California Insurance - No Liability Coverage for Sender of Unsolicited Faxes
ACS Systems, Inc. v. St. Paul Fire & Marine Ins. Co., No. B181837 (Jan. 29, 2007)
The California Court of Appeal (Second District) held that the “advertising injury” and “property damage” provisions of liability policies were not triggered by a lawsuit alleging that the insured unlawfully
transmitted unsolicited advertisements via facsimile.
In ACS Systems, ACS was named as a defendant in a class action lawsuit alleging violations of the Telephone Consumer Protection Act of 1991 (“TCPA”), which prohibits sending unsolicited advertisements
to fax machines. The lawsuit also alleged violations of California’s unfair competition laws, negligence and invasion of privacy. Specifically, plaintiffs alleged that ACS used an advertising service to send thousands
of unsolicited faxes promoting ACS’s services.
ACS tendered the defense of the lawsuit to St. Paul Fire and Marine Insurance Company and St. Paul Mercury Insurance Company (collectively, “St. Paul”), which issued business package policies that provided coverage
for, among other things, “advertising injury” and “property damage.” St. Paul denied coverage on the ground that its policies did not cover the type of invasion of privacy that was alleged in the
underlying action. When ACS later brought suit against St. Paul the trial court sustained St. Paul’s demurrer without leave to amend and dismissed the action. The Court of Appeal affirmed.
The Court rejected ACS’s argument that the conduct alleged in the underlying action constituted the “advertising injury offense” of “making known to any person or organization written or spoken material
that violates an individual’s right of privacy.” The court distinguished between two meanings of privacy – “secrecy” and “seclusion” – concluding that when read in context,
the St. Paul policy’s definition of advertising injury was concerned with “secrecy privacy.” Because the faxes that were sent neither contained any private information about the recipients nor conveyed such information
to third parties, there was no privacy violation alleged in the underlying action.
The Court also found that the St. Paul policies did not provide coverage for the underlying action under the “property damage” provisions of those policies. ACS argued that because faxing unsolicited ads consumes
the recipients’ ink and paper it constitutes “physical damage to tangible property of others.” ACS also argued that there was “loss of use of tangible property of others” during the time that
a fax machine is receiving an unsolicited fax.
Assuming, without deciding, that the underlying complaint alleged property damage within the meaning of the St. Paul policies, the Court held that coverage was nonetheless unavailable. First, the policies limited coverage to
property damage that was caused by an “event,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The fax transmissions were not accidental,
but were intentional conduct.
Second, and related, the Court held that the policies excluded coverage for property damage that was expected or intended. According to the Court, the sender of a fax necessarily anticipates that the consequence of sending a
fax is to consume a recipient’s ink and paper, and to cause the loss of the use of the machine while it is receiving and printing the unsolicited fax.