Illinois Appellate Court Broadly Construes Violation of Statutes Exclusion

Jonathan T. Viner

May 7, 2014

In a decision issued May 2, 2014, the Illinois appellate court broadly construed a commonly-used exclusion for the violation of certain statutes aimed at protecting the privacy and/or confidentiality of information.  In a notable decision, the court held that a version of the so-called Violation of Statutes exclusion precluded an insurer’s duty to defend or indemnify its insured relative to a class-action complaint that asserted causes of action for violation of the Telephone Consumer Privacy Act (“TCPA”), as well as a common-law cause of action and a cause of action for consumer fraud.

The coverage dispute arose out of a blast-faxing suit against the insured and centered on the insurer’s duty to defend an amended complaint.  The amended complaint alleged that the insured sent the plaintiffs facsimile advertisement without their permission.  The amended complaint asserted causes of action for violations of the TCPA, common-law conversion, and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (“consumer fraud act”).  The amended complaint was carefully drafted so that the causes of action for common-law conversion and violation of the consumer fraud act selectively incorporated only those background allegations that made no express reference to the TCPA.  Those counts did not incorporate any allegations from the count for TCPA violation.

The insurer denied coverage, citing its Violation of Statutes exclusion endorsement.  This endorsement barred coverage for liability, including personal injury or advertising injury, “arising directly or indirectly out of any action or omission that violates or is alleged to violate” the TCPA, CAN-SPAM or “any other statute, ordinance or regulation prohibiting  or limiting the sending, transmitting, communicating or distribution of material or information.”

Litigation commenced.  The trial court found the insurer was obligated to defend because the exclusion did not preclude coverage for the insured’s potential liability for conversion or consumer fraud.  However, the appellate court reversed. 

The appellate court found that State Farm had no duty to defend or indemnify in relation to the amended complaint.  The court broadly construed the exclusion, noting its use of the phrase “arising directly or indirectly out of.”  The court held that, if the alleged injury would not have occurred “but for” a violation of the TCPA or other statute, the injury necessarily “arises out of” that violation (or alleged violation), and the exclusion bars coverage for other causes of action premised on that particular conduct. 

Analyzing the allegations of the amended complaint, the court observed that each count incorporated all common background allegations, the very same allegations that formed the basis for the insured’s alleged TCPA violation.  The court found that, but for the sending of the improper faxes, the claimants would have suffered no injury, because the sending of the faxes that violated the TCPA was the sole alleged act or omission by the insured.  The court held that the exclusion therefore precluded coverage for the entire complaint, and that State Farm was correct in refusing to defend.

Application of the Violation of Statutes exclusion remains a fact-specific inquiry.  However, this is a well-reasoned decision that provides significant support for the position that this particular Violation of Statutes exclusion precludes coverage for liability that arises out of conduct that violates the statute, even if other theories of liability based on that conduct are, or could be, articulated.