Insurer must fund $50M settlement despite assignment of claim to class with agreement not to pursue policyholder

A New York district court, applying New York law, granted partial summary judgment, finding that Illinois Union Insurance Company (“Illinois Union”) must fund a nearly $50 million class action settlement for alleged Telephone Consumer Protection Act (“TCPA”) violations.  The court held that Illinois Union was required to cover the entire settlement even though the insured assigned its rights under the policy pursuant to a settlement agreement.

James Bull sued US Bus Charter & Limo Inc. d/b/a US Coachways (“US Coachways”) on behalf of a class, alleging that US Coachways sent “unsolicited text messages promoting deals on bus and limousine rentals” in violation of the TCPA.  Illinois Union issued a Miscellaneous Professional Liability Policy to US Coachways.  Illinois Union denied coverage for the alleged TCPA violations.  Bull and US Coachways settled the claim for nearly $50 million.  The settlement agreement provided that Bull and the class would only seek payment of the judgment from Illinois Union.  US Coachways assigned Bull and the class the right to challenge Illinois Union’s denial of coverage and agreed to pay $50,000 to fund notice to the class.  Bull and the class sought a declaration that the policy covered the settlement in the underlying class action.

The Illinois Union policy provided coverage for any actual or alleged personal injury offense committed in the performance of “Professional Services,” which was defined to include a bus charter broker for others for a fee.  Additionally, the policy provided coverage for “Travel Agency Operations,” defined as “services necessary or incidental to the conduct of travel agency business including the procurement or attempted procurement for a fee or commission of travel, lodging, or guided tour accommodations.”

The court found that the policy unambiguously provided coverage for the alleged TCPA violations.  The court looked to dictionary definitions and a federal statute to determine that the services provided by a bus charter broker included advertising bus transportation to specific groups of people.  The alleged TCPA violation text messages were “clearly offering bus transportation and travel accommodations to their recipients.”  The court also found that there was coverage for the TCPA violations under the Travel Agency Operations coverage because the advertisements in the text messages were “necessary or incidental to the conduct of travel agency business as attempted procurement for a fee or commission of travel lodging, or guided tour accommodations.”

Illinois Union argued that US Coachways was not performing services “for a fee” and “for others” because the alleged violations occurred when US Coachways was advertising for itself.  The court rejected this argument.  According to the court, advertising bus rentals is an essential part of the bundle services US Coachways provides as a bus charter broker and its travel agency business and it was irrelevant that US Coachways did not collect a fee for the advertising because the advertisements mentioned services being offered for a fee.

Illinois Union argued, that even if the policy covered the class action, liability was limited to the $50,000 that US Coachways agreed to pay to fund notice to the members of the class.  Illinois Union argued that any additional amount was excluded by the policy’s definition of damages, which excluded “amounts for which the Insured is not financially liable or legally obligated to pay.”

Absent a New York Court of Appeals decision addressing whether an insured’s legal obligation to pay survives an assignment to a third party in exchange for a covenant not to execute against the insured, the court looked to intermediate New York court divisions and other state rulings.  The court concluded that “an insured remains ‘legally obligated to pay’ despite an assignment of indemnification rights to a third party and the third party’s covenant not to execute against the insured.”

The policy excluded damages for “any amount for which the Insured is not financially liable or legally obligated to pay.”  Illinois Union argued that US Coachways must be both “financially liable” and “legally obligated” to be covered under the policy.  However, the court held that the plain reading of the language in the policy did not require both criteria to be met because the policy used “or,” and not “and.”  The court found that US Coachway’s rights under the policy were assigned to Bull and that the settlement agreement provided that Bull was not releasing US Coachways from liability.  Therefore, US Coachways remained “legally obligated to pay” the judgment, which fell within the policy’s definition of “Damages.”  Therefore, the court held that Illinois Union was required to cover the $50 million settlement.  Illinois Union Ins. Co. v. US Bus Charter & Limo Inc. d/b/a US Coachways, No. 1:16-cv-06602-FB-RLM (E.D.N.Y. Mar. 8, 2018).