Ted Lay Real Estate Agency ("Lay") was a real estate agency in Girard, Illinois. Lay hired Business to Business Solutions which offered a "blast fax" service. Business to Business created an advertisement for Lay, which was transmitted to 5000 fax numbers, which had not consented to receive fax advertisements. Locklear Electric, Inc. ("Locklear") received one of the unsolicited faxes, and filed a class action lawsuit against Lay, representing a putative class of 3,478 people and entities.
Lay tendered his defense to Standard Mutual Insurance Company ("Standard"), which issued a CGL policy and a primary businessowners liability policy to Lay. Standard wrote a reservation of rights letter informing Lay that there may not be coverage for the conduct alleged iin the complaint. Specifically, Standard advised that the TCPA "may constitute a penal statute," and the policies excluded coverage for wilful violations of penal statutes. Standard also advised that a conflict of interest existed for any attorney that Standard would retain to defend Lay. Lay was advised that it could choose its own defense attorney at Standard's expense, or waive the conflict and accept counsel hired by Standard. Lay signed a waiver, and Standard hired James Mendillo, who removed the case to federal court.
Lay subsequently hired Edmond Rees as his own chosen counsel. Rees sent a letter outlining the conflict between Standard and Lay and asking Mendillo to withdraw from the case. Lay and Rees later signed a proposed settlement of the class action. Although he was advised that he had been dismissed by Lay, Mendilllo continued to attend all subsequent court hearings. Mendillo recognized Rees as Lay's personal counsel and acknowledged that he was protecting the interests of Standard. The federal court approved the settlement and entered a judgment against Lay for $1,737,500. Pursuant to the settlement, Locklear agreed to only seek satisfaction of the judgment from Lay's insurance policies.
When Lay accepted Standard's representation in the underlying action subject to a reservation of rights, Standard filed a declaratory judgment action against Lay and Locklear. The trial court granted Standard's motion for summary judgment and denied Lay's motion. The appellate court affirmed. The appellate court addressed only two issues, concluding that (1) Standard was not estopped from raising policy defenses; and (2) TCPA damages were punitive damages which were not insurable under Illinois law. 2012 IL App (4th) 110527.
On appeal to the Illinois Supreme Court, Locklear argued that Standard was estopped from asserting its coverage defenses because its reservation of rights letter did not adequately inform Lay of potential coverage defenses and conflicts of interest. The Court noted that where an insurer defends without a reservation of rights, it will only be estopped from asserting coverage defenses unless prejudice exists. Prejudice will be found if the insurer's assumption of defense induced the insured to surrender its right to control the defense. The Court found that Standard's 12-page reservation of rights letter specifically referred to the coverage defense and conflict of interest regarding violations of penal statutes, in addition to including an extensive list of other policy defenses. The Court affirmed the decision of the appellate court that Standard was not estopped from asserting its coverage defenses.
Locklear also argued that TCPA damages of $500 per violation are insurable under Illinois law. The Supreme Court noted that the appellate court did not base its decision on the language of Lay's insurance policy, but rather on its conclusion that the TCPA damages constitute punitive damages, which are uninsurable as a matter of Illinois public policy. Locklear argued that even if punitive damages are uninsurable under Illinois law, the TCPA is remedial and not a penal statute and that the statutory damages are not punitive damages. Locklear also urged the Supreme Court to hold that punitive damages are insurable under Illinois law.
The Supreme Court concluded that the "manifest purpose of the TCPA is remedial and not penal." The Court noted that the purposes of the TCPA were to protect privacy interests and to facilitate interstate commerce by restricting certain uses of fax machines. The Court concluded that harms caused by individual violations of the TCPA were small but were compensable by a liquidated sum of $500. Congress also intended the $500 liquidated damages to be an incentive from private parties to enforce the statute. The Court expressly disagreed with those courts that have concluded that TCPA damages were penal or punitive damages. Because this issue was dispositive of the appeal, the Supreme Court declined to address the issue of the insurability of punitive damages.