Risk Management

The "unsolicited information" endorsement

New liability policy exclusion from ISO
targets spammers, junk faxers, and telemarketers

by Donald S. Malecki, CPCU

One of the more annoying interferences with business operations occurs when someone sends an unsolicited facsimile advertising a product or service, such as a low-fare vacation package, an opportunity to purchase low-cost health insurance, or a message promoting office equipment at substantial cost savings. These facsimiles commonly state that if recipients do not want to receive future facsimiles, they should call the phone number as shown.

Calling the number to request the cessation of such unsolicited facsimiles appears to be a complete waste of effort, since these transmissions seem to continue, much to the chagrin of those on the receiving end. Adding to the annoyance are the loss of recipients’ paper, unnecessary use of cartridge ink, and the time employees take to read and toss these unwanted advertisements into File 13. From the perspective of many, this annoying conduct is an intrusion into the private space of the recipients.

What also may be frustrating to recipients is their inability to return these facsimiles the same way they arrive, except with an insertion of another message to cease and desist, along with a warning that these documents will be part of a class action suit that is likely to result if enough recipients get annoyed enough to hire an attorney. After pondering how good it would feel to do this, perhaps one will conclude that it is just as well that these facsimiles cannot be returned that way, because the person returning a facsimile could also be viewed as being in the same category as the violators themselves!

ISO steps in

In March 2005, if not sooner, ISO will make available a mandatory exclusion for insurers to add to their liability policies. This endorsement is intended to specifically exclude claims and suits alleging bodily injury, property damage, and personal and advertising injury arising from unsolicited facsimiles or other communications that violate or allegedly violate the federal Telephone Consumer Protection Act (TCPA) of 1991, or any similar state statute, ordinance or regulation.

The TCPA defines an unsolicited advertisement as “any material advertising the commercial availability or quality of any property, goods, or services which is transmitted to any person without that person’s prior express invitation or permission.”

The act addresses not only the use of any telephone facsimile machine, computer or other equipment to send an unsolicited advertisement, but also encompasses telemarketing calls that have become an annoyance in recent years. In fact, the TCPA permitted the Federal Communication Commission to establish a national “do-not-call registry” for consumers who do not want to receive sales pitches from telemarketers.

The new endorsement is titled “Exclusion - Violation of Statutes That Govern E-Mails, Fax, Phone Calls or Other Methods of Sending Material or Information,” CG 00 67. Translated, this endorsement is intended to affect violators who send unsolicited facsimiles or computer spam, and telemarketers or persons who have a habit of calling people at the most inopportune times, from both a federal and state law perspective.

Double trouble

Some of the businesses engaged in these marketing practices have been the targets of class action suits for having violated the TCPA. What can be double trouble for violators, who now will be without insurance for any litigation filed against them, is that fines also can be assessed under this federal law, which sets as damages: $500 for each violation/each illegal fax or telephone call, and triple damages when the violations are committed “willfully and knowingly.”

Without an exclusion applicable to commercial liability policies, these violators might be able to obtain coverage for the damages they cause by issuing unsolicited communications. If past court decisions are any indication, violators are fairly certain to obtain insurance coverage, despite the efforts of insurers to reject defense and indemnity for damages.

One such recent case is Universal Underwriters Insurance Co. v. Lou Fusz Automotive Network, Inc., 300 Fed. Supp.2d 888 (U.S.D.C. D. Mo. 2004), which involved two auto dealerships and their insurance programs that included garage liability policies.

Class action suits were brought against the two dealerships by two claimants on behalf of all persons harmed by the dealers, alleging unlawful transmission of unsolicited facsimile advertisements that were in violation of the Telephone Consumer Protection Act of 1991. The claimants not only sought injunctive relief, but also the full amount of statutory damages as set forth in the TCPA.

One of the dealers denied that it ever sent unsolicited advertisements and even went so far as to argue that it had not authorized anyone to send these facsimiles on its behalf, nor did anyone have such permission. The other dealer admitted that it had contracted with a company engaged in the distribution of facsimile advertisements and other services to distribute advertisements. This dealer also maintained it did not know the identity of the recipient even though it knew that such facsimiles would be sent.

When these class actions were submitted to the insurer, the insurer denied it owed any defense, but accepted the defense pursuant to a reservation of rights and then filed a motion before the court denying defense and indemnity of both cases, which were consolidated by the court.

The insurer asserted that these claims were not covered for two reasons: (1) the TCPA violations alleged by the claimants did not seek “civil penalties,” and (2) the transmission of unauthorized facsimiles was an “intentional act,” which is not a covered occurrence under garage liability policies.

In considering the insurer’s first argument, the court stated that garage policies did not define “civil penalties,” but did include a definition of “damages” as “amounts awardable by a court of law,” and added the caveat that “damages” did not include “civil penalties, fines or assessments.”

The problem with the insurer’s first argument was that the TCPA violations of the claimants did not allege civil penalties. In fact, no party, according to the court, argued that the award of actual monetary damages was somehow a civil penalty. Since the claimants potentially sought to recover actual monetary loss, potential damages were being sought, thereby triggering the duty to provide defense.

The insurer’s second argument, that the transmission of facsimiles was an intentional act, also failed. The court held that since the two auto dealerships denied intentionally transmitting or authorizing anyone to transmit unauthorized facsimiles, whether the acts were intentional was at best “coverable.” With a potential for coverage, therefore, the court decided that the insurer had a duty to defend.

Insureds’ arguments

The two auto dealerships maintained that the TCPA allegations triggered coverage under their respective garage liability policies in four ways: (1) by invading the privacy rights of those who received the faxes; (2) by presenting a “private nuisance” under the policy; (3) by invading the right of those who received the faxes to their possession of personal property; and (4) by damaging or causing loss to tangible property.

The court held here that the legislative history of the TCPA, as interpreted by the court in the case of State of Missouri v. American Blast Fax, Inc., 323 F.3d 649 (8th Cir. 2003), supported the dealerships’ arguments that the alleged violations represented both private nuisances and the invasion of the right to privacy, as they are commonly understood.

In fact, the court noted that in the above case, “Congress found telemarketing solicitations by a person to be less of a nuisance or an invasion of privacy than artificial or prerecorded calls,” and that “artificial or prerecorded messages, like a faxed advertisement, were believed to have heightened intrusiveness.…”

In the final analysis, the court in the Universal Underwriters case found coverage to be implicated by the invasion of privacy, private nuisance and interference with possession of personal property provisions of the policies (which defined “injury” to include many of the same offenses found in Coverage B of the standard ISO Commercial General Liability Policy). Having found coverage and the requirement that the insurer provide defense, the court sidestepped the issue of whether coverage also applied to damage or loss of use of tangible property, e.g., loss of paper and cartridge ink.

One of the cases noted by this court as also covering these offenses is Prime TV, L.L.C. v. Travelers Ins. Co., 223 Fed. Supp. 2d 744 (M.D. N.C. 2002). The court found here that the TCPA violations were an “advertising injury,” the definition of which included oral or written publication of material that violates a person’s right to privacy. Some of the cases cited by ISO with the introduction of this new mandatory exclusion are: TIG Ins. Co. v. Dallas Basketball, LTD, et al., 2004 WL 352079 (Tex. App. 2004); and Western Rim Investment Advisors, Inc. v. Gulf Ins. Co., 269 Fed. Supp.2d 836 (N. D. Tex. 2003).

Scope of new endorsement

This new mandatory endorsement, which is earmarked for use beginning in March 2005 in most jurisdictions, affects senders of unsolicited facsimiles as well as telemarketers. With the enactment by Congress of the CAN-SPAM Act of 2003, which became effective January 1, 2004, the time is ripe to broaden this new exclusion to encompass those persons and entities who send unsolicited e-mail messages. With each violation of the provisions of the CAN-SPAM Act (subject to fines of up to $11,000), violators will be confronted with double trouble here as well, given that an endorsement will preclude both defense and the payment of any damages.

The impact of this new endorsement, according to ISO, is a reduction of coverage in those states where courts have granted coverage to violators of these federal and state laws. There are no known insurance cases involving the CAN-SPAM Act, but eventually some violator probably will seek coverage for this type of violation as well, even though the availability of firewalls and spyware may reduce some of the unwanted messages commonly churned up daily. n

The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is a member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.