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November 2012  Vol. XXV  Number 11
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Evaluating Coverage for Class Actions Seeking Statutory Minimum
Damages: Covered Loss or Excluded Penalties?
by Seth D. Lamden
Introduction
Seth D. Lamden
is a partner in Neal,
Gerber & Eisenberg
LLP’s Insurance
Policyholder Practice
Group. Seth has
extensive experience
representing corporate
policyholders in
connection with
coverage disputes
involving a broad array
of claims and losses.
He can be reached at
[email protected].
With multi-million dollar class action
settlements appearing in the news on a
daily basis, it should be no surprise that
disputes between insurers and their
insureds regarding defense and coverage
for those settlements are equally as
common. When insureds are sued in
class actions seeking statutory damages,
which are damages in an amount set by
law, often without regard to the actual
monetary loss suffered by the claimant,
coverage disputes often arise regarding
the applicability of “fines or penalties”
exclusions typically found in professional
liability policies. These disputes can
present complex issues that turn on the
precise wording of the policy, the purpose
behind the statute authorizing the
damages in the underlying class action,
and state-specific principles of statutory
interpretation and public policy.
While there is a fairly well-developed
body of case law in many jurisdictions
regarding whether punitive damages are
insurable—in many U.S. states, punitive
damages for vicarious liability are
insurable and punitive damages for direct
liability are not insurable—there are
relatively few cases regarding the distinct
issue of the applicability of “fines or
penalties” exclusions. While cases
addressing the insurability of punitive
damages may be instructive on some
issues, they do not resolve the
fundamental issue of what types of
statutory damages, if any, are in fact
“penalties,” nor do they provide guidance
when resolving disputes involving
professional liability policies that cover
punitive damages. This article provides
an overview of how some of the leading
cases in the United States have interpreted
and applied “fines or penalties”
exclusions, particularly in the context of
class actions seeking statutory damages.
Many Consumer Protection and
Privacy Statutes Authorize Private
Causes of Action for Statutory Damages
Without Proof of Monetary Losses
There are a number of state and federal
consumer protection and privacy
statutes that authorize individuals to
recover statutory damages ranging
from $100 to $1,500 or more for what
are often technical violations of the
statute, even without a showing of
actual monetary loss. Given the
relatively low amount of available
damages and the lack of proof of actual
monetary losses, claims under these
statutes typically are brought as class
actions rather than single-plaintiff
claims. Although a claim for statutory
damages brought by a single claimant
does not present significant liability
exposure, a class action seeking to
aggregate statutory damages across a
large plaintiff class can result in an
enormous judgment against the
defendant, especially because in such
situations, attorneys for the class often
can recover fee awards of 20 to 40
percent of the class recovery in addition
to the per-claimant damages authorized
by statute.
Examples of federal statutes that
authorize private claims for statutory
damages include the Telephone
Consumer Protection Act (“TCPA”),1
which prohibits the “use [of ] any
telephone
facsimile
machine,
computer, or other device to send an
unsolicited advertisement to a
telephone facsimile machine” and
authorizes individuals to file suits
against persons or entities violating the
TCPA for up to $1,500 for each
violation or to recover actual damages,
whichever is higher. The Federal Credit
Reporting Act (“FCRA”)2 also
authorizes private causes of action for
statutory damages. FCRA claims
typically involve a consumer alleging
that a business has obtained his or her
credit information and used that
information for purposes not
authorized by FCRA, or allegations
that employers conducted preemployment background checks
without proving proper notice to job
candidates. Other federal statutes that
authorize private claims for statutory
damages include the Fair and Accurate
Credit Transactions Act (“FACTA”),3
which prohibits businesses from
printing more than five digits of a
credit card number or card expiration
date on any receipt provided to the
cardholder at the point of sale or
transaction, the Truth in Lending Act
(“TILA”),4 which authorizes statutory
damages for a lender’s failure to disclose
credit terms, and the Fair Debt
Collection Practices Act (“FDCPA”),5
which authorizes statutory damages
against debt collectors that do not
comply with the Act.
Some Courts Have Held that “Fines
or Penalties” Exclusions are
Ambiguous If They Do Not Define
the Terms “Fine” or “Penalty”
Many professional liability and
directors’ and officers’ policies broadly
cover “loss,” which can be defined to
include
damages,
settlements,
judgments, punitive damages, and
exemplary damages, or even any
“monetary amount which an Insured is
legally obligated to pay.” As in every
insurance policy, however, “[t]he large
print giveth and the small print taketh
away,”6 and most professional liability
policies exclude coverage for “fines or
penalties,” either in the definition of
“damages” or “loss,” or stated in a
separate exclusion. Insurance policies
rarely define the terms “fines” or
“penalties,” nor do most policies specify
what types of statutory damages are
excluded from coverage. Given the
wide variety of situations in which
statutory damages are available, some
courts have held that exclusions for
“fines or penalties” are ambiguous if
the policy does not define the terms
“fines” or “penalties.”7
Early Cases Interpreting “Fines or
Penalties” Exclusions in the Context of
Payments to the Government Focused
on Whether the Payments Were
Compensatory or Punitive
Many of the early cases to interpret
“fines or penalties” exclusions did not
involve private causes of action but,
instead, involved payments made by
the insured to a government body. In
those cases, the courts generally found
that the exclusion applied if the
2
purpose of the payment was punitive,
and that it did not apply if the purpose
of the payment was compensatory. For
example, the court in Wellcome v. Home
Insurance Co.,8 held that a provision in
an attorney’s professional liability
policy stating that damages did not
include “fines” was not ambiguous and
excluded coverage for sanctions
imposed by a trial court when the
attorney gave a closing argument that
violated a court order, because the
sanction was “to impose a pecuniary
punishment.” In contrast, the court in
Carey v. Employers Mutual Casualty
Co.,9 held that an exclusion for “[f]ines or
penalties imposed by law” in a
professional liability policy issued to
the supervisors of a township did not
bar coverage for a statutory damages
claim brought by the township
pursuant to a statute authorizing claims
“for the amount of any loss to the
township caused by the officer’s act”
arising out of the overpayment of a
settlement because the payment was to
compensate the township for actual
loss.
Some Cases Interpreting Whether a
“Fines or Penalties” Exclusion Applies
to a Class Action for Statutory
Damages Focus on the Purpose Behind
the Statute Authorizing the Damages
In determining whether a “fines or
penalties” exclusion applies to a class
action claim for statutory damages,
courts often focus on the purpose
behind the statute at issue to determine
whether the damages are remedial or
penal. Statutory damages are available
in a variety of contexts, and some
statutory damages are clearly
compensatory in nature. As the court
in Murphy v. Kenneth Cole Productions,
Inc.,10 explained, “[w]here damages are
obscure and difficult to prove, the
Legislature may select a set amount of
compensation without converting that
remedy into a penalty.”11 Such was the
basis for the ruling in Universal
Underwriters Ins. Co. v. Lou Fusz
Automotive Network, Inc.,12 in which
the court found that statutory damages
available to consumers under the
TCPA of $500 per violation were not
excluded from coverage under a “civil
penalties” exclusion in a professional
liability policy because even if the
statutory damages had a punitive
purpose, they also had a remedial
purpose and because they were at least
partially compensatory in nature they
were not excluded “penalties.” Focusing
on the legislative history of the TCPA,
the court explained:
We also believe that Congress
intended the fixed damages available
under the Act to be, at least in part,
an incentive for private parties to
enforce the Act. Because the actual
losses associated with individual
violations of the Act are small, this
added incentive is necessary.
Whether we view the fixed award as
a liquidated sum for actual harm or
an incentive for aggrieved parties to
act as private attorneys general, or
both, it is clear that the fixed amount
serves more than purely punitive or
deterrent goals.13
The court in Indian Harbor Insurance
Co. v. Bestcomp, Inc.14 also considered
the purpose behind statutory damages
awarded to a class of health care
providers under a Louisiana statute
that requires insurers to provide proper
notice before discounting invoices for
medical treatment in workers
compensation claims in determining
whether such damages were covered
under a professional liability policy.
Although the court noted that several
Louisiana courts had referred to the
statutory damages as “penalties,” the
court did not apply the “penalties”
exclusion in the policy, but nevertheless
denied coverage because such damages
were “punitive damages,” “exemplary
damages,” and “multiplied damages,”
all of which were expressly excluded
under the definition of “Damages” in
the professional liability policy at issue.
In so ruling, the court found significant
that the statute was “punitive in nature”
because its “purpose is to punish group
purchasers for failure to provide notice
of PPO discounts...”
Similarly, the court in Hooters of
Augusta, Inc. v. American Global Ins.
Co.,15 considered the purpose behind
the statute authorizing damages in the
underlying class action in holding that
an exclusion in a commercial general
Professional Liability Underwriting Society
liability policy for “Advertising Injury...
Arising out of the willful violation of a
penal statute or ordinance committed
by or with the consent of the Insured...”
did not eliminate coverage for TCPA
damages, because the TCPA is
“remedial” rather than “penal.” In so
holding, the court explained that a
“remedial action is one that
compensates an individual for specific
harm suffered, while a penal action
imposes damages upon the defendant
for a general wrong to the public.”
Since the purpose of the TCPA is to “to
provide a remedy to the individual fax
machine owner who is harmed by the
receipt
of
unsolicited
fax
advertisements,” the court concluded
that it is not a “penal statute” and,
therefore, the exclusion did not apply.
Some Cases Interpreting Whether a
“Fines or Penalties” Exclusion Applies
to a Class Action for Statutory Damages
Focus on the Policy Language Rather
than the Purpose of the Underlying
Statute
Other courts have turned to principles
of contract interpretation to interpret
“fines or penalties” exclusions rather
than focus on the purpose of the
damages authorized by the statute in
the underlying action. For example,
the court in Flagship Credit Corp. v.
Indian Harbor Ins. Co.,16 considered
whether the settlement of a consumer
fraud class action was covered under a
professional liability policy that
contained an exclusion for “fines,
penalties or taxes imposed by law.”
The underlying plaintiff class in
Flagship sought statutory damages,
alleging that the insured “substantively
and procedurally” failed to provide
statutorily-mandated notice regarding
their collateral pursuant to the Texas
Business and Commerce Code. The
insurer in Flagship Credit denied
coverage, claiming that the settlement
fell within the exclusion for “fines,
penalties or taxes imposed by law.” The
court disagreed, holding that the
damages authorized by the statute were
not “fines or penalties” because they
were paid to the class rather than to the
government. In so ruling, the court
applied the canon of policy construction
known as noscitur a sociis, which applies
where a word in a group of words has
multiple meanings, and requires that
the meaning of each word in the group
is consistent with the meaning of its
companion words. Because the term
“penalties” was grouped with the words
“fines” and “taxes,” both of which are
payments to the government, the court
held that “penalties” similarly only
includes payments made to the
government.
Cases Interpreting Whether Statutory
Damages are Covered Under CGL
Policies May Not Be Applicable to
Claims for Statutory Damages under
Professional Liability Policies
Although many commercial general
liability (“CGL”) policies now expressly
exclude coverage for damages awarded
pursuant to specific privacy-related
statutes, some courts in jurisdictions
that prohibit coverage for punitive
damages as against public policy have
held that statutory damages available
under the TCPA are not covered under
CGL policies that do not contain such
exclusions because TCPA damages
“resemble” punitive damages.17 Other
courts have held that statutory TCPA
damages are not punitive or penal and,
therefore, are covered under a CGL
policy.18 The analysis in these cases
may have limited applicability to the
interpretation of a “fines or penalties”
exclusion in a professional liability
policy, however, because while CGL
policies provide coverage only for
“damages,” many professional liability
policies provide coverage for much
broader definitions of “loss,” which
often includes punitive damages under
“most favorable jurisdiction” choice of
law clauses.
Choice of Law Disputes May Arise
When Determining the Applicability
of a “Fines or Penalties” Exclusion
Focusing on the nature of the relief in
the underlying action for purposes of
evaluating the applicability of a “fines
or penalties” exclusion can give rise to
a complex choice of law issues when
the underlying damages were imposed
pursuant to the law of a state other
than the state in which the policy was
issued or where the insured resides. It
is possible, for example, that the law of
November 2012 PLUS Journal Reprint
one jurisdiction will apply to the
interpretation of the policy language,
while the law of another jurisdiction
will apply to the interpretation of the
statute that authorized the underlying
damages. Although there is not a welldeveloped body of case law on the
issue, several courts have held in other
contexts that when an insurance
coverage dispute implicates issues
regarding “damages and fault” in the
underlying action, contract law governs
the interpretation of the policy, while
tort law governs the damages issues.19
In Many Jurisdictions, the Insurer
Will Have the Burden of Proving that
a Settlement or Judgment is Comprised
Solely of Excluded “Fines or Penalties”
When a claim is for common law
compensatory damages in addition to
statutory damages, the law in many
jurisdictions specifies that an insurer
seeking to deny coverage pursuant to a
“fines or penalties” exclusion will bear
the burden of proving that the entire
judgment or settlement is for excluded
“fines or penalties.”20 Several courts to
consider the issue have held that the
insurer bears the burden of proof on
this issue regardless of whether the
“fines or penalties” exclusion is stated
as a separate policy exclusion or is part
of the definition of “loss” or “damages.”
For example, the court in PMI
Mortgage Ins. Co. v. American
International Specialty Lines Ins. Co.,21
held that an insurer bore the burden of
proof as to “what portion, if any, of the
underlying settlement specifically [fell]
within the loss exclusions” in a
professional liability policy that defined
“loss” to include “damages, judgments,
[and] settlements...,” and also stated
that “loss” did not include “civil or
criminal fines or penalties imposed by
law...” The Ninth Circuit affirmed this
ruling, holding that the “policy
language in question, although part of
the ‘Insuring Agreement,’ clearly
functions as an exception to the
definition of ‘Loss,’ the functional
equivalent of an exclusion to coverage,
the burden of proof of which falls
upon the insurer.”22
In practice, therefore, an insurer likely
will not be able to avoid its duty to
3
defend a claim for statutory damages
based on a “fines or penalties”
exclusion, even if the exclusion
ultimately applies to the resulting
settlement or judgment, where the
claimants seek damages that are not
fines or penalties. This was the situation
in Veneziano,23 in which the court held
that a “fines and penalties” exclusion
did not eliminate its duty to defend an
ERISA claim because it failed to prove
that “the only remedy available to [the
claimant] under his ERISA claim is a
fine or a penalty.”24
Endnotes
1
2
3
4
5
6
7
Conclusion
Consumer class actions for statutory
damages are particularly attractive to
plaintiffs’ lawyers because they present
the potential for large plaintiff classes
and, accordingly, substantial recovery
without the need to prove actual
monetary losses. Given the high cost of
defending consumer class actions and
the ever-increasing amount of
settlements or judgments in connection
with those actions, there is no doubt
that coverage disputes regarding the
applicability of “fines or penalties”
exclusions will continue to arise. As the
preceding cases illustrate, the law that
will govern these disputes is far from
settled and, as with many other
coverage disputes, often will be
jurisdiction-specific and turn on the
specific policy language at issue and
the facts and damages in the underlying
action.
8
9
10
11
12
13
14
47 U.S.C. § 227, et seq.
15 U.S.C. § 1681, et seq.
15 U.S.C. § 1681n(a)(1)(A).
15 U.S.C. § 1640 et seq.
15 U.S.C. § 1692 et seq.
Tom Waits, The Early Years: The Lyrics, 19711983.
See Carey v. Employers Mut. Cas. Co., 189 F.3d
414 (3d Cir. 1999) (holding that exclusion for
“fines or penalties imposed for violations of
federal or state law” is ambiguous and must be
construed against insurer); Veneziano v. Long
Island Pipe Fabrication & Supply, No. 99-2753,
2001 U.S. Dist. LEXIS 26465, at *18 (D.N.J.
May 17, 2001) (same). See also Universal
Underwriters Ins. Co. v. Lou Fusz Auto. Network,
Inc., 401 F.3d 876, 880 (8th Cir. 2005)
(“Because the policy does not contain a
technical definition for the phrase “civil
penalty,” we must use the term’s lay meaning.
If we find that the lay meaning is ambiguous, or
that there is more than one reasonable lay
meaning for the term, we must adopt the
meaning that supports a finding of coverage”).
849 P.2d 190 (Mont. 1993).
189 F.3d 414 (3d Cir. 1999).
40 Cal. 4th 1094, 1112 (2007).
See also Boz Scaggs Music v. KND Corp., 491
F. Supp. 908, 915 (D. Conn. 1980) (federal
Copyright Act “contemplates an award of
statutory damages in lieu of actual damages
and profits, and not an award premised on
notions of penalty or punishment.”); Doehrer v.
Caldwell, No. 79-C-394, 1980 U.S. Dist. LEXIS
10713 (N.D. Ill. 1980) (“[s]tatutory damages
are not to be regarded as penalties. The
purpose of statutory damages is to permit a
wronged plaintiff to recover where there is
insufficient proof of actual damages or
profits...”).
401 F.3d 876 (8th Cir. 2005).
Id. (internal citation omitted).
C.A. No. 09-7327, 2010 WL 5471005 (E.D. La.
Nov. 12, 2010).
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15 272 F. Supp. 2d 1365 (S.D. Ga. 2003) aff’d
157 Fed. Appx. (11th Cir. 2005).
16 No. 11-20408, 2012 WL 2299484 (5th Cir.
June 15, 2012).
17 See, e.g., Standard Mut. Ins. Co. v. Lay, No.
4-11-0527, 2012 WL 1377599 (Ill. App. Ct.
April 20, 2012). See also Olsen v. American
Family, No. ED97455, 2012 Mo. App. LEXIS
635 (Mo. Ct. App. May 9, 2012) ($500 per
violation statutory damages were not damages
under a CGL policy because they are “penal in
nature”).
18 See e.g. Motorists Mutual Insurance Co. v.
Dandy-Jim, Inc., 912 N.E.2d 659 (Ohio App. Ct.
2009) (the purpose of the statutory damage
provision is to liquidate uncertain actual
damages and to encourage victims to bring
suit); Penzer v. Transportation Ins. Co., 545
F.3d 1303 (11th Cir. 2008); Terra Nova Ins. Co.
v. Fray-Witzer, 869 N.E. 2d 565 (Mass. 2007).
19 See State Farm Mut. Auto. Ins. Co. v. Patterson,
7 A. 3d 454, 457 (Del. 2010) (“Although a
claim for insurance policy benefits arises out of
contract, we have held that tort law governs the
assessment of the underlying damages.”). See
also Allstate Prop. & Cas. Ins. Co. v. Banks, No.
10-241, 2010 U.S. Dist. LEXIS 80048 (W.D. Pa.
Aug. 9, 2010) (same); Quigley-Dodd v. General
Accident Ins. Co. of Am., 256 Conn. 225, 242
(Conn. 2001)(same).
20 See Veneziano v. Long Island Pipe Fabrication
& Supply, No. 99-2753, 2001 U.S. Dist. LEXIS
26465, at *18 (D.N.J. May 17, 2001) (insurer
failed to prove that exclusion for “fines and
penalties” eliminated duty to defend ERISA
claim when it failed to prove that the only
remedy available to the underlying plaintiff is a
fine or a penalty).
21 No. Civ. A. No. C 02-1774 PIH, 2006 U.S. Dist.
LEXIS 82623 (N.D. Cal. Nov. 13, 2006).
22 PMI Mortgage Ins. Co. 291 Fed. Appx. 40, 41
(9th Cir. 2008).
23 Veneziano, 2001 U.S. Dist. LEXIS 26465, at
*19.
24 Id. at *19-20.
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