Insurer Not Liable for Million Dollar Windfall in Junk Fax Case

This is a case about a fax. In 2008, well after the rest of the world had retired its fax machines, Custom Mechanical Equipment faxed CE Design an unsolicited advertisement, perhaps because their carrier pigeon had the day off. CE Design reacted proportionately -- by filing a class action lawsuit.

Custom's insurer, Emcasco, refused to defend the junk faxers, not just because they were embarrassed to represent a company that advertised via fax. They also didn't believe Custom's policy required them to defend or indemnify Custom for the junk faxes. They were right, the Tenth Circuit ruled this week.

Spam, Even Fax Spam, is a Highly Regulated Industry

Before sending out the junk faxes, Custom purchased one year commercial general and umbrella liability plans from Emcasco. Part of that coverage insured against accidental property damage, and personal and advertising injury. The coverage applied to property damage arising from "occurrences," defined as "an accident." The policy also excluded coverage for damage that was "expected or intended" or stemmed from a violation of the Telephone Consumer Protection Act or other laws regulating commercial communications.

The TCPA prohibits unsolicited advertising faxes. It provides $500 for each violation. When Custom approached Emcasco, the insurer refused to defend Custom. The insurer argued that the junk fax was not an "occurrence" covered by the policies. Further, even if it was, coverage would be excluded under the terms of the policy.

Custom had sent out 2,552 unsolicited faxes, leading to a settlement with CE Design for $1,276,000. Since the judgment would have put Custom into bankruptcy, CE Design agreed to enforce it only against Emcasco.

Don't Count Your Money Just Yet

CE Design quickly sued Emcasco, seeking a declaratory judgment that it was obligated to pay the judgment against Custom. At oral arguments, however, even CE Design was forced to concede that Custom's TCPA and state law violations excluded coverage for CE Design's injuries. Under the contract, Emcasco was not obligated to defend or indemnify Custom for the faxes, and thus, CE Design had no one to collect against.

It's a sad turnaround for CE Design, which must have briefly thought their one bad fax had turned into a million dollar windfall.

Related Resources:

• Junk Fax Act Compliance: One Week Left to Request a Waiver for Non-Compliance (National Law Journal)
• Tenth Circuit Talks About the Ghosts of Escape Clauses Past (FindLaw's U.S. Tenth Circuit Blog)
• 11th Cir. Revives Lawsuit Over an Unseen Junk Fax (FIndLaw's U.S. Eleventh Circuit Blog)
• When a Law Firm Gets Scammed: Must Insurer Defend, Indemnify? (FindLaw's Strategist)