MA Appeals Court Reverses $7 Million Telephone Consumer Protection Act Judgment Against Peerless Insurance’s Subsidiaries

Precision Electronic Glass, Inc. (Precision), headquartered in New Jersey, manufactures custom glass and quartz components, which it sells on a national basis.

In 2007, its president made an agreement with a marketing company that told him that they could produce business nationwide by faxing to companies interested in Precision’s products and services and that this would all be legal. Several months later, in the space of three days, Precision solicited over 31,000 different companies by fax, companies that had not given Precision any permission to solicit them. One of the companies that received Precision fax was Addison Automatics, Inc. (Addison), an Illinois company.

In 2010, Addison sued Precision, in a class action, alleging its fax marketing program violated the Telephone Consumer Protection Act (TCPA).

The TCPA is a federal statute that prohibits the sending of faxes among other electronic communications without either explicit permission or a prior business relationship with the persons receiving the faxes.

The statute imposes strict liability on the sender of the unsolicited faxes. The sender is liable to any person who receives such unsolicited faxes for a $500 penalty with a knowing and willful violation resulting in a trebling of the penalties.

The receiver of the unsolicited fax may sue in federal court either in an individual suit or on a class-action basis against the sender seeking a penalty of $500 for each fax. Since under the TCPA, each unsolicited fax sent by Precision amounted to a separate violation, the 31,000 unsolicited faxes created a potential liability to Precision of $15.5 million for its statutory violations.

When Precision notified its liability insurance companies, Netherlands Insurance Company (“Netherlands”) and Excelsior Insurance Company (“Excelsior,” collectively, “the Netherlands,” or the “Insurers”), subsidiaries of the Peerless Insurance Company, that provided primary and follow form excess coverages to Precision, the companies denied liability, pointing to an exclusion that had been sent to Precision in 2007 as part of a 200-page policy of which the 49th slip notice out of 50 concerning coverage changes advised Precision that the companies would no longer provide any coverage for violations of the TCPA.

Precision eventually settled with Addison by way of a class action consent judgment for $15 million approved by an Illinois federal court that only allowed collection against Precision’s insurers. Accordingly, Addison pursued the Netherlands and Excelsior as a judgment creditor in the Massachusetts Superior Court. Addison brought the suit in Massachusetts since both the Netherlands and Excelsior, as subsidiaries of Peerless Insurance, had their home offices in Boston as part of Liberty Mutual.

After seven years of litigation, the Superior Court ruled the change of coverage notices invalid under New Jersey law, the state where Netherlands and Excelsior issued their policies to Precision. The final judgment against the Insurers issued for the 2007 policies’ limits of $7 million-plus $373 thousand of the 2008 policy’s limit for a total award of $7,373,000.

The insurers appealed to the Appeals Court, which reanalyzed the same undisputed facts litigated in the Superior Court but came to an opposite conclusion and reversed the judgment for Addison.

Precision’s policies with the Netherlands and Excelsior

The Netherlands issued a commercial general liability (CGL) policy to Precision with a policy period of March 12, 2007, to March 12, 2008, with a liability limit of $1 million for Personal and Advertising Injury, among other coverages, and a general aggregate limit of $2 million. Upon expiration, the Netherlands renewed Precision’s policy with a policy period of March 12, 2008, to March 12, 2009, with the same limit of liability of $1 million for any Personal and Advertising Injury of $1M, and the same general aggregate limit of $2 million.

In the 2007 and 2008 policies, the term “person and advertising injury” included claims:

arising out of one or more of the following offenses:

***

e) Oral or written publication, in any manner, of material that violates a person’s right of privacy.

Excelsior issued umbrella liability policies to Precision that followed form to the Netherlands policies for 2007 and 2008, with the same policy periods but with a combined liability limit for each occurrence and an aggregate limit of $5 million.

Marketing campaign brings lawsuit and coverage denial

Precision conducted its marketing campaign between January 16 and January 19, 2008, by faxing 31,004 unsolicited advertisements to potential customers. In July 2008, Precision sent another 747 faxes.

One of the companies receiving unsolicited faxes during Precision’s marketing campaign was Addison.

In August 2010, Addison sued Precision in the United States District Court for Illinois for violations of the TCPA on behalf of itself and the class of the thousands of other businesses that had received unsolicited faxes from Precision.

The Netherlands and Excelsior, upon being notified by Precision of Addison’s TCPA class action, immediately denied any duty to defend or indemnify Precision based on an exclusion added to the 2007 policy and continued on the 2008 policies.

This exclusion endorsed onto the Netherlands’ 2007 policy titled: “Exclusion — Violation of Statutes that Govern E-Mails, Fax, Phone Calls or Other Methods of Sending Material or Information. While the exclusion was applicable to both Coverage A (bodily injury and property damage) and Coverage B:

For coverage B, advertising injury, the exclusion stated, in part:

This insurance does not apply to…”Personal and advertising injury” arising directly or indirectly out of any action or omission that violates or is alleged to violate:

a. The Telephone Consumer Protection Act (TCPA), including any amendment of or addition to such law.

Settlement by a $15,875,00 consent judgment providing only rights against the Insurers

Eventually, in December 2012, Precision and Addison proposed a settlement that the United States District Court in Illinois approved and issued final judgment on a settlement in the Underlying Suit.

The settlement contemplated a nominal payment by Precision’s marketing company and Precision with a $15,875,500 judgment against Precision, which the settlement class agreed to seek from the Netherlands.

On July 26, 2012, Addison and Precision entered into the Settlement Agreement, which required, among other things, the entry of a consent judgment in the amount of $15,875,500.00, with Addison executing the Settlement Agreement in its individual capacity and as the class representative of a settlement class comprised of recipients of Precision faxes “between January 19, 2008, and July 24, 2008.”.

Pursuant to the Settlement Agreement, the parties agreed that:

Precision caused 31,004 fax transmissions to be sent in January of 2008 and 747 fax transmissions in July of 2008.A judgment in the amount of $15,875,500.00 (the 31,751 unsolicited faxes times $500) would enter against Precision, but the settlement class would not execute the agreed judgment against Precision.Any funds received from Precision’s insurers remaining after payment of all class administration costs, Addison’s incentive award, Addison’s attorneys’ fees, and costs, and payment to the settlement class, would be paid to a charity or charities approved by the court at the request of Addison’s attorneys.Precision would pay Addison $85,000.The marketing company, which was also sued, agreed to pay Precision $150,000, andPrecision agreed it would not notify its insurers of the settlement.

In addition, the Consent Judgment, as approved by the federal court, contained findings and conclusions that the “settlement amount was fair and reasonable;” that “[Precision] believed that they had the consent of the fax recipients when they sent the faxes” and “did not intend to injure the fax recipients” and that “Defendants successfully faxed 31,004 advertisements between January 16-19, 2008, and 747 on July 24, 2008

Superior Court suit and judgment for Addison against the insurers

Even before the settlement of the TCPA suit against Precision, Addison filed suit against the Netherlands in the Massachusetts Superior Court, seeking a declaratory judgment that the primary and excess policies issued by the Insurers provided coverage.

During the Superior Court litigation and the appeal to the Appeals Court, Addison did not seriously dispute that the TCPA Exclusions in the Netherlands and Excelsior contracts, if valid, excluded the violations of the TCPA by Precision.

Instead, Addison argued successfully in the Superior Court that the notice of the policy change adding the endorsement to exclude TCPA coverage did not adequately notify Precision as required under New Jersey law, the state where the policies were issued.

The Superior Court agreed with Addison, stating, after detailing the applicable New Jersey disclosure requirements that:

“While Netherlands and Excelsior did offer much more conspicuous and detailed outlines of the TCPA Exclusions within the body of the renewal policies, those packages contained over one hundred pages of information…No specific, separate notices were forwarded with the renewal packages…Rather, it appears that Netherlands and Excelsior merely indicated a policy change in a line item of the declaration sheets—without providing any specific information regarding the exclusions—and buried what would otherwise have been an informative notice within the bodies of the renewal policies.”

Following the entry of a judgment for Addison and the class in the amount of $7,373,000, the Insurers appealed to the Appeals Court.

The Appeals court decision finds adequate notice under New Jersey law

The Appeals Court focused on the history of the TCPA exclusion. In April of 2005, the Insurers had issued an agency bulletin advising that they were, effective May 1, 2005, issuing mandatory endorsement excluding any coverage for statutory violations involving unsolicited communications by electronic means:

“[i]n light of burgeoning claim activity in the area of unsolicited faxes and given the intentionally intrusive nature of unsolicited faxes, e-mails, and telephone calls as well as the statutory efforts to prohibit such actions.”

Consistent with this mandatory exclusion, the Appeals Court noted that “Accordingly, on March 12, 2006, when renewal policies were issued to Precision for the 2006-2007 term, the declarations pages for both policies listed the form number and endorsements for the TCPA exclusions.”

The Precision renewal policies for the term March 12, 2007, to March 12, 2008, were furnished to Precision in two packages on March 2, 2007. Each package contained slip notices advising of changes to the policy, the declarations pages, the endorsements, and the policy provisions.

The proposed Netherlands policy package had fifty-three pages preceding the declarations pages and endorsements. The first was a cover page, and the remaining fifty-two pages were slip notices. The slip notice detailing the TCPA exclusion appeared two pages before the declaration at page fifty-one.

The form of the slip notice for the TCPA exclusion warned:

IMPORTANT NOTICE TO POLICYHOLDERS

EXCLUSION—VIOLATION OF STATUTES THAT GOVERN E-MAILS, FAX, PHONE CALLS, OR OTHER METHODS OF SENDING MATERIAL OR INFORMATION

This notice does not form a part of your insurance contract. The notice is designed to alert you to coverage changes when the exclusion for violation of statutes that govern e-mails, fax, phone calls, or other methods of sending material or information is attached to this policy…[C]overage is excluded for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury arising directly or indirectly out of any action or omission that violates or is alleged to violate the Telephone Consumer Protection Act (TCPA).”

The same slip notice form as in the primary policy package was included in the excess policy package as the last of the nineteen slip notices preceding the policy’s declaration pages and endorsements.

In both policies, the declaration pages had the TCPA exclusion endorsement identified with its number and the legend: “Exclusion – Violation of Statutes.”

The main issue the Appeals Court addressed was the principle of New Jersey law that holds “when an insurer issues a renewal policy with terms altering its insureds’ level of coverage, the insurer has a duty to “call the lessened coverage to the attention of the insureds so that they might suitably protect themselves.”

If the insurer does not so adequately notify a New Jersey insured like Precision about the reduced coverage, then “the changes to the policy will not be given effect, and the insurer will be bound by any greater coverage afforded in the earlier policy.”

While the Superior Court found that the location of the slip notices advising about the TCPA exclusion did not provide adequate notice, the Appeals Court found that opposite, stating:

In sum, we conclude that under the circumstances here, where the insurers provided Precision, a corporate entity, with a package addressing each policy and its changes ten days prior to issuance of the policies and seventy-four days prior to the premium due date and where those packages contained slip notices addressing the TCPA exclusions, several headings conspicuously noting the exclusions, and the exclusions were included on declarations pages, notice was timely and sufficient to fairly convey to Precision that any act or omission in violation of the TCPA would not be covered by the renewal policies.

The final order of the Appeals Court

The final order of the Court was a denial of any recovery to Addison:

Conclusion. The judgment is reversed, and the matter is remanded for entry of a new declaration consistent with this memorandum and order.

The decision is Addison Automatics, Inc. v. The Netherlands Insurance Company et al

Addison has already filed for further appellate review

Unsurprisingly, Addison has filed an application for further appellate review to the Supreme Judicial Court to reinstate the Superior Court decision.

The Netherlands moved, and the Court allowed it until February 28, 2022, to file its objections to the allowance of the petition. Agency Checklists will keep its readers informed of the action by the Supreme Judicial Court on the petition and the opposition.

Owen Gallagher

Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists

Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.

To learn more about ForbesGallagher, visit our website. Or, to contact me directly, please call me at 617-598-3801 or send an email using the button below.