Antitrust Law Daily Wrap Up, PRIVACY—Ill. App.: Hearing required for defendant’s insurer in TCPA class action settlement, (Jun 26, 2015)

By Edward L. Puzzo, J.D.

The insurer for the defendant in a Telephone Consumer Protection Act class action settlement was entitled to a hearing on whether the $6 million settlement was reasonable, the Illinois Appellate Court in Elgin has ruled (Stonecrafters, Inc. v. Wholesale Life Insurance Brokerage, Inc. June 23, 2015, Burke, M.).

Stonecrafters, on behalf of itself and a class, brought claims against Wholesale Life for sending mass unsolicited advertisements by facsimile transmission to the class, in violation of the Telephone Consumer Protection Act (TCPA) and the Illinois Consumer Fraud and Deceptive Business Practices Act. Plaintiff and defendant reached a settlement calling for the payment of approximately $6 million. Plaintiff further agreed to not seek recovery of the damages from Wholesale itself, but rather only through proceeds of Wholesale’s insurance coverage through its insurers Milwaukee Insurance Company (MIC), its parent Unitrin, and American Economy. The trial court found the settlement to be reasonable and granted plaintiff summary judgment.

Action against insurers. Plaintiff consequently brought supplementary third-party actions against the insurers, seeking payment of insurance proceeds in satisfaction of the judgment against Wholesale under the insurance policies’ “advertising injury” and “property damage” provisions. Plaintiff further argued that MIC was estopped from raising any defenses because it had breached its duty to defend Wholesale in the underlying litigation by denying Wholesale’s claim for defense and indemnity under the policy after Wholesale had notified MIC of plaintiff’s claims. The insurers denied that the allegations of the class action complaint were covered by the policies.

During the pendency of the case, the Illinois Supreme court decided, in Valley Forge Insurance Company v. Swiderski Electronic, Inc., 223 Ill. 2d 352 (2006), that TCPA claims for unsolicited faxes do trigger coverage for advertising injury.

Plaintiff then argued that the insurers should not have the opportunity to investigate the reasonableness of the settlement made between plaintiff and defendant, but the trial court disagreed, ordering the parties to move forward with discovery. In discovery, Wholesale’s President testified that he believed the $6 million settlement was reached by simply adding insurer American Economy’s $4 million coverage limit to MIC’s $2 million coverage limit.

On March 26, 2014, the trail court granted summary judgment in favor of plaintiff and against MIC, finding that (1) a reasonably prudent person in the position of defendant would have agreed to settle this case for the amount of $5.99 million; (2) considering the totality of the circumstances in the case, the decision of the insured did conform to the standard of a prudent uninsured; (3) the common sense consideration for the totality of the facts bearing on the liability and damage aspects of plaintiff’s case as well as the risks of going to trial when applied to the facts and circumstances support the finding that a reasonably prudent person would have entered into the same settlement as defendant did; (4) there was a substantial risk of a judgment of damages between more than $8 million at $500 per TCPA violation and more than $25 million for treble damages of $1,500 for willful or knowing violations, and this was sufficient proof that defendant acted reasonably and prudently; and (5) after reviewing the concerns that the settlement in question was within the policy limits of the available insurance coverage, there was no evidence of collusion in settling the case for $5,999,999.98. MIC appealed.

Guillen standards. The appellate court stated that it must evaluate, under standards set forth in Guillen v. Potomac Insurance Company of Illinois, 203 Ill. 2d 141 (2003), whether a settlement reached by an insured defendant, where the insurer has breached its duty to defend, is binding on the third-party insurer. Under Guillen, there are two “reasonableness” inquiries to be made. Regarding the insured’s decision to settle, the test is whether the insured decision conformed to the standard of a prudent uninsured, considering the totality of the circumstances. Regarding the amount of the settlement, the test is what a reasonably prudent person in the position of the insured would have settled for, given the merits of plaintiff’s claim.

Under these standards, the trial court had found that the $6 million settlement was reasonable. But, the appellate court noted, the lower court did not address discrepancies in the numbers of recipients who received the offending faxes, which had a direct bearing on the amount of damages possible at trial if settlement had not been reached. The evidence regarding the number of recipients likely to have received the fax transmissions—and the predictable claimant response rates—should be considered by a fact finder in a Guillen hearing, the appellate court stated. Another factor calling into doubt the reasonableness of the settlement amount was that it was nearly identical to the maximum amount of defendant’s insurance coverage. Finally, since the settlement called for unclaimed money, over half the total, to be distributed cy pres, it raised the question of whether a prudent uninsured would agree to such a settlement.

Guillen hearing required. For the above reasons, the appellate court stated, the insurer was entitled to a hearing under the Guillen standards for determining the reasonableness of the settlement. The appellate court reversed the summary judgment in favor of plaintiff and remanded the case for further proceedings. The court directed the lower court to address the following specific issues: (1) the parties’ ability to identify the fax recipients; (2) the predicted claimant response rate; (3) whether it was reasonable to consider the staggering maximum exposure; (4) the reasonableness of a large cy pres distribution; (5) whether the settlement was the product of an arm’s length transaction; (6) whether there was an abdication of a true defense; and (7) whether there were strategic efforts to implicate coverage up to the policy limits.

The case is Civil Action No. 2-14-0728; 2015 IL App (2d) 140728-U.

Attorneys: (Rieck & Crotty, PC) and (Best Vanderlaan & Harrington) for Wholesale Life Insurance Brokerage, Inc. (Anderson & Wanca) and (Diab & Bock) for Stonecrafters Inc.

Companies: Wholesale Life Insurance Brokerage, Inc.; Stonecrafters Inc.

Cases: Advertising Privacy StateUnfairTradePractices IllinoisNews