Penalties for violating the Real Estate Settlement Procedures Act (RESPA) can be steep: triple the amount of the settlement charge at issue, plus attorney’s fees. Businesses often assume their corporate insurance protects them from RESPA liability and similar professional missteps. That sort of coverage might be illegal.
This concept is radical, and one that is rapidly gaining traction with another law that class-action lawyers favor, the Telephone Consumer Protection Act (TCPA). That statute bars many forms of telemarketing and, like RESPA, allows an aggrieved consumer to sue for specified amounts that far exceed any actual damages a person may have suffered. For example, for a single call that violates the TCPA, the offending company can be forced to pay as much $1,500, plus legal fees, even though the victim may have suffered only brief annoyance or lost one minute on her monthly cell-phone plan.
These types of “statutory” penalties can intersect insurance law in a bizarre and counterintuitive way. Under most states’ law, a person cannot buy insurance to protect against liability for intentional misconduct or against punitive damages (judicial awards that punish and deter an offender, on top of any amounts that compensate a plaintiff for her actual damages). A new and emerging line of court decisions holds that, because the TCPA mandates recovery of amounts that are much greater than a person’s actual damages, that statute results in punitive damages. Those awards, according to this theory, are therefore uninsurable, and offering coverage for them would violate a state’s public policy. The United States Court of Appeals for the Tenth Circuit, in the case of Ace American Insurance Company v. Dish Network, LLC, recently came to that conclusion when interpreting Colorado law.
No courts have yet grappled with the question of whether RESPA awards similarly constitute punitive damages and are thus uninsurable. But the analogy isn’t a weak one. So don’t be surprised if this issue surfaces in RESPA lawsuits, in which case that statute could become even more problematic for real estate businesses than it already is.