Maxum Indemnity Company and Security Insurance Company of Hartford v. Eclipse Manufacturing Co. et al

Filing 395

OPINION and ORDER Signed by the Honorable Joan H. Lefkow on 1/31/2012:Mailed notice(mad, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
MAXUM INDEMNITY COMPANY and
SECURITY INSURANCE COMPANY OF
HARTFORD as successor in interest to FIRE
AND CASUALTY INSURANCE COMPANY
OF CONNECTICUT,

)
)
)
)
)
)
Plaintiffs/Counter-Defendants,
)
)
v.
)
)
ECLIPSE MANUFACTURING CO.,
)
M&M RENTAL CENTER, INC., ROBERT
)
HINMAN and ITALIA FOODS, INC.,
)
)
Defendants/Cross-Defendants/
)
Counter-Plaintiffs/Cross-Plaintiffs )
)
FIRST SPECIALTY INSURANCE CORP.,
)
)
Intervenor Defendant/
)
Counter-Plaintiff/Cross-Plaintiff. )

No. 06 C 4946
Judge Joan H. Lefkow

OPINION AND ORDER
This case involves whether three insurers had the duty to defend and indemnify their
insured in an underlying case, Hinman v. M&M Rental Center, Inc., No. 06 C 1156, which was
pending in this district before Judge Elaine Bucklo until it settled and a final order of judgment
was entered October 6, 2009. Maxum Indemnity Company (“Maxum”) and Security Insurance
Company of Hartford (“Security”) seek a declaratory judgment that they did not have the duty to
defend and need not indemnify M&M Rental Center, Inc. (“M&M”). M&M filed a counterclaim seeking declarations that Maxum and Security had the duty to defend and must indemnify
M&M in the underlying litigation. First Specialty Insurance Corporation (“FSIC”) filed an
intervening complaint seeking a declaration that FSIC did not have the duty to defend or

indemnify M&M and that Maxum and Security have the duty to defend and indemnify M&M.
FSIC also requests equitable contribution from Maxum and Security for the costs it expended in
defending M&M in the underlying suit. Robert Hinman and Italia Foods, Inc. (“Italia Foods”),
plaintiffs in the underlying litigation, also filed counter-claims and cross-claims seeking
declarations that Maxum, Security, and FSIC have the duty to defend and indemnify M&M.
As part of the settlement, M&M assigned the right to pursue its claims against Maxum
and Security in this declaratory judgment action to the plaintiff class, represented by Hinman and
Italia Foods.1 With the underlying case concluded, this coverage case became ripe for decision.
Five motions for summary judgment are presently before the court. Despite the large
volume of the motion papers, the facts are largely undisputed and the legal arguments repeated
from one brief to another. For the following reasons, the court concludes that Maxum and
Security had the duty to defend M&M while FSIC did not and that FSIC is entitled to
reimbursement of its defense costs from Maxum and Security. Whether Security and Maxum
have the duty to indemnify and the extent of that duty remain open issues.
BACKGROUND
I.

The Maxum Policy
Maxum issued a commercial general liability policy to M&M covering the period from

February 1, 2004 to February 1, 2005. As relevant to this litigation, the Maxum policy provides
coverage for bodily injury, property damage, personal injury, and advertising injury, all terms
specifically defined in the policy. Property damage is defined as “[p]hysical injury to tangible

1

As matters between M&M, Hinman, Italia Foods, and FSIC were resolved by the settlement
agreement in the underlying case, claims raised in this litigation involving these parties are moot.

2

property, including all resulting loss of use of that property” and “loss of use of tangible property
that is not physically injured.” Ex. A to Cunningham Aff. at M&M337 (hereinafter, “Maxum
Policy”). The damage must be due to an occurrence, i.e. “an accident, including continuous or
repeated exposure to substantially the same general harmful conditions,” id. at M&M336, that
occurred during the policy period, id. at M&M322. Expected or intended injury is excluded
from coverage. Id. at M&M322. Advertising injury includes “[o]ral or written publication of
material that violates a person’s right of privacy.” Id. at M&M334. As with coverage for
property damage, the advertising injury must be the result of an offense committed during the
policy period. Id. at M&M328.
While Maxum has a duty to defend its insured against suits seeking damages to which the
insurance policy applies, the duty is qualified by an allocation provision for mixed claims:
In the event that a claim or “suit” seeks “damages,” some of which are covered
and others of which are not covered by this policy, the Insured must agree to a
reasonable allocation of the costs and fees of defense, and the Insured will be
responsible for payment of the costs and fees to defend the “damages” or claims
not covered by this policy. This agreement shall be reached in writing, signed by
the insurer and the Insured, prior to the date when a responsive pleading to the
claim or “suit” is filed on behalf of the Insured. In the absence of such
agreement, our duty to defend will only apply to those specific portions of the
“suit” which are covered.2
Maxum Policy at M&M322, M&M328.

2

This differs from the default rule in Illinois, which is that if there is a duty to defend one claim,
the insurer must defend all claims. See U.S. Fid. & Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926,
930, 144 Ill. 2d 64, 161 Ill. Dec. 280 (1991).

3

II.

The Security Policy
Security’s predecessor in interest, Fire and Casualty Company of Connecticut, issued five

commercial general liability policies to M&M effective from February 1, 2000 to February 1,
2004 (collectively, “the Security policy”).3 The policy contains very similar provisions to that of
the Maxum policy, with personal and advertising injury again including injury arising out of an
invasion of privacy. The policy does not include an allocation provision similar to that found in
the Maxum policy, however.
III.

The FSIC Policy
FSIC issued a commercial insurance policy to M&M covering the period from February

1, 2005 to February 1, 2006. M&M cancelled this policy as of July 1, 2005. Under the policy,
FSIC has the duty to defend M&M against any suit seeking damages to which the policy applies,
including bodily injury and property damage caused by an occurrence and personal and
advertising injury arising out of an offense during the policy period. Property damage and
occurrence are defined as in the Maxum and Security policies, and expected or intended injuries
are excluded from coverage. Unlike the Maxum and Security policies, personal and advertising
injury is defined more narrowly as:
injury including consequential “bodily injury” arising out of one or more of the
following offenses:
a.
b.

False arrest, detention or imprisonment;
Malicious prosecution;

3

More specifically, the individual policies covered the following periods: February 1, 2000 to
February 1, 2001; February 1, 2001 to February 1, 2002; February 1, 2002 to April 3, 2002; April 3, 2002
to February 1, 2003; and February 1, 2003 to February 1, 2004.

4

c.

d.

The wrongful eviction from, wrongful entry into, or invasion of the right
of private occupancy of a room, dwelling or premises that a person
occupies, committed by or on behalf of its owner landlord or lessor; or
Oral or written publication of material that slanders or libels a person or
organization or disparages a person’s or organization’s goods, products or
services.

Ex. T to Smith Aff. at FSIC 01025. Invasion of privacy is not included within this list.4
IV.

The Underlying Litigation
The class action complaint, filed November 14, 2005 by Eclipse Manufacturing

Company (“Eclipse”), included claims for violation of the Telephone Consumer Protection Act
(“TCPA”), 47 U.S.C. § 227, and the Illinois Consumer Fraud and Deceptive Business Practices
Act (“ICFA”), 815 Ill. Comp. Stat. 505/2, and for common law conversion, all arising from the
transmission of an unsolicited advertisement by M&M to Eclipse on June 23, 2005. A first
amended complaint dropped the conversion and ICFA claims, focusing instead on the alleged
TCPA violation that occurred upon the transmission of the June 23, 2005 fax.5 This fax offers
M&M’s services in event planning, such as a “picnic, employee recognition dinner, meeting,
trade show or even a ‘holiday’ party.” Ex. B to Cunningham Aff. Eclipse sought to represent
the following class:
All persons who (1) on or after four years prior to the filing of this action, (2)
were sent telephone facsimile messages of material advertising the commercial

4

The page cited to by FSIC in its L.R. 56.1 statement for the definition of personal and
advertising injury, FSIC 01018, includes “[o]ral or written publication of material that violates a person’s
right of privacy” within the definition. This section, however, was deleted in its entirety and replaced
with the narrower language quoted in the text of this opinion as part of an intellectual property
endorsement adopted by FSIC and M&M.
5

The fax attached to the first amended complaint indicates that it was sent on June 23, 2005,
while the complaint references July 23, 2005. “[W]hen a written instrument contradicts allegations in the
complaint to which it is attached, the exhibit trumps the allegations.” N. Indiana Gun & Outdoor Shows,
Inc. v. City of South Bend, 163 F.3d 449, 454 (7th Cir. 1998).

5

availability of any property, goods, or services by or on behalf of [M&M], and (3)
with respect to whom [M&M] cannot provide evidence of prior express
permission or invitation for the sending of such faxes.
Id. at ¶ 14. It claimed that the purported plaintiff class was damaged by M&M’s actions because
receipt of the fax “caused them to lose paper and toner,” “prevented Plaintiff’s fax machine from
being used for Plaintiff’s business purposes during the time [M&M] was using Plaintiff’s fax
machine for [M&M’s] illegal purpose,” and “cost Plaintiff employee time, as Plaintiff’s
employees used their time receiving, routing and reviewing [M&M’s] illegal faxes and that time
otherwise would have been spent on Plaintiff’s business activities.” Id. at ¶ 24.
After it was discovered that Eclipse had assigned the right to proceed with the action
against M&M to Hinman, who was formerly Eclipse’s sole owner, shareholder, and president,
Hinman, as assignee, and Italia Foods filed a second amended complaint against M&M on June
15, 2007. The second amended complaint alleged that M&M sent unsolicited faxes on October
29, 2004 and June 23, 2005, and “on information and belief” on other occasions. Ex. C to
Cunningham Aff. ¶¶ 11–14. The class definition remained the same. The sending of unsolicited
faxes was said to damage recipients in the following ways:
A junk fax recipient loses the use of its fax machine, paper, and ink toner. An
unsolicited fax wastes the recipient’s valuable time that would have been spent on
something else. A junk fax interrupts the recipient’s privacy.6 Unsolicited faxes
prevent fax machines from receiving authorized faxes, prevent their use for
authorized outgoing faxes, cause undue wear and tear on the recipient fax
machines, and require additional labor to attempt to discern the source and
purpose of the unsolicited message.

6

The complaint further specified that the relevant privacy interest was one of seclusion. Ex. C to
Cunningham Aff. ¶ 35.

6

Id. at ¶ 3. The October 29, 2004 fax was not attached to the complaint but was later produced in
discovery. This fax offered M&M’s help with holiday parties and special events,7 including
corporate meetings, product introductions, team building, employee/customer entertaining, and
trade shows. Ex. G to Cunningham Aff. The fax invited recipients to an industry open house to
learn more about M&M’s rental offerings and services.
Prior to the filing of the second amended complaint, Judge Bucklo had to determine
whether Hinman had standing to pursue Eclipse’s claims. She concluded that he did, as a
corporation could assign its TCPA claims. Eclipse Mfg. Co. v. M & M Rental Ctr., Inc., 521 F.
Supp. 2d 739, 743–44 (N.D. Ill. 2007). The assignment, however, was limited to the property
interests protected by the TCPA, as corporations lack privacy interests in seclusion. Id.
In their subsequent motion for class certification, Hinman and Italia Foods claimed that
M&M sent unsolicited advertisements to the class on June 24, 2002, September 15, 2003,
November 5, 2003, October 29, 2004, and June 23, 2005. On April 7, 2008, Judge Bucklo
certified a class defined as
[a]ll persons who, on or after four years prior to the filing of this action, were
sent, without permission, telephone facsimile messages of material advertising the
commercial availability of any property, goods, or services by or on behalf of
[M&M].
Hinman v. M & M Rental Ctr., Inc., 545 F. Supp. 2d 802, 808 (N.D. Ill. 2008).
The parties in the underlying litigation then filed cross-motions for summary judgment,
which Judge Bucklo granted in part and denied in part on January 27, 2009. Hinman v. M & M
Rental Ctr., Inc., 596 F. Supp. 2d 1152 (N.D. Ill. 2009). The facts of the case, as found by the

7

In his deposition, Berk, M&M’s president, characterized backyard parties and weddings as
“special events.” Ex. D to Cunningham Aff. 31:19-22.

7

district court, are as follows: In August 1997, Michael Berk, M&M’s president, purchased a list
of names and fax numbers (the “leads list”) from Corporate Marketing, Inc. (“CMI”). The leads
list consisted of approximately 5,000 contacts, including Eclipse and Italia Foods. Hinman was
listed as the contact name for Eclipse. CMI included companies on the list that were likely to
spend over $5,000 per year on corporate parties, meetings, and banquets. M&M used Xpedite
Systems (“Xpedite”) to send fax blasts to the leads list on at least five occasions between June
2002 and June 2006. According to Xpedite’s records, the first fax (“fax #1”) was sent on June
24, 2002 to 4,469 recipients. The second fax (“fax #2”) was sent on September 15, 2003 to
4,288 recipients. The third fax (“fax #3”) was sent on November 5, 2003 to 4,174 recipients. No
copies of faxes #1-3 were produced in the underlying litigation and their content is unknown.
The fourth fax (“fax #4”) was sent on October 29, 2004 to 3,944 recipients. The fifth fax (“fax
#5”) was sent on June 23, 2005 to 3,781 recipients. Copies of faxes #4 and #5 were produced in
the litigation. Judge Bucklo concluded that faxes #4 and #5 violated the TCPA and granted
judgment in favor of plaintiffs as to these faxes. The plaintiff class was awarded statutory
damages of $3,862,500 for these violations.8 Because no copies of faxes #1-3 were produced
and the circumstantial evidence of the content of these faxes was too attenuated to carry
plaintiffs’ burden of demonstrating that the faxes were advertisements, Judge Bucklo granted
judgment for M&M on these faxes. She was “aware of no case (nor do plaintiffs cite any) in
which a plaintiff has prevailed under the TCPA where it cannot produce a copy of the allegedly
offending advertisement.” Id. at 1163.

8

The TCPA provides for statutory damages of $500 per unsolicited fax or in the amount of the
actual monetary loss, whichever is greater. 47 U.S.C. § 227(b)(3)(B). 7,725 faxes were sent on October
29, 2004 and June 23, 2005, which multiplied by $500 equals $3,862,500.

8

After the summary judgment order was entered, Hinman and Italia filed a motion to
reconsider, arguing that there was a genuine issue of fact as to whether faxes #1-3 were
advertisements. M&M also sought reconsideration, claiming that because Hinman and Italia
Foods had failed to provide adequate notice of the lawsuit to the class prior to the summary
judgment ruling, damages should only be awarded for the two faxes the named plaintiffs
received. The parties agreed to stay briefing on these post-judgment motions pending settlement
discussions. All parties in the underlying litigation and this coverage action then participated in
an unsuccessful settlement conference. A subset of the parties, Hinman, Italia Foods, M&M, and
FSIC, resumed settlement discussions that ultimately proved fruitful. The settlement agreement
provided that M&M would consent to entry of judgment against it for $5,817,150. This amount
was apportioned to the five faxes, with $685,350 allocated to fax #1, $643,200 to fax #2,
$626,100 to fax #3, $1,972,000 to fax #4, and $1,890,500 to fax #5.9 Hinman and Italia Foods
agreed not to execute the judgment against any of M&M’s assets other than its non-FSIC
insurance policies.10 FSIC agreed to pay $100,000 into a trust for the benefit of the class to
satisfy the judgment as to fax #5. A fairness hearing was held on September 10, 2009. Final
approval of the settlement and judgment was entered on October 6, 2009. The order of final
approval and judgment provided that the agreement was the “result of good faith arm’s length
negotiations by the parties,” Ex. Q to Cunningham Aff. ¶ 8, and was “made in reasonable
anticipation of liability,” id. ¶ 10. The order stated that the settlement amount was fair and
reasonable, that the amount was “what a reasonably prudent person in [M&M’s] position would
9

These figures amount to $150 per fax for faxes #1-3 and $500 per fax for faxes #4 and #5.

10

The order also excluded additional insurance policies M&M had for the period of February 1,
2005 to February 1, 2006, including one provided by the James River Insurance Company.

9

have settled for on the merits of the claims in this Litigation,” and that M&M conformed to the
standard of a prudent uninsured in settling. Id. As a condition of settlement, summary judgment
was vacated.
V.

Coverage of the Underlying Action
On December 20, 2005, FSIC agreed to defend M&M in the underlying litigation

pursuant to a reservation of rights. Due to FSIC’s reservation of rights, M&M controlled its own
defense but was reimbursed for its costs in accordance with FSIC’s billing guidelines. As of
November 19, 2009, FSIC had incurred $643,134.05 in costs and fees in defending M&M in the
underlying litigation. By July 27, 2006, Maxum and Security had notice of the underlying
litigation. $576,207.60 of the defense costs were incurred on or after this date.
On September 13, 2006, Maxum and Security filed this declaratory judgment action.
$547,553.23 of the total defense costs were incurred on or after that date. FSIC was given leave
to intervene in this action on November 5, 2008. Hinman and Italia Foods were added as
defendants on December 3, 2007 but were not served until March 11, 2009. Their counsel,
however, received the complaint on December 3, 2007 and actively participated despite Hinman
and Italia Foods not being served.
VI.

The Leads List
One of the few relevant factual disputes in this case involves whether the underlying

plaintiff class is composed solely of business entities or also includes natural persons. The class
was defined to include “all persons” who received fax advertisements. These advertisements
were sent to fax numbers contained on the leads list. The leads list includes four columns,
headed “ref,” “type,” “addr,” and “header.” Ex. E to Cunningham Aff. The “ref” column

10

generally contains company names, although it also includes the names of individuals without an
accompanying company or entity name. For example, Henry Bechstein, Phillip R. Suth, and
Ronald S. Jacobson are all listed in the “ref” column with no indication that the names refer to
anything or anyone other than natural persons. The “type” column identifies that the number
provided in the “addr” column is a fax number. The “header” column provides a contact name
to whom the faxes were addressed.
Berk testified that the faxes he sent to contacts on the leads list were sent to companies.
Judge Bucklo, in her now vacated summary judgment order, with no mention of natural persons,
referred to the faxes as having been sent to companies. Further discovery regarding the leads list
was not undertaken in this litigation.
LEGAL STANDARD
Summary judgment obviates the need for a trial where there is no genuine issue as to any
material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(c). To determine whether any genuine issue of fact exists, the court must pierce the pleadings
and assess the proof as presented in depositions, answers to interrogatories, admissions, and
affidavits that are part of the record. Fed. R. Civ. P. 56(c) & advisory committee’s notes. The
party seeking summary judgment bears the initial burden of proving that there is no genuine
issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 91 L. Ed. 2d
265 (1986). In response, the nonmoving party cannot rest on mere pleadings alone but must use
the evidentiary tools listed above to designate specific material facts showing that there is a
genuine issue for trial. Id. at 324; Insolia v. Philip Morris Inc., 216 F.3d 596, 598 (7th Cir.
2000). A material fact is one that might affect the outcome of the suit. Insolia, 216 F.3d at

11

598–99. Although a bare contention that an issue of fact exists is insufficient to create a factual
dispute, Bellaver v. Quanex Corp., 200 F.3d 485, 492 (7th Cir. 2000), the court must construe all
facts in a light most favorable to the nonmoving party and draw all reasonable inferences in that
party’s favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505, 91 L. Ed. 2d
202 (1986).
ANALYSIS
I.

Duty to Defend
Under Illinois law, “an insurer’s duty to defend is determined by comparing the

allegations in the underlying complaint to the relevant provisions of the insurance policy.”
LaGrange Mem’l Hosp. v. St. Paul Ins. Co., 740 N.E.2d 21, 26, 317 Ill. App. 3d 863, 251 Ill.
Dec. 191 (2000). The duty to defend is broader than the duty to indemnify; an insurer may be
required to defend even though it ultimately may not be required to indemnify the insured.
Zurich Ins. Co. v. Raymark Indus., Inc., 514 N.E.2d 150, 163, 118 Ill. 2d 23, 112 Ill. Dec. 684
(1987). The duty to defend arises if the complaint’s allegations fall within or potentially within
the policy’s coverage. LaGrange Mem’l Hosp., 740 N.E.2d at 26. “[T]he complaint need
present only a possibility of recovery, not a probability of recovery.” Id. at 27. An insurer may
not refuse to defend its insured “unless it is clear from the face of the underlying complaint[ ]
that the allegations fail to state facts which bring the case within, or potentially within, the
policy’s coverage.” U.S. Fid. & Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930,
144 Ill. 2d 64, 161 Ill. Dec. 280 (1991). In a declaratory judgment action, the court may look
beyond the allegations of the underlying complaint to determine whether the insured’s action
falls within one of the insurance policy’s exclusions, so as to defeat the duty to defend, if such

12

evidence does not go to an ultimate fact in the underlying litigation. Fremont Comp. Ins. Co. v.
Ace-Chicago Great Dane Corp., 710 N.E.2d 132, 138–39, 304 Ill. App. 3d 734, 237 Ill. Dec. 709
(1999); Fid. & Cas. Co. of N.Y. v. Envirodyne Eng’rs, 461 N.E.2d 471, 473–75, 122 Ill. App. 3d
301, 77 Ill. Dec. 848 (1983). Any doubts as to coverage are to be resolved in favor of the
insured. Wilkin, 578 N.E.2d at 930.
A.

Property Damage Coverage

The FSIC, Maxum, and Security policies contain the same property damage provision.
Coverage exists for property damage caused by an occurrence as long as the damage is not
expected or intended by the insured. The underlying complaint alleged that a recipient of
unauthorized faxes “loses the use of its fax machine, paper, and ink toner.” Ex. C to
Cunningham Aff. ¶ 3. The Seventh Circuit, in considering the identical situation, concluded that
property damage coverage clearly does not apply to this loss as the senders of the faxes
anticipate that the recipient’s paper and toner will be used upon receipt of the fax. Am. States
Ins. Co. v. Capital Assocs. of Jackson County, Inc., 392 F.3d 939, 943 (7th Cir. 2004). As the
property damage to the plaintiff class was expected by M&M, under American States, coverage
is foreclosed. See id. (“Because every junk fax invades the recipient’s property interest in
consumables, this normal outcome is not covered.”). FSIC, Maxum, and Security thus had no
duty to defend M&M based on the property damage provision in their policies.11
B.

Personal and Advertising Injury Coverage

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Hinman and Italia recognize that this court is bound by the Seventh Circuit’s ruling in
American States. They do, however, raise the issue in order to preserve it for appeal, citing to an Illinois
appellate court decision, Ins. Corp. of Hanover v. Shelborne Assocs, 905 N.E.2d 976, 389 Ill. App. 3d
795, 329 Ill. Dec. 138 (2009), that is in conflict with American States. Bound by American States, the
court need not consider whether Shelborne Associates dictates a different outcome in this case.

13

1.

FSIC

The FSIC policy provides coverage for personal and advertising injury in only limited
circumstances. Specifically, coverage is provided for false arrest, detention, or imprisonment;
malicious prosecution; wrongful eviction, entry, or invasion; and slander, libel, or
disparagement. Invasion of privacy, the only potential advertising injury at issue in the
underlying suit, is not covered. Because the allegations in the underlying complaint do not fall
even potentially within FSIC’s personal and advertising injury coverage, FSIC did not owe
M&M the duty to defend.
2.

Maxum and Security

Unlike FSIC, whose policy included an endorsement narrowing the scope of its
advertising injury coverage, the Maxum and Security policies include invasion of privacy as a
covered offense. Maxum and Security nonetheless contest whether the allegations of the
complaint gave rise to a potentially covered invasion of privacy claim. They first argue that the
TCPA blast fax provision does not protect privacy interests. This argument, however, has been
rejected by both the Seventh Circuit and the Illinois Supreme Court. See Valley Forge Ins. Co.
v. Swiderski Elecs., Inc., 860 N.E.2d 307, 315, 223 Ill. 2d 352, 307 Ill. Dec. 653 (2006) (“The
receipt of an unsolicited fax advertisement implicates a person’s right of privacy insofar as it
violates a person’s seclusion, and such a violation is one of the injuries that a TCPA fax-ad claim
is intended to vindicate.”); Am. States, 392 F.3d at 942 (“Section 227(b)(1)(C) doubtless
promotes this (slight) interest in seclusion . . . .”).
In American States, the Seventh Circuit, in the absence of an Illinois Supreme Court
decision on the issue, held that an advertising injury provision that covers violations of privacy

14

does not create a duty to defend TCPA fax-ad claims. The court reasoned from common law
doctrines that invasion of privacy may relate to an interest in secrecy or an interest in seclusion.
It concluded that a recipient’s interest in secrecy is not invaded because no publication of the
recipient’s private information has occurred. Id at. 942. Whatever “slight interest” in seclusion
a recipient might have, the court found that the word privacy in the insurance policy at issue
“strongly implies that coverage is limited to secrecy interests ” in that “[i]t covers a
‘publication’ that violates a right of privacy.” Id.12 “To put this differently,” the court added, “§
227(b)(1)(C) condemns a particular means of communicating an advertisement, rather than the
contents of that advertisement, while an advertising injury coverage deals with informational
content.” Id. at 943.
In Valley Forge, the Illinois Supreme Court rejected the approach taken by American
States. 860 N.E.2d at 323. The Court concluded that, although the distinction between secrecy
and seclusion made in American States “may very well hold true as a general matter in the realm
of privacy law,” Illinois courts must interpret insurance policy provisions using their plain,
ordinary, and popularly understood meanings. Id. The Court held that the insurer had a duty to
defend because a “TCPA fax-ad potentially falls within the coverage of the policies’ advertising
injury” provisions.” Id. at 318, 323. Under Valley Forge, the TCPA claim in the underlying case
is covered under the advertising injury provisions in the Maxum and Security policies.13

12

The clause in the policies at issue in this case also refer to “publication of material that violates
a person’s right of privacy.”
13

Although the initial and first amended complaints do not specifically mention invasion of a
privacy right, a violation of the right to seclusion is implicit in a TCPA fax blast claim. Valley Forge, 860
N.E.2d at 316.

15

Maxum and Security maintain that Valley Forge is distinguishable under the particular
facts of the underlying case. They note that the plaintiff in American States was a corporation
whereas the plaintiff in Valley Forge was an individual “doing business as” a corporation.
Maxum and Security conclude that Valley Forge therefore did not affect the Seventh Circuit’s
holding that a claim brought by a corporation is not covered. The court disagrees. Valley Forge
explicitly “decline[d] to follow” American States. Id. at 323. The Seventh Circuit in American
States did draw a distinction between a corporation, such as the underlying plaintiff in that case,
and an individual. See 392 F.3d at 942. (“[Plaintiff] is a corporation, and businesses lack
interests in seclusion . . . .”). But in the end it made no difference. Rather, under American
States, a TCPA violation is not an advertising injury.
Moreover, the Illinois Supreme Court could readily have distinguished the case before it
on the basis that the underlying plaintiff in American States was a corporation, but it did not. See
Pekin Ins. Co. v. XData Solutions, Inc., 958 N.E.2d 397, 402, 354 Ill. Dec. 654 (Ill. Ct. App.
2011) (“[H]ad the court intended for its holding to apply only to ‘natural’ persons rather than to
corporations, it would have so stated.”). Indeed, the Illinois Supreme Court did not indicate that
the trial court would at some point need to distinguish between class members who are
individuals and those who are business entities. Cf. American States, 392 F.3d at 942 (“The
class of junk-fax recipients may include real rather than artificial people, however, so we cannot
stop yet.”). At the same time, under American States a privacy provision would not cover claims
brought by an individual – certainly not one doing business as a corporation – any more than it
would cover claims brought by the corporation itself. In light of the foregoing, the correct

16

reading of Valley Forge is that the duty to defend arises under an advertising injury provision for
TCPA fax-ad claims brought by business entities as well as natural persons.
Maxum’s and Security’s argument that the policy language only provides coverage for
individuals’ as opposed to organizations’ rights is unavailing. The Maxum and Security policies
state that injury arising from the publication of material that violates “a person’s right to
privacy” is covered. Another covered advertising injury is that which results from the
publication of material “that slanders or libels a person or organization or disparages a person’s
or organization’s goods, products or services.” Maxum Policy at M&M334. Maxum and
Security argue that only provisions referring to both persons and organizations are intended to
cover business entities. Where the term “person” is not defined in an insurance policy, however,
it is given its plain and ordinary meaning. Supreme Laundry Serv., L.L.C. v. Hartford Cas. Ins.
Co., 521 F.3d 743, 747 (7th Cir. 2008). The dictionary definition of person includes both natural
persons and business entities. Id.; see also 1 U.S.C. § 1 (“person” includes “corporations,
companies, associations, firms, partnerships, societies, and joint stock companies, as well as
individuals”); Black’s Law Dictionary 1178 (8th ed. 2004) (including among definitions of
“person” both “a human being” and “an entity (such as a corporation) that is recognized by law
as having most of the rights and duties of a human being”); Webster’s Third New International
Dictionary 1686 (1981) (person is defined to include “a human being, a body of persons, or a
corporation, partnership, or other legal entity that is recognized by law as the subject of rights
and duties”). Even though some provisions use person or organization, where person is used
alone, it will not be read “to refer to simply natural persons when it can plausibly apply to a

17

corporate entity, especially where the drafters never expressed any intent that usage of the term
was meant only to refer to natural persons.” Id. at 748.
This does not end the inquiry, however, as the duty to defend was only triggered if the
alleged privacy violation occurred while the policies were in effect. Maxum does not dispute
this, but Security argues that the underlying complaint contained no allegations that an
advertisement violating the TCPA was sent during its policy periods. While the initial and
amended complaints in the underlying action specify only two dates on which faxes were sent,
October 29, 2004 and June 23, 2005, both outside of Security’s policy periods, the class
definition used throughout includes persons who received faxed advertisements from M&M
beginning in 2001. The second amended complaint also alleges that M&M sent unsolicited
advertisements to Eclipse and Italia Foods “on other occasions.” Ex. C to Cunningham Aff.
¶ 14. These allegations raised the possibility that advertisements in violation of the TCPA were
sent while Security’s policies were in effect.14
Security claims that extrinsic evidence, specifically Judge Bucklo’s now vacated
summary judgment order finding no TCPA violation for faxes #1-3, establishes that the only
alleged TCPA violations occurred outside Security’s policy period. Judge Bucklo based her
ruling on the absence of copies of faxes #1-3, despite there being circumstantial evidence that the
faxes sent during Security’s policy period constituted advertisements as defined by the TCPA.
Using Judge Bucklo’s order as evidence that no duty to defend existed under the Security policy
effectively equates the duty to defend with the duty to indemnify, as the order goes to an ultimate

14

In fact, the dates on which faxes #1-3 were sent had been identified in the public record prior to
the filing of the second amended complaint. See Eclipse Mfg. Co. v. M&M Rental Ctr., Inc., No. 061156, dkt. no. 67 (filed January 18, 2007) (Eclipse reply to its motion for class certification).

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fact in the underlying case — whether the faxes sent during the Security policy period were
advertisements under the TCPA. There is no question, however, that faxes were sent during the
policy period. Accordingly, Maxum and Security had the duty to defend under the advertising
injury provisions in their policies.
C.

Equitable Contribution

FSIC defended M&M in the underlying suit pursuant to a reservation of rights. It now
seeks to recover the defense costs incurred on or after Maxum and Security received notice of
the underlying suit on July 27, 2006 totaling $576,207.60. Equitable contribution “as it pertains
to insurance law is an equitable principle arising among coinsurers which permits one insurer
who has paid the entire loss, or greater than its share of the loss, to be reimbursed from other
insurers who are also liable for the same loss.” Home Ins. Co. v. Cincinnati Ins. Co., 821 N.E.2d
269, 276, 213 Ill. 2d 307, 290 Ill. Dec. 218 (2004). FSIC shouldered the entire costs of M&M’s
defense, even though it did not have the duty to defend. It is thus entitled to reimbursement of
its costs from Maxum and Security unless it acted as a volunteer in assuming the defense.
A volunteer is one who has made a payment not under compulsion, legal obligation, or to
preserve its rights. See Progressive Ins. Co. v. Univ. Cas. Co., 807 N.E.2d 577, 589, 347 Ill.
App. 3d 10, 282 Ill. Dec. 953 (2004) (quoting Aetna Life Ins. Co. v. Town of Middleport,
124 U.S. 534, 539, 8 S. Ct. 625, 31 L. Ed. 537 (1888)); 16 Couch on Insurance § 223:25. An
insurer that makes payments with a reasonable, good faith belief in liability is not considered a
volunteer, even if no liability is ultimately found. 16 Couch on Insurance § 223:27. While this
court has concluded that FSIC did not to have a duty to defend, FSIC did not act as a volunteer
in defending M&M in the underlying suit. It did exactly what the law encourages insurers to do

19

when faced with a situation of debatable coverage: defend under a reservation of rights in order
to ensure that it is not later estopped from raising coverage defenses. FSIC may have acted out
of an abundance of caution, concerned that the Seventh Circuit’s ruling on property damage
coverage in American States would be overruled by the Illinois Supreme Court. An Illinois
appellate court did subsequently rule the other way on the issue, see Ins. Corp. of Hanover v.
Shelborne Assocs., 905 N.E.2d 976, 389 Ill. App. 3d 795, 329 Ill. Dec. 138 (2009), but the issue
has not been taken up by the Illinois Supreme Court. Given the American States court’s
conclusion that the property damage question was not even close, the chance of the Seventh
Circuit’s reversing course is slim. Nonetheless, there is some indication that FSIC defended so
as to preserve its rights and not because it desired to expend money where not required as a
volunteer. Reaching a contrary result “would discourage insurers[ ] from defending their insured
where there is a dispute over coverage.” Westport Ins. Co. v. St. Paul Fire & Marine Ins. Co.,
375 F. Supp. 2d 4, 9 (D. Conn. 2005). Consequently, FSIC is entitled to reimbursement from
Maxum and Security for the cost of M&M’s defense incurred on or after July 27, 2006.
II.

Duty to Indemnify

The duty to indemnify is narrower than the duty to defend. Outboard Marine Corp. v.
Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1221, 154 Ill. 2d 90, 180 Ill. Dec. 691 (1992). It can be
determined only after the insured becomes legally obligated to pay damages in the underlying
suit. Id. An insurer must indemnify the insured for a loss if it actually falls within the insurance
policy’s coverage. Id. The insured, in this case the plaintiff class standing in M&M’s shoes, has
the burden to prove that the liability incurred in the underlying suit is covered by the policy. St.
Michael’s Orthodox Catholic Church v. Preferred Risk Mut. Ins. Co., 496 N.E.2d 1176, 1179,

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146 Ill. App. 3d 107, 100 Ill. Dec. 111 (1986). Where liability was incurred because of
settlement, the insured must establish that it settled “an otherwise covered loss in ‘reasonable
anticipation of personal liability.’” Fed. Ins. Co. v. Binney & Smith, Inc., 913 N.E.2d 43, 48,
393 Ill. App. 3d 277, 332 Ill. Dec. 448 (2009). Where multiple claims are involved, an insured is
not required to apportion liability but must instead demonstrate that a primary focus of
settlement was a claim covered by the insurance policy. Santa’s Best Craft, LLC v. St. Paul Fire
& Marine Ins. Co., 611 F.3d 339, 350–51 (7th Cir. 2010). This is because apportioning liability
for different claims “would either require the coverage litigation to be a retrial of the merits of
the insured’s underlying lawsuit and/or would discourage settlement because the insured would
essentially have to prove its own liability for the underlying conduct even if it had not made that
concession in arriving at a settlement.” Id. (citing Commonwealth Edison Co. v. Nat’l Union
Fire Ins. Co. of Pittsburgh, Pa., 752 N.E.2d 555, 565–66, 323 Ill. App. 3d 970, 256 Ill. Dec. 675
(2001)). The insured is required “to establish when the covered claims arose to allocate
responsibility for paying the settlement based on which insurer’s policy was in effect at the
time.”15 Id.
Here, the key issue is whether the settlement was entered into in reasonable anticipation
of liability.16 A settlement that effectively lets the insured off the hook gives rise to concerns

15

There is no dispute about when the faxes were sent and the amounts that would be allocable to
the various insurance policies at issue.
16

Maxum and Security argue that they have no duty to indemnify because it is not possible for
the underlying plaintiffs – at least those engaged in business – to have suffered an invasion of privacy as a
result of the TCPA violation. This is where the application of Valley Forge is troubling because, while
setting aside the scope of privacy law in reading the “invasion of privacy” language of the policy, the
Court necessarily concludes that a TCPA violation is an invasion of privacy under the policy. If it were
not, it would not invoke a duty to defend. Nonetheless, as long as Valley Forge stands, the duty to

(continued...)
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about collusion. In such a case, as here, the settlement will bind Maxum and Security only if
Hinman and Italia Foods prove that the settlement was reasonable. Guillen ex rel. Guillen v.
Potomac Ins. Co. of Illinois, 785 N.E.2d 1, 14, 203 Ill. 2d 141, 271 Ill. Dec. 350 (2003). Maxum
and Security have the right to rebut any showing of reasonableness. Id. In determining
reasonableness, the court should consider whether the settlement was made in reasonable
anticipation of liability and “whether, considering the totality of circumstances, the insured’s
decision conformed to the standard of a prudent uninsured.” Id. (internal quotation marks
omitted). Some factors to consider include the facts bearing on liability and damages and the
costs and risks of going to trial. Id.
Although Judge Bucklo held a fairness hearing on the settlement agreement and entered
findings that the settlement amount agreed to was “what a reasonably prudent person in
[M&M’s] position would have settled for on the merits of the claims in this Litigation” and that
M&M conformed to the standard of a prudent uninsured in deciding to settle, Ex. Q to
Cunningham Aff. ¶ 10, this does not satisfy Hinman and Italia Foods’ burden. See Stonecrafters,
Inc. v. Wholesale Life Ins. Brokerage, Inc., 915 N.E.2d 51, 60–63, 393 Ill. App. 3d 951, 333 Ill.
Dec. 530 (2009). Nor are Maxum and Security collaterally estopped from challenging the
reasonableness of the settlement in this proceeding. Id. at 63.
Maxum and Security argue that M&M could not have anticipated that it would be liable
to class members who are business entities when it agreed to the settlement. They emphasize
that when Judge Bucklo granted Hinman and Italia’s motion for leave to file a second amended

16

(...continued)

indemnify in a case such as this inevitably follows.

22

complaint she concluded that Eclipse could only assign claims based on its property interest in
the TCPA because a corporation lacks the seclusion interest that is protected by the TCPA. See
Hinman, 521 F. Supp. 2d at 743–44 (“Therefore, it only makes sense that corporations bringing
claims under the TCPA may only assert the property interest the TCPA was designed to protect.”
(citing American States and Valley Forge)). Judge Bucklo wrote, “‘A corporation, partnership or
unincorporated association has no personal right of privacy’ and therefore has no cause of action
for invasion of privacy other than intrusions upon the use of its own name or identity.” Id. at
743 (quoting Restatement (Second) of Torts § 652I cmt. a (1977)).
It appears that the parties did not raise this issue again during the course of the
proceedings, however, as neither Judge Bucklo’s ruling on class certification nor her summary
judgment order distinguishes between claims brought by corporations or claims brought by
individuals. Thus, it is unlikely that the parties who settled the underlying litigation were
focused on whether the plaintiff class was composed of business entities as well as individuals.
It can readily be inferred, as well, that because Valley Forge was decided before the negotiations
leading to the settlement, the parties knew that the court of last resort on insurance coverage had
decided that “advertising injury” includes interests protected by TCPA and that an appeal in this
case could result in the abrogation of American States on this issue. Nevertheless, the language
in Judge Bucklo’s ruling on the motion to amend the complaint is enough to create a genuine
issue of fact as to whether M&M reasonably anticipated liability for faxes sent to business
entities. Moreover, the record is not well-developed on this issue. Compare with Pietras v.
Sentry Ins. Co., 513 F. Supp. 2d 983 (N.D. Ill. 2007) (examining settlement amounts in similar

23

cases); Binney, 913 N.E.2d at 49–50 (examining affidavits submitted by counsel during the
underlying litigation).
In addition, Security argues that M&M did not act in reasonable anticipation of liability
in agreeing to settle claims related to faxes #1-3 because Judge Bucklo had already found in
M&M’s favor on these faxes. While the summary judgment order was vacated as part of the
settlement, the fact that no copies of faxes #1-3 were ever produced remains unchanged.
Hinman and Italia Foods respond by referencing the circumstantial evidence they had produced
that at least, in their opinion, created a genuine issue of material fact as to whether faxes #1-3
were advertisements. This evidence included Berk’s testimony on the purpose of purchasing the
leads list, copies of fliers created by M&M that could not be connected to a particular fax
transmission, and records showing that faxes were sent to the leads list on dates corresponding to
faxes #1-3. Hinman and Italia Foods argue that, despite Judge Bucklo’s contrary summary
judgment ruling, M&M could have reasonably anticipated incurring liability on faxes #1-3
because Hinman and Italia Foods had filed a motion for reconsideration contending that there
was a genuine dispute as to faxes #1-3. Alternatively, M&M faced the possibility of an appeal,
further drawing out the litigation. Hinman and Italia Foods also emphasize the reasonableness of
the amount for which the claims for faxes #1-3 were compromised, as $150 per fax in damages is
well below the $500 per fax provided by statute. This discount may have been an
acknowledgment of the comparative weakness of the evidence for these three faxes as compared
to that for faxes #4 and #5. Although Hinman and Italia Foods’ argument as to reasonableness is
something of a stretch, they have at least raised a genuine dispute about it. Summary judgment

24

will be denied on the issue of indemnity and the parties will be given the opportunity to submit
additional materials on the issue of the reasonableness of the settlement.
CONCLUSION AND ORDER
For the foregoing reasons, FSIC’s motion [#246] is granted. Maxum’s motion [#254] is
denied as to the duty to defend and as to the duty to indemnify. Security’s motion [#261] is
denied as to the duty to defend and the duty to indemnify. Hinman and Italia Food’s motions
[#275, #277] are granted as to the duty to defend and denied as to the duty to indemnify.
FSIC had no duty to defend M&M in the underlying suit, while Maxum and Security did.
Maxum and Security must reimburse FSIC for the costs and fees it incurred in defending M&M
on or after July 27, 2006. Maxum and Security are instructed to attempt to reach an agreement
as to the proper allocation of these defense costs between them.
This case will be called for a status hearing on February 16, 2012 at 8:30 a.m.
Dated: January 31, 2012

Enter:
___________________________________
JOAN HUMPHREY LEFKOW
United States District Judge

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