Deny Coverage for TCPA Cases - Telephone Consumer Protection Act
As policyholder lawyers, one can usually count on a few basic mistakes that insurers will make. First, they wrongfully deny coverage and fail to defend. They abandon their insured who is then left to its own devices to protect itself. The policyholder enters into a consent judgment or settlement with the plaintiff and then the plaintiff agrees to pursue collection only from the insurer. Given that the denial was wrongful and the settlement was reasonable, the insurer pays.
In G.M. Sign, Inc. v. Schane, 2013 IL App (2d) 120434, State Farm went on the offensive in a completely new direction and won. After State Farm disclaimed any coverage in the underlying action against Schane (its insured) for violations of the Telephone Consumer Protection Act (“TCPA”), it also filed a petition under section 2-1401 of the Illinois Code of Civil Procedure to vacate the consent judgment in the TCPA class action. State Farm argued that it acted diligently and it only learned of the settlement after the plaintiff class filed the declaratory judgment complaint. Its 2-1401 petition claimed there were potentially meritorious defenses to the TCPA action, such as that G.M. Sign was inadequate as the class representative, the notice provided to the class was inadequate, and the settlement terms were unfair to absent class members.
In ruling on the 2-1401 petition, the trial court found that State Farm had not been diligent. It dismissed the 2-1401 petition, finding that State Farm had been aware of the underlying litigation and made a conscious decision not to participate based on an explicit TCPA exclusion in the policy. At the same time as it filed its motion to approve the settlement, G.M. Sign filed an amended complaint which potentially brought the claims within the insurance policy. The Illinois appellate court reversed the dismissal of the petition and the cause was remanded for an evidentiary hearing.
Meanwhile, the declaratory judgment proceeded. The trial court ruled that State Farm had a duty to defend and indemnify. The Illinois appellate court reversed in G.M. Sign, Inc. v. State Farm, 2014 Il App (2d) 130593. The appellate court found there was no duty to defend the TCPA Suit because the conversion and Illinois Consumer Fraud counts arose from the same acts as the alleged violation of the TCPA. Because the exclusion was for property damage or advertising injury “arising directly or indirectly” out of any action or omission that violates or is alleged to violate the TCPA, it applied to the other counts. “But for” the sending of the faxes, plaintiff would have suffered no injury because the only act or omission alleged is sending the faxes. Because there was no duty to defend, there was no estoppel.
The coverage case reflects the lessons State Farm has learned for how to draft an exclusion, so that even non-TCPA counts will be excluded. The 2-1401 Petition reflects the “out of the box” thinking that State Farm will use to overturn class action settlements.
Here’s the timeline for how both actions proceeded:
Oct. 1, 2010: Schane entered into a settlement agreement for $4.9 million in 10 CH 4480 Lake County (“TCPA Suit”).
Oct. 7, 2010: In TCPA Suit, court entered order certifying the settlement and preliminarily approving settlement.
Nov. 12, 2010: In TCPA Suit, plaintiff sought leave to file amended complaint to add a conversion and consumer fraud count, and made no express reference to the TCPA.
Dec. 10, 2010: Schane tendered amended complaint to State Farm, but did not mention settlement.
Dec. 16, 2010: In TCPA Suit, trial court held fairness hearing and entered final approval of settlement.
Feb. 24, 2011: G.M. Sign filed declaratory judgment against State Farm in 11 MR 315 Lake County, alleging estoppel (“DJ Action”).
Nov. 2011: In DJ Action during discovery on reasonableness of settlement, State Farm alleges it learned of facts to support 2-1401 Petition.
Nov. 30, 2011: In DJ Action, trial court ruled State Farm had a duty to defend Schane, breached the duty, and was estopped from raising policy-based defenses to coverage.
Dec. 29, 2011:In TCPA Suit, State Farm files section 2-1401 petition to vacate or modify December 16, 2010 judgment.
Mar. 8, 2012: In TCPA Suit, court denied the 2-1401 petition finding State Farm was not diligent in filing the petition.
Feb. 27, 2013: In DJ Action, trial court ruled that estoppel did not preclude determination of the extent of coverage and reasonableness of settlement agreement. Court found TCPA damages were insurable, products/completed ops did not cover damages caused by advertisements, damages were result of single occurrence; settlement was reasonable.
Mar. 1, 2013: In TCPA Suit, Second District reversed court’s dismissal of 2-1401 petition and cause remanded for evidentiary hearing. 2013 IL App (2d) 120434. There were further proceedings on remand on a parallel track with the DJ Action, primarily related to discovery into whether there was a meritorious defense to the class certification. Motion to stay granted pending final resolution of DJ Action.
May 15, 2013: In DJ Action, trial court denied motions to reconsider ruling that there was coverage for TCPA consent judgment.
May 2, 2014: In DJ Action, appellate court reverses trial court and finds no duty to defend TCPA Suit 2014 Il App (2d) 130593. Petition for Rehearing filed. Plaintiff will file PLA, when rehearing denied.
Counsel for GM Sign: David Oppenheim, Anderson & Wanca (Class Action Plaintiff Counsel; formerly with Wildman as coverage lawyer for insurers)
Counsel for State Farm: Rosa Tumialan, Dykema Gossett PLLC