(Article from Insurance Law Alert, December 2023)
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Holding
An Illinois appellate court ruled that general liability insurers were not obligated to defend a suit alleging violations of the Biometric Information Privacy Act (“BIPA”), expressly rejecting a recent Seventh Circuit ruling that reached the opposite conclusion. National Fire Ins. Co. of Hartford v. Visual Pak Co., Inc., 2023 Ill. App. LEXIS 482 (Ill. App. Dec. 19, 2023).
Background
The underlying BIPA suit arose out of a company policy that involved the collection of employees’ fingerprints to monitor daily working hours. The company tendered defense of the suit to its general liability and umbrella insurers, who denied coverage and sought a declaration that they had no duty to defend or indemnify the BIPA claims. The trial court initially ruled that questions of fact existed as to whether the company was entitled to coverage, but upon reconsideration, granted the insurers’ motion for judgment on the pleadings. The appellate court affirmed.
Decision
The appellate court held (and the insurers did not contest) that the BIPA claims fell within the policies’ initial grant of “personal and advertising injury” coverage, which encompassed injuries arising out of “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy.” The controversy centered on whether a policy exclusion barred coverage for the claims. The exclusion, titled “Recording And Distribution Of Material Or Information In Violation Of Law,” stated that coverage did not apply to:
Personal and advertising injury arising directly or indirectly out of any action or omission that violates or is alleged to violate:
(1) The Telephone Consumer Protection Act (TCPA), including any amendment of or addition to such law; or
(2) The CAN-SPAM Act of 2003, including any amendment of or addition to such law;
(3) The Fair Credit Reporting Act (FCRA), and any amendment of or addition to such law, including the Fair and Accurate Credit Transactions Act (FATCA); or
4) Any federal, state, or local statute, ordinance or regulation, other than the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, that addresses, prohibits, or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.
As the appellate court noted, decisions involving the same exclusionary language as that presented here are divided as to whether the “catch all” sub-section encompasses BIPA claims. In a recent decision, the Seventh Circuit held that nearly identical language did not preclude a duty to defend, abrogating several federal district court decisions that found similar exclusions applicable to BIPA Claims. See Citizens Ins. Co. of Am. v. Wynndalco Enterprises, LLC, 70 F.4th 987 (7th Cir. 2023) (discussed in our June 2023 Alert).
In Wynndalco, the Seventh Circuit acknowledged that a plain-text reading of the catch all provision would include BIPA violations, but nonetheless concluded that the provision was ambiguous because a liberal reading of it would exclude from coverage injuries or damage arising from a large category of intellectual property claims that the policy by its express terms otherwise purported to cover. The Seventh Circuit also held that the interpretative cannon of ejusdem generis, under which broad or general contract terms are construed according to the specific terms that precede them, did not resolve the ambiguity because there was no “readily discernible theme” of privacy in the exclusion.
The Illinois appellate court expressly rejected the Seventh Circuit’s reasoning, noting that it “gave too little credit to the reasonable person purchasing this business liability policy” in concluding that a theme of personal privacy among the statutes listed in the exclusion was not readily apparent. The court expressly disagreed with the Seventh Circuit’s reasoning and holding as to ambiguity, deeming it inconsistent with Illinois law. In particular, while the Illinois appellate court agreed with the Seventh Circuit’s proposition that an insurer’s interpretation of an exclusion will not be adopted if it would altogether eliminate coverage, the court deemed that principle inapplicable here, where “the exclusion at issue does not come close to wholly erasing the insured’s coverage.” The court also took issue with Seventh Circuit’s invocation of other contract provisions that were not implicated in the coverage dispute (such as those relating to coverage for copyright and trade dress claims) in order to deem the exclusion ambiguous. The Illinois appellate court stated:
[T]he Seventh Circuit’s point establishes, at most, that the catch all exclusion might irreconcilably conflict with a few provisions of the “personal and advertising injury” coverage. That may be so, but these provisions are not at issue in this case. . . . We are aware of no authority in Illinois law, nor did the Seventh Circuit cite any, for the proposition that a hypothetical conflict in language that was not at issue before the court could permit the court to essentially nullify an entire coverage exclusion as illusory, even though there is no such conflict between the coverage and exclusion provisions at issue in the case before the court.
As such, the court deemed Wynndalco wrongly decided and ruled that the insurers owed no duty to defend the underlying BIPA claims in the present case.
Comments
The court also distinguished West Bend Mutual Ins. Co. v. Krishna Schaumburg Tan, Inc., 2021 Ill. LEXIS 430 (Ill. May 20, 2021), in which the Illinois Supreme Court ruled that a similar exclusion did not bar coverage for BIPA claims. As the court noted, the exclusion in West Bend differs from that in the present case in several important respects. Most notably, the catch all provision in the West Bend exclusion references only “sending, transmitting, communicating or distribution” of material, whereas the catch all provision in this case included those terms, as well as “disposal, collecting [and] recording.” The court explained that the inclusion of these additional terms “undoubtedly broaden[s]” the scope of the exclusion at issue here. Further, the court noted the title of the exclusion in West Bend (“Violation of Statutes That Govern E-Mails, Fax, Phone Calls or Other Methods of Sending Material or Information”) speaks exclusively to modes of communication, whereas the exclusion in this case (“Recording And Distribution Of Material Or Information In Violation Of Law”) suggests a more expansive scope by virtue of the word “Recording,” which contemplates the collecting and retaining of information for future use. Finally, the court noted that the inclusion of only the TCPA and the CAN-SPAM Act of 2003 in the West Bend exclusion indicates an intent to limit application of the catch all provision to statutes that likewise govern unsolicited communication. In contrast, the exclusion here also lists the FCTA and FACTA, statutes that relate more generally to the privacy of personal information.
The decision also highlights the limits of a policyholder’s estoppel argument. Here, the policyholder had also argued that the insurers were estopped from denying coverage by virtue of an alleged delay in denying coverage. The court explained that under the doctrine of estoppel, if an insurer fails to issue a reservation of rights or alternatively seek a declaration that it has no duty to defend, it may subsequently be estopped from asserting defenses to coverage. However, estoppel has no application where, as here, a court has determined there is no duty to duty to defend in the first place. As the court noted, to hold otherwise “would be to give estoppel the power to magically rewrite a policy from one that does not obligate the insurer to defend into one that does.”