United States: Those Blasted Exclusions! Court Rules That Notice Of TCPA Exclusion In Renewal Policy Was Valid

Last week, the Illinois Court of Appeals released an opinion ruling that Cincinnati Insurance Company has no obligation to contribute an additional $4 million to a settlement of a class action claim brought under the Telephone Consumer Protection Act (TCPA).  Windmill Nursing Pavilion Ltd. v. Cincinnati Insurance Co. et al., 2013 IL App (1st) 122431 (Ill. App. 2013) (Available here: http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1122431.pdf)

In 2009, a class led by Windmill Nursing Pavilions Ltd. sued Unitherm, Inc. for allegedly sending blast faxes in violation of the TCPA.  Unitherm held two policies with Cincinnati, one which ran from April 7, 2003 to April 7, 2006, and a renewal policy which ran April 7, 2006 to April 7, 2007.  Both policies had a $1 million general aggregate limit, a $1 million products-completed operations aggregate limit, a $1 million personal and advertising injury aggregate limit, and a $2 million commercial umbrella liability coverage limit.  Unlike the first policy, the renewal policy contained a modification excluding coverage for "bodily injury," "property damage," or "personal and advertising injury" which arose out of "any action or omission" that violated the TCPA.

In the underlying class action, Unitherm, along with Cincinnati, agreed to a settlement with the class.  A $7 million consent judgment would be entered against Unitherm, but the class could only collect from Cincinnati to the extent coverage was available under Unitherm's insurance policies.  Cincinnati agreed to pay $3 million, representing the general aggregate limit and the umbrella limit under the first policy, and agreed that its obligation to pay the remaining $4 million would depend on the outcome of litigation over the following two carved out issues: (1) whether the notice of reduction in coverage regarding the TCPA exclusion added to the renewal policy was sufficient, and thus whether the TCPA exclusion is valid; and (2) whether the products-completed operations limit in either policy provides an additional $1 million in coverage.

As stipulated by the parties, the only notice Cincinnati provided to Unitherm of the TCPA exclusion was the notice of change that the endorsement was being added to the primary policy and the endorsements themselves for both the primary and the umbrella policy.  Cincinnati mailed the renewal policy, which contained all of these, on or about April 7, 2006, the day the renewal policy took effect.   Under Illinois law, when an insurer renews a policy but makes "changes in deductibles or coverage that materially alter the policy," the insurer has to provide written notice "at least 60 days prior to the renewal or anniversary date." Illinois Insurance Code § 143.17a.  Cincinnati conceded it did not meet this requirement, but claimed Ohio law, not Illinois law, applied, and the court agreed.

Under Ohio law, "an insured is entitled to adequate notice of a material change in the terms of an insurance contract; absent this notice, the insured is entitled to assume that the renewal policy contains the same terms as an original policy."  An insured is imputed with knowledge of the material change if actual notice is provided through a "separately attached and clearly worked letter describing the modifications."

Windmill claimed that Cincinnati's Notice of Change form contained within the policy was deficient under Ohio law because it was late, not "separately attached," and did not apply to the umbrella policy.  The court disagreed.  Since Cincinnati only modified coverage but did not terminate it, Ohio's 30 day notice requirement for non-renewal did not apply and no advance notice was required.  The court further held that the endorsements and the Notice of Change form were indeed "separately attached" because they were on separate pages attached to the renewal policy.  Finally, the endorsements and Notice of Change form specified that they related to both the commercial general liability coverage and the umbrella coverage.  Therefore, the court held, no coverage for TCPA violations was available under the renewal policy.

Windmill next sought an additional $1 million in coverage under the first policy's "Products-Completed Operation Hazard" coverage.  However, the Court held that since the faxed advertisements were meant to solicit orders for Unitherm's products and Unitherm was not in the business of selling advertisements, the faxed advertisements did not constitute Unitherm's "goods," "products," or "work" and were therefore not covered under the policy's "Products-Completed Operations Hazard."

Another Illinois Appellate Court recently used the same logic to resolve a different issue in Standard Mutual Ins. Co. v. Lay, 2014 IL App (4th) 110527-B (Ill. App. 2014) (Available here: http://www.state.il.us/court/Opinions/AppellateCourt/2014/4thDistrict/4110527.pdf).  In that case, the court ruled that a professional services exclusion did not apply to a TCPA claim against a real estate company.  Although the insured was a real estate broker and therefore a professional service provider, the TCPA claim arose out of the insured's advertisements, not its professional real estate services and the professional services exclusion was therefore inapplicable.  (For more on this decision, see our previous post "Three, Two, One, Blast Off! Illinois Court Finds Coverage for Blast Fax TCPA Violations," available here: http://www.classactionlawsuitdefense.com/2014/01/29/three-two-one-blast-off-illinois-court-finds-coverage-for-blast-fax-tcpa-violations/).

As TCPA exclusions become more prevalent, it will be interesting to see whether insureds increasingly challenge the application of the exclusion based on defective notice of the change to the policy.

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