Determination of whether Settlement is Collusive in Case Involving Unsolicited Fax Advertisements
In Central Mutual Insurance v. Tracy’s Treasure Inc., Tracy’s Treasure Inc. (“Tracy’s”) engaged in the business of selling dating and social relationship services, which it publicized, at least in part, by facsimile advertisements. On March 5, 2007, Idlas filed a three-count class action complaint against Tracy’s for unsolicited fax advertisements that allegedly violated the Telephone Consumer Protection Act (“TCPA”), the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/2 (West 2006)), and Illinois common law (“Idlas”). Idlas alleged that between March 5, 2003, and March 5, 2007, Tracy’s sent unsolicited facsimile messages advertising Tracy’s dating services without prior express permission from the recipients.
Several years before the Idlas action was commenced, Tracy’s was a defendant in another suit arising under the TCPA, captioned Law Offices of Martha J. White, P.C., et al. v. Tracy’s Treasures, Inc. In that case, filed July 8, 2003, the plaintiffs also alleged that Tracy’s had violated the TCPA by sending them unsolicited facsimile advertisements of the same type involved in Idlas. Tracy’s is the insured under a number of primary and excess commercial liability policies issued by Central Mutual Insurance (“Central”). Central insured Tracy’s under a series of business owner primary liability insurance policies.
The court reviewed issues regarding: (1) whether coverage is available for an underlying class action alleging claims for unsolicited faxes in violation of the federal TCPA (47 U.S.C. § 227(b)(1) (2006)); (2) the reasonableness of a settlement in the underlying action between the insured and the underlying plaintiffs; and (3) whether the “buyout” of coverage under the insurance policies, which resulted from a settlement of a prior class action against the insured, precludes claims under the “advertising injury” coverage of these policies. Due to an intervening change in the law that formed the basis of the trial court’s ruling in favor of plaintiff and cross-appellant, Central, we must reverse. We affirm the other rulings appealed by Central and remand for further proceedings.
Under Illinois law, our supreme court recognized that the concept of “damages” includes all “money required to be expended in order to right a wrong.” In the TCPA, Congress has determined that the sum of $500 is the amount that will compensate a recipient of an unsolicited fax for the invasion of privacy, inconvenience and loss of use of the recipient’s fax machine, ink, toner and paper. 47 U.S.C. § 227(b)(3) (2006). The fact that the sum is set by statute does not mean that it falls outside the definition of “damages.”
Additionally, the fact that an insured is not required to obtain the insurer’s consent to a settlement does not necessarily preclude the insurer from later contesting the reasonableness of the settlement. Further, where the insurer has preserved its rights by filing a declaratory judgment action, even though it is not participating in its insured’s defense and even though the underlying case may be settled without its consent, the insurer may still challenge its obligation to pay the settlement.
The court goes on to further state the standards which must be used to evaluate whether the settlement is binding. First, with respect to the insured’s decision to settle, the litmus test must be whether, considering the totality of the circumstances, the insured’s decision conformed to the standard of a prudent uninsured. Second, in reference to the amount of the settlement, the test is what a reasonably prudent person in the position of the insured would have settled for on the merits of plaintiff’s claim. The latter test involves a commonsense consideration of the totality of facts bearing on the liability and damage aspects of plaintiff’s claim, as well as the risks of going to trial. Under either test, the burden of proving reasonableness rests with the underlying plaintiff, both out of fairness (since the plaintiff was the one who agreed to the settlement) and out of practicality, since (as between the plaintiff and the insurer) the plaintiff will have better access to the facts bearing upon the reasonableness of the settlement. The insurer is also entitled to rebut any preliminary showing of reasonableness with affirmative evidence bearing on the issue.
The court also holds that the amount of the Idlas settlement may be deemed unreasonable if there is evidence of bad faith, collusion, or fraud by Tracy’s. There are no Illinois state court decisions addressing the circumstances under which a settlement will be deemed collusive, but courts in other jurisdictions have considered such issues. Although the decisions of foreign courts are not binding, the use of foreign decisions as persuasive authority is appropriate where Illinois authority on point is lacking or absent.
The court recognized that collusion and fraud, in the context of settlements negotiated by an insured and an underlying plaintiff, are broad-brush concepts and that any negotiated settlement involves cooperation to a degree. But, a settlement becomes collusive when the purpose is to injure the interests of an absent or non-participating party, such as an insurer or non-settling defendant. Among the indicators of bad faith and collusion are unreasonableness, misrepresentation, concealment, secretiveness, lack of serious negotiations on damages, attempts to affect the insurance coverage, profit to the insured, and attempts to harm the interest of the insurer. They have in common unfairness to the insurer, which is probably the bottom line in cases in which collusion is found.
Collusion occurs when the insured and a third party claimant work together to inflate the third party’s recovery to artificially increase damages flowing from the insurer’s breach of the duty to defend. Several factors are relevant to a determination whether a settlement is collusive, including the amount of the overall settlement in light of the value of the case; a comparison with awards or verdicts in similar cases involving similar injuries; the facts known to the settling insured at the time of the settlement; the presence of a covenant not to execute as part of the settlement; and the failure of the settling insured to consider viable available defenses.
Cent. Mut. Ins. Co. v. Tracy’s Treasures, Inc., 2014 IL App (1st) 123339.
