Insurance Law

How To Maintain A 'Sterling' Reputation With Your Clients: What You Need To Know About CGL Coverage For Unauthorized Recording Claims

By Colin B. Willmott and Jonathan L. Schwartz

One of the most remarkable and memorable scandals of 2014 involved Donald Sterling, the longtime owner of the Los Angeles Clippers, who received a lifetime ban from the National Basketball Association. What triggered this scandal? A bigotry-laced audio recording was unearthed, which purported to be a private conversation between Sterling and his girlfriend V. Stiviano. Sterling's actions were widely deplored, yet a not insignificant minority of commentators expressed concern over punishing a man for comments he made allegedly in the privacy of his own home. These concerns are not limited to Mr. Sterling's situation, as recent rapid technological advances cause this privacy concern to become magnified. Nearly everyone has a recording device in the form of a smartphone. The ability to surreptitiously post what was intended to be a private conversation has never been easier.

This battle between the right to privacy and the monitoring and recording of private communication is at the center of the proliferation of class action lawsuits.

See e.g., Robert Milligan & Joshua Salinas, California Invasion of Privacy Act Cases on the Rise, Law360, June 2, 2014 ("If a company records or monitors inbound or outbound telephone calls with customers or employees, it runs the risk of violating California's call recording and monitoring laws, which have become enticing to the plaintiff's consumer class action bar."); Michael Mallow & Christine Reilly, Recording Cellphone Calls in California Is Risky for Companies, Law360, May 15, 2014 ("The lure to plaintiffs' firms is evident, given the potential for enormous class action damages and the relatively low barrier to pleading . . . violations [of the applicable California Penal Code sections]."). A representative sample of these class action lawsuits resulting from the alleged unauthorized recording of conversation is McCabe v. Six Continents Hotels, Inc., which is pending in the United States District Court for the Northern District of California, No. 3:12-CV-04818-NC. That class action lawsuit alleges that Six Continents Hotels monitored and recorded the putative class members' phone calls to a hotel reservation hotline, without their consent, in violation of California Penal Code § 632.7 [enhanced version available to lexis.com subscribers].

These unauthorized recording class action lawsuits are, or should be, on the proverbial radar of insurance carriers that write commercial general liability ("CGL") policies. Policyholders are turning in increasing numbers to their policies' "personal and advertising injury" coverage when confronted with these claims. In particular, policyholders contend that the offense of "oral or written publication, in any manner, of material that violates a person's right of privacy" (the "Privacy Offense") provides coverage. The jurisprudence regarding whether unauthorized recording claims satisfy the Privacy Offense is nuanced, complex, and divisive. Whether coverage applies to an unauthorized recording claim generally comes down to two questions: 1) does the claim satisfy the "publication" requirement in the Privacy Offense, and if so, 2) which exclusions, if any, bar coverage?

This article focuses on the answers to these two questions and provides practical claim handling suggestions for carriers confronted with these thorny claims.

I. What Statutory Relief Is Available For Consumers And Employees Subject To Unauthorized Recordings?

To address the rising concern over electronic surveillance, federal and state governments have enacted laws to regulate the interception of private communications. In 1986, the federal government enacted the Electronic Communications Privacy Act ("ECPA"), 18 U.S.C. § 2510 et seq., [enhanced version available to lexis.com subscribers], which prohibits the interception and disclosure of wire, oral, or electronic communications. The ECPA allows for recovery in the form of equitable or declaratory relief, actual or statutory damages (whichever is greater between $100 a day per violation, or $10,000), punitive damages, attorney's fees and other litigation costs. 18 U.S.C. § 2520, [enhanced version available to lexis.com subscribers].

Also, 48 states, as well as the District of Columbia, have a statute either prohibiting the interception of communications and imposing criminal liability, creating a private right of action, or both. While some statutes cover wire, oral, and electronic forms of communication, some cover only one form of communication. See www.fas.org/sgp/crs/misc/R41733.pdf. Nonetheless, virtually all of the statutes that create a private right of action allow the award of statutory damages, which, in the aggregate, can amount to multi-million dollar exposure for businesses and their insurers. E.g., CAL. PENAL § 637.2 ($5,000 per violation), [enhanced version available to lexis.com subscribers]; OHIO REV. CODE ANN. § 2933.65 (whichever is greater between $200 per day for each day of violation, or $10,000), [enhanced version available to lexis.com subscribers]; WIS. STAT. § 968.31 (whichever is the greater between $100 per day for each day of violation, or $1,000), [enhanced version available to lexis.com subscribers].

II. How Have Courts Decided The 'Publication' Requirement In Unauthorized Recording Cases?

As referenced above, policyholders are seeking CGL coverage for these unauthorized recording class action lawsuits. They are specifically targeting the Privacy Offense. In virtually all of these coverage disputes, a fundamental issue is whether the Privacy Offense's publication requirement is satisfied. Accordingly, this section will focus on the jurisprudence examining the "publication" requirement as applied to unauthorized recording claims.

Cases Finding The Requirement Satisfied In The Surveillance Context

In Bowyer v. Hi-Lad, Inc., 216 W. Va. 634, 609 S.E.2d 895 (2004), [enhanced version available to lexis.com subscribers], the Supreme Court of Appeals of West Virginia articulated an unusually broad interpretation of the term "publication." In doing so, the Supreme Court determined that the subject CGL policy provided coverage to a hotel owner who allegedly subjected a hotel employee to oral surveillance, in violation of West Virginia's Wiretapping and Electronic Surveillance Act ("WESA"). The CGL policy issued by Westfield Insurance Company ("Westfield"), the hotel's insurer, contained standard Privacy Offense language. The lower court had determined that the publication requirement was not satisfied. The Supreme Court of Appeals disagreed. The Supreme Court of Appeals found significant that the term "publication" was undefined in the Westfield policy and dismissed Westfield's argument that the term "publication" required publication to third parties as in defamation cases. Nonetheless, the Supreme Court of Appeals concluded that even if a transmission to a third-party was needed, the surveillance system functioned in a way that anyone in the office where the surveillance monitoring equipment was placed had the ability to listen to the employee's conversations.

Similarly, in National Fire Insurance Co. of Hartford v. NWM-Oklahoma, LLC, Inc., 546 F. Supp. 2d 1238, 1241 (W.D. Okla. 2008), [enhanced version available to lexis.com subscribers], an Oklahoma federal district court concluded that the Privacy Offense's "publication" requirement was met because the insured allegedly had the ability to listen to private conversations via a baby monitoring system. Without specifically deciding whether "publication" required dissemination of information to a third party, the district court found compelling that the baby monitoring system enabled third parties, including the insured's customers, to listen to private conversations. The district court also suggested that if the insured's employees could listen in on the private conversations, the "publication" requirement could be satisfied, at least for purposes of the duty to defend.

Another district court concluded that dissemination of private information to the public at large was not required to satisfy the "publication" requirement in the Privacy Offense. In Encore Receivable Mgmt., Inc., v. Ace Property & Cas. Ins. Co., 2013 U.S. Dist. LEXIS 93513 (S.D. Ohio Jul. 3, 2013), [enhanced version available to lexis.com subscribers], two underlying lawsuits alleged that the insured operated a call center where the employees were recording telephone conversations between customers and customer service representatives without obtaining the customer's consent, in violation of California Penal Code § 637.2. The insurers maintained that for there to be a "publication," there needed to be distribution of the information or news to the public. The district court rejected that argument and instead held that "publication" occurs once a conversation is transmitted to a recording device. The district court explained, "this Court need not find that the communications were actually disseminated to third parties, because the initial dissemination of the conversation constitutes a publication at the very moment that the conversation is disseminated or transmitted to the recording device." Nonetheless, the district court found that there was evidence that the recordings were disseminated to the public, in light of the allegations that the recorded communications "were listened to and eavesdropped on" and were disclosed to employees of the companies for which the insured operated the call center.

The reasoning in Bowyer and Encore leaves insurers in a precarious position. These courts' explanation of the alleged multiple meanings of "publication" effectively affords the Privacy Offense an awkward and untenable construction. This explanation begs the question, how can there be more than one reasonable interpretation of "publication" when, like in the defamation context, the injury to the plaintiff occurs only after third parties learn of the claimant's private or secret information?

Cases Finding The Requirement Not Satisfied In The Electronic Surveillance Context

In Defender Security Co. v. First Mercury Insurance Co., No. 1:13-cv-00245-SEB-DKL, 2014 U.S. Dist. LEXIS 33318 (S.D. Ind. Mar. 14, 2014), [enhanced version available to lexis.com subscribers], the district court correctly found that First Mercury Insurance Company ("First Mercury") did not have a duty to defend Defender Security Company ("Defender Security") in connection with telephonic communications with certain employees, representatives, and agents that were recorded without their consent, in violation of California Penal Code § 632. Focusing on the term "publication," the district court found significant that Defender Security maintained a record of the call, but did not relay the private conversation to anyone. Further, the district court found compelling that any personal information disclosed by the claimant to the insured was, in fact, disclosed by the claimant, herself, not by the insured. Notably, the district court expressly disagreed with Encore.

In sum, many jurisdictions have not yet addressed this issue directly. It thus remains to be seen how broadly or narrowly other courts will construe the "publication" requirement in the Privacy Offense. The district court's reasoning in Defender Security is the most in line with common sense. Not only does it incorporate the ordinary meaning of the word "publication," but it also ensures that the provision in the insurance policy actually means something and is not simply a throwaway requirement.

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Colin B. Willmott is an associate in the Global Insurance Services Practice Group of Goldberg Segalla LLP. He focuses his practice on general liability and insurance coverage matters involving commercial general liability policies. Jonathan L. Schwartz is a partner in the Global Insurance Services Practice Group of Goldberg Segalla LLP. He concentrates his practice on insurance coverage litigation and counseling, including primary and excess commercial general liability, professional liability/errors and omissions, commercial auto, employer's liability, employment practices liability, and directors and officers liability insurance policies. Any commentary or opinions do not reflect the opinions of Goldberg Segalla or LexisNexis, Mealey's. Copyright (C) 2015 by Colin B. Willmott and Jonathan L. Schwartz. Responses are welcome.

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