Violation-of-Law Exclusion Bars Coverage for BIPA Claim; Estoppel Does Not Apply   

The Illinois Appellate Court for the First District, in an opinion written by Judge Ellis, applying Illinois law, declined to follow a recent decision from the Seventh Circuit and determined that there were no coverage obligations for an underlying claim asserting violations of the Biometric Information Privacy Act, 740 ILCS 14/15 (West 2016) (“BIPA”) due to the catch-all provision of the violation-of-law exclusion. The Appellate Court also held that doctrine of estoppel did not apply to bar policy exclusions where there was no duty to defend.  

National Fire Insurance Company of Hartford and Continental Insurance Company (collectively “CNA”) sought a declaration that it had no duty to defend or indemnify Visual Pak Company, Inc. (“Visual Pak”) under a commercial general liability policy in an underlying class action asserting BIPA violations brought by Luis Sanchez. In the underlying class action, Sanchez asserted, on behalf of himself and other similarly situated, that Visual Pak “collected, stored, used, or disseminated” his fingerprints without his consent and without any policies in place regarding the retention and deletion of his fingerprints from the database in violation of BIPA. Ultimately, the underlying class action settled for $19.5 million. Visual Pak agreed to pay $3.5 million in a confession of judgment and assigned its claims against the CNA to Sanchez and the plaintiffs in the class action.  

CNA moved for a judgment on the pleadings on the coverage dispute. In addition to arguing that Visual Pak was entitled to coverage under the terms of the policies, Sanchez argued that CNA was estopped from asserting a denial coverage due to a two-year delay in responding to Visual Pak’s tender of coverage and its belated filing of the declaratory judgment action. The Circuit Court initially agreed with Sanchez and found there was an issue of fact that prevented judgment on the pleadings. On reconsideration, the Circuit Court granted CNA’s motion on the pleadings, holding no duty to defend or indemnify and determining that the question of estoppel was inapplicable.  

On appeal, the Appellate Court compared the allegations of the underlying amended class action complaint to the personal and advertising injury coverage of the policy, which includes oral or written publication, in any manner, of material that violates a person’s right of privacy. It held, based on the Illinois Supreme Court ruling in West Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc., 2021 IL 125978, that the claims asserted in the underlying class action fell within the scope of coverage.  

The Appellate Court then examined the violation-of-law exclusion, which excludes coverage for personal and advertising injury arising directly or indirectly out of any action or omission that violates or is alleged to violate: (1) TCPA, (2) CAN-SPAM Act of 2003, (3) FCRA and FACTA; or (4) “any federal, state, or local statute, ordinance or regulation, other than TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, that addresses, prohibits, or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.” The Appellate Court determined the catch-all exclusion at issue before it is broader than the provision examined in West Bend. The Appellate Court also concluded that if it were merely to isolate the catch-all language, “it is simply impossible to deny that it describes BIPA. BIPA regulates the collection, dissemination, and disposal of one’s biometric identifiers and information.”  

Following the lead of the Illinois Supreme Court in West Bend, the Appellate Court went on to invoke the interpretive canon ejudem generis, which means “of the same kind.” The Appellate Court concluded the statutes and other laws identified in the exclusion share the common denominator of protecting personal privacy. In doing so, it disagreed with and distinguished the Seventh Circuit opinion in Citizens Ins. Co. of America v. Wynndalco Enterprises, LLC, 70 F.4th 987 (7th Cir. 2023).  

Then, in following the lead of the Seventh Circuit, the Appellate Court employed the related canon noscitur a sociis, which means “it is known from its associates.” The Appellate Court determined that it made no difference because “[i]f we limit the meaning of the catchall phrase as limited to the protection of personal privacy, the catchall excludes coverage for liability arising from BIPA lawsuits, which clearly concerns personal privacy. If we cannot limit that catchall phrase, then the phrase is given its full breadth as written—and likewise excludes coverage for BIPA liability.” It held that the exclusion applied, and CNA owed no duty to defend.  

The Appellate Court devoted a substantial portion of its opinion to its disagreement with the Seventh Circuit’s reasoning and ruling. “We find two fundamental flaws in the [Seventh Circuit’s] reasoning. First, under Illinois law, the fact that an exclusion has a ‘broad sweep’ is not, in and of itself, a reason to deem the coverage ‘illusory.’ … And second, the fact that the exclusion might ‘conflict’ or ‘clash’ with other provisions of the coverage that are not presently at issue in this case is not a basis to invalidate the exclusion as applied to this case; our job is not to seek out other problems and solve them, but rather to adjudicate the controversy presently before us.”  

On appeal, Sanchez asserted that CNA was estopped from asserting policy defenses to deny coverage because it did not defend Visual Pak in the underlying class action under a reservation of rights or promptly file a declaratory judgment action asserting that it owed no duty to defend. The Appellate Court disagreed and explained that the estoppel doctrine does not factor into the equation if the court ultimately determines that the insurer owed no duty to defend. Additionally, the Appellate Court clarified that “[a] ‘policy defense’ is, for example, a defense that the insured did not file a timely claim or otherwise failed to comply with some condition precent to coverage in the policy.” “To hold otherwise, to allow the estoppel question to precede the duty-to-defend question, would be to give estoppel the power to magically rewrite a policy from one that does not obligate the insurer to defend into one that does.”  Thus, because the Appellate Court determined that CNA did not have a duty to defend, the estoppel doctrine had no application. The National Fire Ins. Co. of Hartford v. Visual Pak Co., Inc., 2023 IL App (1st) 221160 (Dec. 19, 2023).