Cent. Mut. Ins. Co. v. Tracy's Treasures, Inc.

Citation19 N.E.3d 1100
Decision Date30 September 2014
Docket NumberNo. 1–12–3339.,1–12–3339.
PartiesCENTRAL MUTUAL INSURANCE COMPANY, Plaintiff–Appellee and Cross–Appellant, v. TRACY'S TREASURES, INC., and Paul Idlas, Defendants–Appellants and Cross–Appellees.
CourtUnited States Appellate Court of Illinois

19 N.E.3d 1100

CENTRAL MUTUAL INSURANCE COMPANY, Plaintiff–Appellee and Cross–Appellant
TRACY'S TREASURES, INC., and Paul Idlas, Defendants–Appellants and Cross–Appellees.

No. 1–12–3339.

Appellate Court of Illinois, First District, Third Division.

Sept. 30, 2014.
Rehearing Denied Oct. 28, 2014.

Modified Upon Denial of Rehearing Nov. 5, 2014.

19 N.E.3d 1104

Anderson & Wanca, of Rolling Meadows (Brian J. Wanca, David M. Oppenheim, and Jeffrey A. Berman, of counsel), and Bock & Hatch, LLC, of Chicago (Phillip A. Bock and Robert M. Hatch, of counsel), for appellants.

Purcell & Wardrope, of Chicago (Michael D. Sanders, of counsel), and Rivkin, Radler, LLP, of Uniondale, New York (William M. Savino, Stephen J. Smirti, Jr., and M. Paul Gorfinkel, of counsel), for appellee.


Justice MASON delivered the judgment of the court, with opinion.

¶ 1 This insurance declaratory action raises issues regarding: (1) whether coverage is available for an underlying class action alleging claims for unsolicited faxes in violation of the federal Telephone Consumer Protection Act (TCPA) (47 U.S.C. § 227(b)(1) (2006) ); (2) the reasonableness of a settlement in the underlying action between the insured and the underlying plaintiffs, which those parties stipulated would be paid from the proceeds of the insurance policies; and (3) whether the “buyout” of coverage under the insurance policies, which resulted from a settlement of a prior class action against the insured, precludes claims under the “advertising injury” coverage of these policies. Due to an intervening change in the law that formed the basis of the trial court's ruling in favor of plaintiff and cross-appellant, Central Mutual Insurance Company, we must reverse. We affirm the other rulings appealed by Central and remand for further proceedings.


¶ 3 Tracy's Treasures, Inc., is the insured under a number of primary and excess commercial liability policies issued by Central. Central insured Tracy's under a series of business owner primary liability insurance policies, cumulatively effective from May 5, 1997, until May 5, 2005, and a series of commercial excess liability insurance policies, cumulatively effective from January 29, 2002, until January 29, 2005. The face value of all of Central's policies of insurance in effect during the relevant time period is $14 million.

¶ 4 Tracy's and Paul Idlas, the plaintiff in the underlying class action, appeal from an order of the trial court granting Central's

19 N.E.3d 1105

motion for summary judgment. The trial court determined, in accordance with the decision in Standard Mutual Insurance Co. v. Lay , 2012 IL App (4th) 110527, 363 Ill.Dec. 790, 975 N.E.2d 1099, that amounts awarded to claimants under the TCPA are punitive in nature and therefore not insurable. After the filing of this appeal, our supreme court reversed Lay and held that damages awarded for TCPA claims are liquidated rather than punitive and, thus, are not uninsurable as a matter of public policy. Standard Mutual Insurance Co. v. Lay, 2013 IL 114617, 371 Ill.Dec. 1, 989 N.E.2d 591.

¶ 5 Central concedes the applicability of the supreme court's decision in Lay but argues that liquidated damages, such as those provided for under the TCPA, are not covered under its policies. Central also advances other provisions of its policies as a bar to coverage for TCPA claims. Finally, Central cross-appeals from two rulings denying its motions for summary judgment: (1) in one motion for summary judgment, Central sought a determination that the settlement reached between its insured and Idlas was, as a matter of law, collusive and unreasonable under the standards articulated by our supreme court in Guillen v. Potomac Insurance Co. of Illinois, 203 Ill.2d 141, 271 Ill.Dec. 350, 785 N.E.2d 1 (2003) ; (2) Central also sought summary judgment on the ground that the insurance contracts had been reformed to eliminate coverage for “advertising injury” or “personal and advertising injury.” Both motions were denied by the trial court.

¶ 6 The Idlas Case

¶ 7 Tracy's engaged in the business of selling dating and social relationship services, which it publicized, at least in part, by facsimile advertisements. On March 5, 2007, Idlas filed a three-count class action complaint against Tracy's for unsolicited fax advertisements that allegedly violated the TCPA, the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/2 (West 2006) ), and Illinois common law (Idlas ). Idlas alleged that between March 5, 2003 and March 5, 2007, Tracy's sent unsolicited facsimile messages advertising Tracy's dating services without prior express permission from the recipients. Idlas received his unsolicited fax on July 22, 2003, and waited almost four years to seek redress.

¶ 8 Tracy's tendered Idlas's claims to Central pursuant to the insurance contracts. On April 27, 2007, Central disclaimed coverage for the claims asserted in Idlas on several grounds, including that (i) in 2005 the parties had agreed to a “buyout” of the coverage for personal and advertising injury, (ii) no “occurrence” giving rise to “property damage” was alleged in Idlas, (iii) any injury caused by the faxes sent by Tracy's was expected or intended by Tracy's, and (iv) Tracy's knew that its conduct in sending the faxes was prohibited.

¶ 9 Despite Central's denial of coverage, it advised Tracy's on October 8, 2007, that it was assigning a lawyer to provide Tracy's a “courtesy defense.” Counsel appointed by Central filed an appearance in the case. Billing records for assigned counsel reflect that he filed a motion to dismiss and discovery requests. The record on appeal does not contain the motion, but counsel's records reflect that portions of the Idlas complaint were dismissed with leave to replead. On June 6, 2007, Central also filed a declaratory judgment action in the circuit court of Cook County seeking an adjudication that it owed no duty to defend or indemnify Tracy's in connection with Idlas.

¶ 10 On November 29, 2007, another lawyer, Gregory Ellis, filed a substitute appearance on behalf of Tracy's. Two

19 N.E.3d 1106

weeks later, on December 12, 2007, Ellis wrote to Central regarding the substitution. Ellis advised that Tracy's retained him due to the conflict between Central and Tracy's in light of Central's position that the Idlas claims were not covered under its policies. In his letter, Ellis described to Central his planned defense of the case:

“My goal would be to attack the viability [of] any finding of a class action in this case. From my review it looks like names of at least 10,000 customers are known. This may be the level of damage control. The fact that the lists are 4 ½ to 6 years old could be in Tracy's Treasures favor because of the transient nature of our society these people may not be able to be contacted. Additionally, a great number of people may well opt-out from this type of case.
In any event, as I am transitioning into this lawsuit I will be contacting you further about the status of the case as I further get my arms around the facts and circumstances and the current law on the TCPA in Illinois and elsewhere. However, you can see from the attached letter that I am familiar with these types of cases and the current law.”

¶ 11 On December 17, 2007, Central consented to the substitution of counsel and indicated that it would pay Ellis a reasonable fee (albeit at an hourly rate less than Ellis's normal billing rate). Central reserved the right to discontinue paying for Tracy's defense on reasonable notice to Tracy's. The record does not reflect that Tracy's ever complained about the rate Central was paying Ellis or informed Central that its decision to pay less than Ellis's normal billing rate constituted a breach of its obligations to Tracy's under the policies. The record also does not reflect whether Tracy's paid Ellis the difference between his hourly rate and the rate at which he was being paid by Central.

¶ 12 Correspondence in the record indicates that a month before he wrote to Central and even before he filed an appearance for Tracy's, Ellis was discussing settlement with counsel for Idlas. On November 15, 2007, two weeks before he filed his substitute appearance and nearly a month before he claimed to be “transitioning into” the lawsuit, Ellis wrote to Tracy Choubmesser, president and sole shareholder of Tracy's, informing her:

“Idlas will settle with Tracy's and you personally but you need to give them all the names/fax numbers or faxing and listing company so they can notify 90,000 people. I'm preparing a settlement agreement and I have talked to [Idlas's] attorney to get this done in the next 30 days.”

¶ 13 In a November 27, 2007 letter to Idlas's attorney, Ellis wrote, “I met with Tracy today. She seems to have gotten onboard. * * * Let me know what you think about this information.” And in a December 10, 2007 letter to Choubmesser, Ellis wrote:

“In order to prepare the Settlement Agreement that we have discussed, we will need additional information regarding these fax providers to use in your Affidavit in support of this settlement.”

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