Following the Illinois Supreme Court’s 2021 ruling in West Bend Mutual Insurance Co. v. Krishna Schaumburg Tan, Inc., 2021 IL 125978, which we covered in detail, a Chicago-based federal court recently handed another insurance coverage victory to businesses facing class actions under the Illinois Biometric Information Privacy Act (BIPA). The U.S. District Court for the Northern District of Illinois found that a general liability (GL) insurer had to defend its policyholders against two class action lawsuits alleging that the policyholders were selling biometric data in violation of BIPA and common law rights.
Significantly, the court rejected a GL insurer’s argument that its policy’s “Distribution of Material in Violation of Statutes” exclusion—an exclusion that is arguably broader than the one that the Illinois Supreme Court rejected in West Bend—barred coverage for the BIPA class actions. The court instead found the exclusion to be ambiguous as applied to the underlying lawsuits and thus found that the insurer had a duty to defend its policyholders. This ruling, which follows the Illinois rules of policy interpretation, should reinvigorate policyholders who were wrongfully denied coverage by their GL insurers for BIPA lawsuits and should give pause to recalcitrant GL insurers who are refusing to honor their contractual obligations, even after the West Bend case.
The Case
In Citizens Insurance Co. of America v. Wynndalco Enterprises, LLC, et al., Case No. 20-cv-3873, 2022 WL 952534 (N.D. Ill. Mar. 30, 2022), an information technology services company and two of its officers sought coverage under a GL policy for two class action lawsuits. The lawsuits alleged that the company and officers violated BIPA and certain common law rights by licensing and selling access in Illinois to a database and application that contained billions of facial scans collected from public platforms. The GL policy at issue provided coverage for “personal and advertising injury,” which included “‘bodily injury,’ arising out of … [o]ral or written publication, in any manner, of material that violates a person’s right of privacy.” The policy also contained a “duty to defend,” meaning that the insurer had to defend its insureds against any suit potentially covered under the policy.
After being notified of the class actions, the general liability insurer denied its duty to defend based on the policy’s “Distribution of Material in Violation of Statutes” exclusion, which bars coverage for:
“[P]ersonal and advertising injury” arising directly or indirectly out of any action or omission that violates or is alleged to violate:
- The Telephone Consumer Protection Act (TCPA) including any amendment of or addition to such law; or
- The CAN-SPAM Act of 2003, including any amendment of or addition to such law;
- The Fair Credit Reporting Act (FCRA), and any amendment of or addition to such law, including the Fair and Accurate Credit Transaction Act (FACTA); or
- Any other laws, statutes[,] ordinances[,] or regulations, that address, prohibit, or limit the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.
The insurer then filed a lawsuit against its policyholders in the Northern District of Illinois seeking a declaration of its rights under the policy, as is required under Illinois’ insurance estoppel doctrine. The policyholders filed counterclaims, setting up cross-motions for judgment on the pleadings—i.e., an opportunity for the court to determine as a matter of law whether the “Distribution of Material in Violation of Statutes” exclusion applied to bar a duty to defend.
The Ruling
As noted above, the court held that the “Distribution of Material in Violation of Statutes” exclusion was ambiguous as applied to the BIPA class actions and, as such, the insurer was required to defend its policyholders. The court’s analysis began with the Illinois Supreme Court’s 2021 ruling in West Bend, which held that an insurer had a duty to defend a BIPA lawsuit and that such duty was not barred by a GL policy exclusion for injuries arising “directly or indirectly out of any action or omission that violates or is alleged to violate:” (1) the TCPA, (2) the CAN-SPAM Act, and (3) statutes “other than” the TCPA or CAN-SPAM Act that “prohibit[] or limit[] the sending, transmitting, communicating or distribution of material or information.” Although the insurer argued that the West Bend exclusion was substantively different than the “Distribution of Material in Violation of Statutes” exclusion, the court disagreed.
The court also disagreed with the insurer’s argument that BIPA falls within the exclusion’s catchall for “[a]ny other laws … that address, prohibit, or limit the … dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of … information.” The court reasoned that reading the catchall as broadly as the insurer did would make much of the policy’s coverage illusory because “[m]ost statutes ‘regulate … information’ to some degree.” The court further explained that the policy explicitly covers areas like slander, libel, false advertising, and copyright infringement, which are statutorily regulated in ways that address “the dissemination … or distribution of material or information.” The court thus found the “Distribution of Material in Violation of Statutes” exclusion to be ambiguous.
Since the exclusion was facially ambiguous, the court—following the lead of the Supreme Court in West Bend—applied the Illinois rules of statutory and policy construction to determine whether BIPA fell within the ambit of the exclusion. In so doing, the court concluded that there was no clear answer, thus making the exclusion ambiguous as applied to BIPA. Relying on the basic rule of Illinois law that insurers hold the “burden to ‘affirmatively establish’ that [an] exclusion applies” in a manner that is “clear and free from doubt,” the court therefore concluded that the GL insurer could not meet its burden with respect to the “Distribution of Material in Violation of Statutes” exclusion and held that the insurer had a duty to defend its policyholders.
What Comes Next?
As we wrote last year, tech-industry policyholders facing an onslaught of BIPA class actions should not simply accept a denial letter from a GL carrier, particularly in light of West Bend. The recent Wynndalco ruling should further encourage tech-industry policyholders to look closely at their GL coverage when facing a BIPA class action and should give GL insurers major pause when deciding whether to honor their duty to defend their policyholders in BIPA class actions. Policyholders dealing with recalcitrant insurers who refuse to take West Bend—and now Wynndalco—seriously should seek assistance from coverage counsel to obtain the insurance coverage they bargained for.