Sending junk fax not advertising injury

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The Seventh Circuit held on Dec. 23 that an insurer that issued a policy for advertising injury has no duty to defend a class action filed on behalf of all recipients of the insured’s junk faxes.

Capital Associates of Jackson County, Inc., sent an unsolicited advertisement to the fax machine of JC Hauling Company, in violation of 47 U.S.C. 227(b)(1)(C). JC Hauling filed a class action on behalf of all recipients of Capital Associates’ junk faxes.

Capital Associates tendered its defense to American States Insurance Company, which had issued Capital Associates a policy covering "advertising injury," among other harms.

American States undertook the defense under a reservation of rights, and filed a declaratory judgment action in Illinois federal court, seeking a declaration that the policy does not require either defense or indemnity.

"Advertising injury" is defined in the policy to include "[o]ral or written publication of material that violates a person’s right of privacy." Another portion of the policy excludes injury that is "expected or intended from the standpoint of the insured."

American States contended that sending unsolicited advertising by fax does not cause "advertising injury" and that, even if it does, the recipient’s loss is "expected or intended from the standpoint of the insured."

However, the district judge held that an unsolicited fax invades the recipient’s "privacy," and that American States therefore must defend its insured. American States appealed, and the Seventh Circuit reversed in a decision by Judge Frank H. Easterbrook.

Privacy

The court began with a lengthy discussion of the different connotations of "privacy."

The court wrote, "The two principal meanings are secrecy and seclusion, each of which has multiple shadings. A person who wants to conceal a criminal conviction, bankruptcy, or love affair from friends or business relations asserts a claim to privacy in the sense of secrecy. A person who wants to stop solicitors from ringing his doorbell and peddling vacuum cleaners at 9 p.m. asserts a claim to privacy in the sense of seclusion (cite omitted)."

Turning to the case at bar, the court found, "American States contends that its advertising-injury coverage deals with secrecy rather than seclusion. The language reads like coverage of the tort of ‘invasion of privacy,’ where an oral or written statement reveals an embarrassing fact, brings public attention to a private figure, or casts someone in a false light through publication of true but misleading facts. Perhaps the language reasonably could be understood to cover improper disclosures of Social Security numbers, credit records, email addresses, and other details that could facilitate identity theft or spamming (cites omitted)."

The court found the district court’s analysis deficient for failing to address the difference between secrecy and seclusion, and whether the policy is limited to violations of the former.

Addressing the difference de novo, the court observed, "an unexpected fax, like a jangling telephone or a knock on the door, can disrupt a householder’s peace and quiet, even though it is easy to throw a junk fax, like a piece of junk mail, in the trash without any risk that someone will observe activities that occur inside one’s home.

Section 227(b)(1)(C) doubtless promotes this (slight) interest in seclusion, as it also keeps telephone lines from being tied up and avoids consumption of the recipients’ ink and paper."

Nevertheless, the court found this analysis insufficient, finding the relevant question to be, not what the word "privacy" means in terms of the statute, but in terms of the insurance policy.

The court noted that the plaintiff in the underlying state court action is not a person, but a corporation: "JC Hauling is a corporation, and businesses lack interests in seclusion. It is not just that they are ‘open for business’ and thus welcome phone calls and other means to alert them to profitable opportunities. It is that corporations are not alive. Where does a corporation go when it just wants to be left alone? Most states hold that business entities lack privacy interests. (Our point is not that business entities lack interests protected by sec. 227(b)(1)(C), but that it does not help to call them ‘privacy’ interests.) Corporate managers have interests in seclusion, but the state suit was filed by the corporation rather than by any natural person. A fax is less disturbing than a phone call, and a business-related call at work does not invade the managers’ interest in seclusion."

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The court acknowledged that, while no state supreme court has addressed the issue, the weight of authority from federal district courts holds that insurers do have a duty to defend junk fax litigation: Park University Enterprises, Inc. v. American Casualty Co., 314 F. Supp. 2d 1094, 1102-11 (D.Kan. 2004); Universal Underwriters Insurance Co. v. Lou Fusz Automobile Network, Inc., 300 F. Supp. 2d 888, 894-96 (E.D. Mo. 2004); Prime TV, LLC v. Travelers Insurance Co., 223 F. Supp. 2d 744, 752-53 (M.D. N.C. 2002).

Nevertheless, the court rejected that authority, because they fail to distinguish secrecy from seclusion, or recognize that "privacy" may have a different meaning in an insurance context than in sec. 227.

The court also found that the property-damage clause in the policy does not require American States to defend, even though junk faxes use up the recipients’ ink and paper. The court concluded, "senders anticipate that consequence. Senders may be uncertain whether particular faxes violate sec 227(b)(1)(C) but all senders know exactly how faxes deplete recipients’ consumables. That activates the policy’s intentional-tort exception (which applies to the property-damage coverage though not the advertising-injury coverage): it forecloses coverage when the recipient’s loss is ‘expected or intended from the standpoint of the insured.’ Because every junk fax invades the recipient’s property interest in consumables, this normal outcome is not covered."

Accordingly, the court reversed.

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David Ziemer can be reached by email.