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Insurance Law

Advertising Injury Coverage: Defense by Independent Counsel Dangerous

In June 2006, Theodore W. Lay, d/b/a Ted Lay Real Estate Agency (Lay), faxed an advertisement in regard to the sale of a particular property to Locklear Electric, Inc. (Locklear), and others. Because the facsimile message (fax) recipients had not given permission to receive these messages, Lay violated the Telephone Consumer Protection Act of 1991 (Telephone Act) (47 U.S.C. § 227 (2006)) [enhanced version available to subscribers]. The statute imposes a penalty in the amount of $500 for each fax sent. Lay was sued in a class action with Locklear as the class representative. Defense of the claim was tendered to Standard Mutual Insurance Company (Standard), Lay’s insurance carrier, which undertook the defense under a reservation of rights. Only to later have the insured fire counsel appointed by Standard and retain independent counsel.

Independent counsel settled with the plaintiffs without the permission or consent of the insurer for $1,739,000 plus costs (the full amount sought in the class action complaint) and assigned all rights against the insurer and took over the insured’s position in the declaratory relief action seeking a determination of no coverage. After two appeals and a Supreme Court decision, the case was sent back to the court of appeal who resolved the issue in Standard Mutual Insurance Co. v. Lay, 4-11-0527 (Ill.App. Dist.4 01/23/2014) [enhanced version available to subscribers].


The Telephone Act claim against Lay was a potential multimillion dollar claim that would bankrupt the agency if a verdict were entered against it and it was not covered by insurance. By so doing the insured’s assets were protected.

The settlement was approved by the federal district court. After extensive briefing, the trial court denied Locklear’s motion and granted that filed by Standard. Locklear appealed this judgment.

First, the commercial general liability (general liability) policy issued to the agency was in regard to a single-family dwelling and several vacant lots under a lessor’s risk-only basis and not in connection with the operation of a business.

On April 19, 2010, the executed settlement agreement was filed with the court in the underlying action. On September 8, 2010, the court entered a judgment on final approval of the settlement for $1,739,000 plus costs.

At the time the settlement in the underlying action was agreed upon and judgment entered, this declaratory judgment action was still pending.

On May 23, 2013, the supreme court issued its opinion affirming the court of appeal’s holding the reservation of rights letter issued by Standard was satisfactory to allow it to raise coverage issues and reversing the holding damages provided under the Telephone Act were punitive in nature and uninsurable under Illinois law. The court then remanded this case for consideration of the other issues raised by Locklear.


Locklear argues all policies issued to Lay, including the general liability policy issued as lessor’s risk only on a residence and some vacant lots and a second business policy issued as a lessor’s risk only on a four-unit apartment building, provide coverage to Lay under the allegations of the underlying action. It argues coverage is provided under both the advertising injury and property damage provisions of the policies. It further argues Norma Lay had a right to settle the underlying action, with or without the consent of Standard, and Standard’s failure to object to the settlement waived any right of consent to the settlement.

Standard also contends there is no coverage under two out of three policies because they were for lessor’s risks only and pertained to the real estate identified in those policies. It argues coverage is not provided under either the advertising injury provisions or property damage provisions of any of its policies and, if coverage was triggered by those provisions, the exclusions in the policies for rendering of professional services and intentional actions excludes coverage in this case. It further argues Lay had no right to settle without Standard’s consent and Standard did not agree to the settlement.

The court of appeal concluded that Standard’s policies issued to Lay cover the damages alleged but note the purpose of the Telephone Act is “to address telemarketing abuses attributable to the use of automated telephone calls to devices including telephones, cellular telephones, and fax machines.” By allowing liability for telemarketing abuses to be covered by insurance, the company responsible for the abuses, in this case Lay, has no incentive to stop the abuses from occurring in the future and the purpose of the Telephone Act is unfulfilled.

General Liability Policy and Business Policy for Lessor’s Risk

One of the business policies at issue here specifically involves coverage for the operation of Lay’s real estate business. The court found the policy provides coverage for the “blast fax” incident. The other two policies refer to various rental premises or vacant lots owned by Lay. However, the policies do not contain “designated premises” limitations, which would attempt to limit their application to liability coverage for activities arising out of the use of those premises alone. The only reference to those premises in the policies is in the descriptive sections of the policy declarations. In the cases cited by Standard for the proposition these policies do not cover liability for faxes in support of Lay’s real estate sales business, the policies included provisions limiting general liability coverage to injuries arising out of ownership of the premises listed in the declaration. The policies in this case do not contain those provisions.

Lay was a real estate agency, not an advertising company. The claim against Lay was not made because Lay incorrectly performed real estate services. Instead, the claim was based on Lay’s tortious conduct ancillary to the performance of real estate services. Following Standard’s argument an insured advertising its business is an excluded professional service would read the coverage of advertising injuries entirely out of the policies despite the fact such coverage is specifically available under the policies.

Locklear argues coverage lies for fax advertisements under Standard’s “personal and advertising injury” provision. Since faxes were sent without the permission of the recipient, they violated the fax recipient’s right to privacy.

An insurer, being charged with a duty to its insured, controls the insured’s defense. When an insurer surrenders control of the defense, it also surrenders its right to control the settlement of the action and to rely on a policy provision requiring consent to settle. Standard had no right to require Lay to obtain permission to settle the underlying suit or to object to it itself.


The insurer of the owners of a real estate agency that clearly violated the Telephone Consumer Protection Act by faxing an advertisement about a property listed for sale to recipients that had not agreed to receive the messages was responsible for providing coverage, where the policies issued by the insurer covered the alleged damages, the claim was not excluded by the professional services exclusion in the policies or the exclusion applicable to intentional conduct, sending the faxes violated the recipients’ right to privacy and fell under the “personal and advertising injury” provision, and the insurer gave up the right to object to the insureds’ settlement of the underlying claim when it allowed them to control the defense.


Insurance is a business where the insurer uses wise discrimination to choose its risks. When it does not do so, when it issues broad policies with minimal limitations, it must pay for its error. Here, the insurer issued lessors risk policies but did not limit the coverage to the property itself, although it easily could have done so, and by that error cost itself more than one million dollars.

Insurance underwriting is a science and an art where the underwriter assesses the risk, determines a fair and reasonable premium to cover the risk, and issues a policy that covers the intent of the insurer and the insured. When the underwriter fails to perform that duty a case like this one reaches the courts, coverage positions are taken based upon the unstated intent of the underwriter.

Insurers should only try to enforce losses based upon the actual wording of the policy not the wording that the underwriter thought was in the policy or wished was in the policy. It failed and that failure cost it enormously in legal fees and indemnity payments.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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