The U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court’s judgment that an insurer had no duty to defend a debt collector in an action brought by a consumer asserting claims under the federal Fair Debt Collection Practices Act (FDCPA) and the federal Telephone Consumer Protection Act (TCPA), as well as common law claims of defamation and invasion of privacy.
In so ruling, the Seventh Circuit concluded that the consumer stated a claim under the FDCPA against the debt collector, and therefore the consumer’s allegations fell within policy exclusions. Because the remaining claims arose out of the alleged FDCPA violations, the Court held that the consumer’s injuries were excluded from coverage under the policy, and the insurer had no duty to defend.
A copy of the opinion in Zurich American Insurance Co. v. Ocwen Financial Corporation is available at: Link to Opinion.
In 2015, a consumer sued a debt collector for its attempts to collect on a mortgage loan that was the subject of a bankruptcy discharge. Counts I through III of her complaint relied on the (FDCPA and the TCPA. Count IV alleged common-law defamation and Count V alleged common-law invasion of privacy.
Soon after the consumer filed her action, the debt collector asked its insurer for a defense pursuant to an insurance agreement between the two entities. However, the insurer refused and filed a declaratory judgment action against the debt collector, alleging that policy exclusions in the insurance agreement relieved it of the duty to defend or indemnify.
“The first exclusion, for “Recording and Distribution of Material or Information in Violation of Law,” precludes coverage for bodily injury and personal and advertising injury:
directly or indirectly arising out of or based upon any action or omission that violates or is alleged to violate:
- The [TCPA] …
- The CAN-SPAM Act of 2003 [Pub. L. No. 108-187] [and amendments] …
- The Fair Credit Reporting Act [FCRA] … including the Fair and Accurate Credit Transaction Act; or
- Any federal, state statute, ordinance or regulation other than the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, or any other legal liability, at common law or otherwise, that addresses, prohibits or limits the printing, dissemination, disposal, monitoring, collecting, recording, use of, sending, transmitting, communicating or distribution of material or information.
The second exclusion, for “Violation of Communication or In- formation Law,” is similar in scope. It excludes bodily injury, property damage, and personal and advertising injury:
resulting from or arising out of any actual or alleged violation of:
- the [TCPA], [Driver’s Privacy Protection Act, or DPPA], or [CAN-SPAM Act]; or
- any other federal, state, or local statute, regulation or ordinance that imposes liability for the:
- Unlawful use of telephone, electronic mail, internet, computer, facsimile machine or other communication or transmission device; or
- Unlawful use, collection, dissemination, disclosure or re-disclosure of personal information of any manner by any insured or on behalf of any insured.”
The debt collector in turn counterclaimed that the insurer breached its duty to defend, and the insurer responded by filing a motion for judgment on the pleadings.
After reviewing the insurance policy and the factual allegations in the complaint, the trial court concluded that all the allegations fell within the scope of the policy exclusions.
The trial court held that the FDCPA is swept into the “catch-all” clause at the end of each policy exclusion as an “other statute” that regulates the communication of information. Because the FDCPA prohibits calls made with the “intent to annoy, abuse or harass,” the trial court concluded that even if some of the debt collector’s calls to the consumer did not violate the TCPA, they still violated the FDCPA because they were made after the consumer had asked the debt collector to stop calling.
The trial court also held that the common-law claims in Counts IV and V (defamation and invasion of privacy) were excluded because they were based on conduct “arising out of” the same operative facts as the conduct that was alleged to have violated the FDCPA. Thus, the trial court held that the insurer had no duty to defend the debt collector in the lawsuit brought by the consumer.
This appeal followed.
For its appeal, the debt collector argued that insurance coverage may exist because the consumer’s complaint included the possibility that (1) some calls were made to the consumer’s home phone using a live operator, (2) some calls were made to the cell phone without the use of an automatic telephone dialing system, and (3) some calls were not made with the intent to annoy, abuse, or harass. If true, the first and second allegation would preclude TCPA liability, and the third allegation would preclude FDCPA liability. In any of these scenarios, the insurer’s duty to defend would be triggered. See Title Indus. Assurance Co. v. First Am. Title Ins. Co., 853 F.3d 876, 887 (7th Cir. 2017).
The Seventh Circuit initially discussed the legal standard for an insurer’s duty to defend. This duty exists “unless it is clear from the face of the underlying complaint that the facts alleged do not potentially fall within the policy’s coverage.” G.M. Sign, Inc. v. State Farm Fire and Cas. Co., 18 N.E.3d 70, 77 (Ill. App. Ct. 2014). “If any portion of the suit potentially falls within the scope of coverage, the insurer is obligated to defend.” Health Care Indus. Liab. Ins. Program v. Momence Meadows Nursing Ctr., 566 F.3d 689, 694 (7th Cir. 2009). Additionally, when deciding whether coverage exists, Illinois courts “liberally construe” the insurance policy and the complaint in the insured’s favor. Pekin Ins. Co. v. XData Sols., Inc., 958 N.E.2d 397, 400 (Ill. App. Ct. 2011).
Next, the Seventh Circuit analyzed the language in the policy exclusions and concluded that the use of “arising out of” calls for a “but-for” inquiry: if the consumer would not have been injured but for the conduct that violated an enumerated law, then all injuries that resulted from that underlying conduct are excluded from coverage, regardless of the legal theory used. See G.M. Sign, Inc., 18 N.E.3d at 78 (“‘Arising out of’ means ‘originating from,’ ‘having its origin in,’ ‘growing out of,’ and ‘flowing from.’”).
With these legal principles in mind, the Seventh Circuit determined that the consumer’s complaint contains no factual allegations that the debt collector called the consumer on her home phone using a live operator. Instead, the debt collector’s contrary argument was based on a stitching together of two unrelated components of the complaint.
The Seventh Circuit also did not find persuasive the debt collector’s assertion that the complaint potentially alleges calls made to the consumer’s cell phone without the use of an ATDS, which would not violate the TCPA. The complaint states that “some or all” of the calls to the consumer’s cell phone “were made using” an ATDS. The Court construed the term “some or all,” in the context of this particular complaint, to serve only to distribute responsibility for the phone calls among the five ATDS devices listed in the complaint.
Finally, even if some of the debt collector’s conduct, as described in the complaint, did not violate the TCPA, the Seventh Circuit held that the alleged conduct clearly violated the FDCPA.
Despite the consumer’s statement in Count V that the debt collector “intentionally and/or negligently” invaded her privacy by calling her repeatedly, the Court held that the term “negligently” was merely a “legal label” that Illinois courts refuse to put stock in without corresponding facts. See G.M. Sign, 18 N.E.3d at 79 (where a complaint is “so bereft of factual allegations” and is so vague that “myriad unpleaded scenarios could fall within its scope,” it cannot trigger a duty to defend).
Instead, the factual allegations point to an intent to “annoy or harass.” “A debt collector may harass a debtor by continuing to call the debtor after the debtor has requested that the debt collector cease and desist communication.” Arteaga v. Asset Acceptance, LLC, 733 F. Supp. 2d 1218, 1227 (E.D. Cal. 2010) (discussing Fox v. Citicorp Credit Servs., Inc., 15 F.3d 1507 (9th Cir. 1994)). The trial court discerned an intent to “annoy or harass” from the debt collector continuing to call after the consumer asked it to stop, and the Seventh Circuit held that the court did not err in drawing this inference.
Accordingly, the Seventh Circuit concluded that because the complaint describes conduct that as a whole would violate the FDCPA, the consumer’s injuries were excluded from coverage under the insurance agreement. Thus, because the insurer had no duty to defend based on the facts in the complaint, the Court affirmed the trial court’s judgment.