One strategy companies can try when defending against potential class-action liability is to seek insurance protection, typically from an errors-and-omissions policy. If coverage is questionable and the insurer balks, a possible window opens: The insured could settle with the plaintiff and assign its policy rights to the class, which can then pursue the insurer. A recent decision in Illinois shows that this sort of three-billy-goats-guff strategy does not always succeed—at least for the class.
In the case, Fayezi v. Illinois Casualty Company, a pizzeria sent out unsolicited fax advertisements in 2006 to over three thousand recipients. One of those recipients, an awning and window company, sued the pizza shop under the weapon of choice for class-action lawyers: the Telephone Consumer Protection Act (TCPA). Alas, poor Pat’s Pizzeria had no money to fend off or settle a class action—but it did have an E&O policy. But its terms excluded coverage for TCPA claims. Nevertheless, the plaintiffs agreed to at $1.8 million settlement with Pat’s, to be paid exclusively from insurance proceeds. The pizzeria then assigned its policy rights to the class.
From there, things got interesting. The class tried to argue that Pat’s insurer had improperly inserted the TCPA exclusion into a policy renewal, which would have been improper change of coverage. Illinois Casualty proved otherwise, showing that the policy at issue was new and not a renewal. The class also argued that the TCPA exclusion was not broad enough to include common law claims, like fraud and conversion. The Illinois courts batted that argument down, finding that all of the pleaded causes of action were based on TCPA violations and were therefore subject to the exclusion.
One of the takeaways from Fayezi is that corporate defendants might be able to lure class plaintiffs into a settlement that costs them virtually nothing out of pocket. Class lawyers, depending on how strong they view their arguments for insurance coverage and the financial resources of the defendant, might actually agree to it.