                           ILLINOIS OFFICIAL REPORTS
                                        Appellate Court




             Standard Mutual Insurance Co. v. Lay, 2014 IL App (4th) 110527-B




Appellate Court            STANDARD MUTUAL INSURANCE COMPANY, Plaintiff-Appellee,
Caption                    v. NORMA LAY, Individually and as Executrix of the Estate of
                           THEODORE W. LAY, d/b/a TED LAY REAL ESTATE AGENCY,
                           Defendant, and LOCKLEAR ELECTRIC, INC., an Illinois Corporation,
                           Defendant-Appellant.


District & No.             Fourth District
                           Docket No. 4-11-0527


Rule 23 Order filed        November 25, 2013
Rule 23 Order
withdrawn                  January 23, 2014
Opinion filed              January 23, 2014


Held                       The insurer of the owners of a real estate agency that clearly violated the
(Note: This syllabus       Telephone Consumer Protection Act by faxing an advertisement about a
constitutes no part of     property listed for sale to recipients that had not agreed to receive the
the opinion of the court   messages was responsible for providing coverage, where the policies
but has been prepared      issued by the insurer covered the alleged damages, the claim was not
by the Reporter of         excluded by the professional services exclusion in the policies or the
Decisions for the          exclusion applicable to intentional conduct, sending the faxes violated the
convenience of the         recipients’ right to privacy and fell under the “personal and advertising
reader.)
                           injury” provision, and the insurer gave up the right to object to the
                           insureds’ settlement of the underlying claim when it allowed them to
                           control the defense.


Decision Under             Appeal from the Circuit Court of Macoupin County, No. 09-MR-32; the
Review                     Hon. Patrick J. Londrigan, Judge, presiding.
Judgment                   Reversed.


Counsel on                 Phillip A. Bock, of Bock & Hatch, LLC, of Chicago, Michael T. Reagan,
Appeal                     of Law Office of Michael T. Reagan, of Ottawa, Brian J. Wanca and
                           David M. Oppenheim, both of Anderson & Wanca, of Rolling Meadows,
                           and Paul W. Bloomer, of Denby, Meno, Bloomer & Denby, of
                           Carlinville, for appellant.

                           Robert Marc Chemers and Peter G. Syregelas, both of Pretzel & Stouffer,
                           Chtrd., of Chicago, for appellee.


Panel                      JUSTICE KNECHT delivered the judgment of the court, with opinion.
                           Justices Pope and Steigmann concurred in the judgment and opinion.




                                             OPINION

¶1           In June 2006, Theodore W. Lay, d/b/a Ted Lay Real Estate Agency (Lay), faxed an
        advertisement in regard to the sale of a particular property to Locklear Electric, Inc.
        (Locklear), and others. Because the facsimile message (fax) recipients had not given
        permission to receive these messages, Lay violated the Telephone Consumer Protection Act
        of 1991 (Telephone Act) (47 U.S.C. § 227 (2006)). The statute imposes a penalty in the
        amount of $500 for each fax sent. Lay was sued in a class action with Locklear as the class
        representative. Defense of the claim was tendered to Standard Mutual Insurance Company
        (Standard), Lay’s insurance carrier, which undertook the defense under a reservation of
        rights. Standard also filed this declaratory judgment action to determine its coverage under
        its policies.
¶2           The Telephone Act claim against Lay was a potential multimillion dollar claim that
        would bankrupt the agency if a verdict were entered against it and it was not covered by
        insurance. Lay opted for independent counsel and then settled with the class action plaintiff
        for $1,739,000 plus costs (the full amount sought in the class action complaint) and assigned
        its rights against Standard to the class in exchange for a promise by the class not to execute
        on any of Lay’s property or assets other than the insurance policies with Standard.
¶3           The settlement was approved by the federal district court and Locklear, the class
        representative, became actively involved in this declaratory judgment action filed by
        Standard in Macoupin County. Both Standard and Locklear ultimately filed for summary
        judgment in the declaratory judgment. After extensive briefing, the trial court denied
        Locklear’s motion and granted that filed by Standard. Locklear appealed this judgment. We

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     affirmed. Standard Mutual Insurance Co. v. Lay, 2012 IL App (4th) 110527, 975 N.E.2d
     1099. Our supreme court allowed Locklear’s petition for leave to appeal. That court affirmed
     our judgment in part and reversed in part and remanded the cause to us for further
     proceedings. Standard Mutual Insurance Co. v. Lay, 2013 IL 114617, 989 N.E.2d 591. We
     reverse the trial court.

¶4                                     I. BACKGROUND
¶5       Lay was a small real estate agency located in Girard, Macoupin County, Illinois. Lay
     hired a fax broadcaster to assist in his advertising effort in selling a property listing. The fax
     broadcaster (Business 2 Business Services) offered a “blast fax” service to Lay where fax
     advertisements were sent to thousands of fax machines cheaply. The broadcaster represented
     to Lay the recipients of the faxes would be only entities that had consented to receiving fax
     messages such as the one contemplated by Lay. Lay agreed and on June 13, 2006, the faxes
     were sent by the broadcaster to approximately 5,000 fax numbers on behalf of Lay. On June
     13, 2006, Locklear received one of these unsolicited faxes.
¶6       Unbeknownst to Lay, it violated the Telephone Act because the recipients of the faxes
     actually had not consented to receipt of faxes advertising property for sale. On June 9, 2009,
     Lay was named as a defendant in a class action for damages filed by Locklear, as class
     representative, under the Telephone Act in Madison County (the underlying action). The
     underlying action sought damages from Lay for alleged willful violations of the Telephone
     Act in count I and sought treble damages for the alleged sending of unsolicited faxes ($1,500
     per occurrence); count II alleged conversion; and count III alleged violations of the Illinois
     Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/2 (West 2006)).
¶7       Lay tendered its defense to Standard. Standard accepted under a reservation of rights. On
     July 13, 2009, Standard sent a reservation of rights letter to Theodore Lay and his wife,
     Norma Lay, at the real estate agency. The letter set forth certain defenses to coverage
     reserved by Standard. The letter noted a conflict of interest for any attorney appointed by
     Standard to represent Lay because the class action sought damages in the nature of a penalty
     or treble damages in the event the statutory violations were willful. The letter noted
     Standard’s policies exclude coverage for intentional or nonaccidental acts. Other potential
     coverage defenses were also noted in the letter. First, the commercial general liability
     (general liability) policy issued to the agency was in regard to a single-family dwelling and
     several vacant lots in Girard and Nilwood under a lessor’s risk-only basis and not in
     connection with the operation of a business. Standard noted both the general liability policy
     and an additional business liability policy (business-owners’ policy (business policy)) may
     not offer coverage based upon the allegations in the complaint against Lay because (1) the
     policies exclude coverage for an intentional or nonaccidental act and only intentional or
     nonaccidental conduct is alleged by the class action; (2) the class did not seek damages
     because of “bodily injury” as defined in the policies; (3) the class did not seek damages
     because of “property damage” to which insurance applies (caused by an “occurrence”); (4)
     the class did not seek damages because of “property damage”caused by nonintentional,
     accidental conduct; (5) the class did not seek damages because of “personal injury” as


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       defined in the policies; (6) the class did not seek damages because of “advertising injury” as
       defined in the policies; (7) the policies exclude coverage for personal injuries arising from
       advertising, so the allegations of the complaint may not be covered; (8) the policies exclude
       coverage for advertising injury arising out of willful violation of a penal statute by or with
       insured’s assent and Telephone Act may constitute a penal statute as contemplated by the
       policies; and (9) the business policy excludes coverage arising out of advertising services.
¶8         The Lays were advised they could hire an attorney of their own, at Standard’s expense,
       to represent them due to the conflict of interest and the possible coverage defenses Standard
       asserts were available. They were also advised they could waive the conflicts and possible
       coverage defenses and accept counsel provided by Standard. On July 13, 2009, the Lays
       signed a waiver, agreeing to accept counsel hired by Standard to defend them in the
       underlying action. Attorney James Mendillo was assigned to represent the Lays in the
       underlying action.
¶9         On July 17, 2009, the underlying action was removed to the United States District Court
       for the Southern District of Illinois, East St. Louis Division, by counsel on behalf of Lay.
¶ 10        Later in 2009, Ted Lay died and letters of office were issued to Norma Lay. Norma Lay,
       individually, as executrix of the estate of Theodore W. Lay, d/b/a Ted Lay Real Estate
       Agency, was substituted as defendant in the underlying action. Norma Lay decided to replace
       counsel Mendillo. On October 30, 2009, replacement counsel of choice, Edmond H. Rees,
       wrote a letter to Mendillo, with a blind copy sent to counsel for Locklear and the class,
       explaining in great detail the conflict of interest between Standard and Lay. If Lay’s conduct
       was found to be intentional, its actions would not be covered by insurance, but if Lay’s
       conduct was proved to have been negligent, it would be covered by insurance. Rees asked
       Mendillo to withdraw from the case. On December 3, 2009, Norma and Rees, as her attorney,
       signed the proposed settlement agreement with Locklear. On February 20, 2010, the
       agreement was signed by Locklear and its attorney. All actions taken by Locklear in this case
       were taken as representative of the class.
¶ 11       On December 18, 2009, Rees wrote Mendillo on behalf of Norma to dismiss him from
       the case and noted Norma wanted to settle the case “pursuant to the copies of documents
       previously forwarded to [Mendillo].” On December 29, 2009, Rees entered his appearance
       in the underlying case. Mendillo never withdrew.
¶ 12       On April 19, 2010, the executed settlement agreement was filed with the court in the
       underlying action. On September 8, 2010, the court entered a judgment on final approval of
       the settlement for $1,739,000 plus costs. Under the agreement, Locklear agreed not to
       execute on any property or assets of Lay other than Lay’s insurance policies and agreed to
       seek recovery to satisfy the judgment only from those insurance policies. Locklear agreed not
       to execute against Lay’s noninsurance assets even if a determination is made Lay’s insurance
       carrier did not owe coverage. Norma Lay assigned to Locklear all of Lay’s claims against and
       rights to payment from Standard. Lay agreed to cooperate with Locklear to consummate the
       agreement to achieve the settlement provided and to obtain recovery.
¶ 13       In its order approving the settlement, the district court found the settlement was made in
       reasonable anticipation of liability; the amount was fair and reasonable; Lay sent 3,478


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       unsolicited faxes between June 1 and June 30, 2006; Lay believed it had the consent of the
       fax recipients when the faxes were sent; and Lay did not intend to injure the recipients.
¶ 14        At the time the settlement in the underlying action was agreed upon and judgment
       entered, this declaratory judgment action was still pending. The second amended complaint
       for declaratory judgment was filed on July 12, 2010.
¶ 15        On February 22, 2011, Locklear filed a motion for summary judgment seeking a
       declaration Standard had a duty to indemnify Lay for the settlement of the underlying action.
       On April 12, 2011, Standard filed its own motion for summary judgment for a declaration
       it did not have a duty to either defend or indemnify Lay for the settlement of the underlying
       action.
¶ 16        On June 14, 2011, the trial court entered an order granting Standard’s motion for
       summary judgment, finding Standard had no duty to defend Lay in the underlying action and,
       further, no “duty or obligation” to Lay in “connection with the stipulated judgment entered
       in [the underlying case].” The court then denied the summary judgment motion filed by
       Locklear. Locklear’s appeal to this court followed.
¶ 17        On April 20, 2012, this court affirmed the trial court’s grant of summary judgment to
       Standard. We held Standard’s reservation of rights letter contained the disclosures necessary
       to avoid being estopped from raising policy coverage issues. We also held statutory damages
       provided under the Telephone Act in the amount of $500 for each occurrence of sending an
       unsolicited fax message (47 U.S.C. § 227 (2006)) is in the nature of punitive damages
       because it is far in excess of actual compensation for injury caused to the recipient of the fax
       message. The damages are not insurable because, under Illinois law, punitive damages are
       not insurable. Locklear appealed to our supreme court.
¶ 18        On May 23, 2013, the supreme court issued its opinion (Lay, 2013 IL 114617, 989
       N.E.2d 591) affirming our holding the reservation of rights letter issued by Standard was
       satisfactory to allow it to raise coverage issues (Lay, 2013 IL 114617, ¶ 22, 989 N.E.2d 591)
       and reversing our holding damages provided under the Telephone Act were punitive in
       nature and uninsurable under Illinois law (Lay, 2013 IL 114617, ¶ 33, 989 N.E.2d 591). The
       court then remanded this case for consideration of the other issues raised by Locklear.

¶ 19                                        II. ANALYSIS
¶ 20       In reviewing the entry of a summary judgment, an appellate court exercises de novo
       review. Barnett v. Zion Park District, 171 Ill. 2d 378, 385, 665 N.E.2d 808, 811 (1996).
¶ 21       Locklear argues all policies issued to Lay, including the general liability policy issued as
       lessor’s risk only on a residence and some vacant lots and a second business policy issued
       as a lessor’s risk only on a four-unit apartment building, provide coverage to Lay under the
       allegations of the underlying action. It argues coverage is provided under both the advertising
       injury and property damage provisions of the policies. It further argues Norma Lay had a
       right to settle the underlying action, with or without the consent of Standard, and Standard’s
       failure to object to the settlement waived any right of consent to the settlement.
¶ 22       Standard contends there is no coverage under two out of three policies because they were


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       for lessor’s risks only and pertained to the real estate identified in those policies. It argues
       coverage is not provided under either the advertising injury provisions or property damage
       provisions of any of its policies and, if coverage was triggered by those provisions, the
       exclusions in the policies for rendering of professional services and intentional actions
       excludes coverage in this case. It further argues Lay had no right to settle without Standard’s
       consent and Standard did not agree to the settlement.
¶ 23       We find Standard’s policies issued to Lay cover the damages alleged here, but note the
       purpose of the Telephone Act is “to address telemarketing abuses attributable to the use of
       automated telephone calls to devices including telephones, cellular telephones, and fax
       machines.” Lay, 2013 IL 114617, ¶ 27, 989 N.E.2d 591. By allowing liability for
       telemarketing abuses to be covered by insurance, the company responsible for the abuses, in
       this case Lay, has no incentive to stop the abuses from occurring in the future and the
       purpose of the Telephone Act is unfulfilled.

¶ 24            A. General Liability Policy and Business Policy for Lessor’s Risk
¶ 25        One of the business policies at issue here specifically involves coverage for the operation
       of Lay’s real estate business. We find it provides coverage for the “blast fax” incident in this
       case. The other two policies refer to various rental premises or vacant lots owned by Lay.
       However, the policies do not contain “designated premises” limitations, which would attempt
       to limit their application to liability coverage for activities arising out of the use of those
       premises alone. The only reference to those premises in the policies is in the descriptive
       sections of the policy declarations. In the cases cited by Standard for the proposition these
       policies do not cover liability for faxes in support of Lay’s real estate sales business, the
       policies included provisions limiting general liability coverage to injuries arising out of
       ownership of the premises listed in the declaration. The policies in this case do not contain
       those provisions, and we cannot find those policies do not provide coverage for the injuries
       caused by the “blast fax” in this case on that ground.

¶ 26                   B. “Professional Services” Exclusion Not Applicable
¶ 27       Standard contends even if there is coverage under “advertising injury,” the rendering or
       failure to render any professional service, including “advertising services,” is specifically
       excluded under the policy. Standard argues because a real estate agency is a “profession”
       under Illinois law, requiring licensure, its operation is a “professional service.” The fax at
       issue provides information regarding commercial property for sale. Standard argues it should
       be considered as rendering of a professional service by Lay’s agency. Any damage alleged
       to be incurred is excluded from coverage by the professional services exclusion of the
       policies.
¶ 28       Lay was a real estate agency, not an advertising company. The claim against Lay was not
       made because Lay incorrectly performed real estate services. Instead, the claim was based
       on Lay’s tortious conduct ancillary to the performance of real estate services. Standard’s
       argument has been rejected by this court in Westport Insurance Corp. v. Jackson National
       Life Insurance Co., 387 Ill. App. 3d 408, 414, 900 N.E.2d 377, 381 (2008) (advertisement

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       describing features of an insurance plan did not amount to rendering professional advertising
       service by an insurance professional). Following Standard’s argument an insured advertising
       its business is an excluded professional service would read the coverage of advertising
       injuries entirely out of the policies despite the fact such coverage is specifically available
       under the policies.

¶ 29                               C. Property Damage Coverage
¶ 30        Standard’s policies define property damage as “injury to tangible property.” Locklear
       alleged Lay “knew or should have known that its misappropriation of paper, toner and
       employee time was wrongful and without authorization.” Lay believed the fax broadcaster
       when it told Lay it had the consent of the fax recipients. Standard argues Lay’s actions were
       intentional and its policies exclude coverage for intentional actions of the insured that injure
       others.
¶ 31        While Lay’s actions in sending the fax were intentional, it thought it had authorization
       to send faxes to the particular recipients. Thus, it did not intend to injure anyone by sending
       the fax. While intentional actions are not covered by Standard’s policies, negligent conduct,
       i.e., Lay knew or should have known its actions in sending fax ads were “wrongful and
       without authorization,” are covered. See Insurance Corp. of Hanover v. Shelborne
       Associates, 389 Ill. App. 3d 795, 800-03, 905 N.E.2d 976, 982-85 (2009).

¶ 32                             D. Advertising Injury Coverage
¶ 33       Locklear argues coverage lies for fax advertisements under Standard’s “personal and
       advertising injury” provision. In Valley Forge Insurance Co. v. Swiderski Electronics, Inc.,
       223 Ill. 2d 352, 860 N.E.2d 307 (2006), the court evaluated the same claims and same policy
       language as were found in this case. Allegations of advertising injury due to invasion of
       privacy were found to be covered by the insurance policy where the definition of privacy
       included the right to seclusion or being left alone. Since faxes were sent without the
       permission of the recipient, they violated the fax recipient’s right to privacy. Id. at 368-69,
       860 N.E.2d at 317. The fax recipient in Swiderski was not a corporation. However, claims
       by corporations are no different for coverage purposes from claims by an unincorporated
       business as in Swiderski. See Pekin Insurance Co. v. XData Solutions, Inc., 2011 IL App
       (1st) 102769, ¶ 18, 958 N.E.2d 397.

¶ 34                                E. Control of Settlement
¶ 35        An insurer, being charged with a duty to its insured, controls the insured’s defense.
       Illinois Masonic Medical Center v. Turegum Insurance Co., 168 Ill. App. 3d 158, 163, 522
       N.E.2d 611, 613 (1988). Where a conflict exists, an insurer’s obligation to defend is satisfied
       by reimbursing the insured for the cost of defense provided by independent counsel selected
       by the insured. Maryland Casualty Co. v. Peppers, 64 Ill. 2d 187, 198-99, 355 N.E.2d 24,
       31 (1976). Under these circumstances, the insured is entitled to assume control of the
       defense. Id. When an insurer surrenders control of the defense, it also surrenders its right to


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       control the settlement of the action and to rely on a policy provision requiring consent to
       settle. Myoda Computer Center, Inc. v. American Family Mutual Insurance Co., 389 Ill.
       App. 3d 419, 425, 909 N.E.2d 214, 220 (2009). Standard had no right to require Lay to
       obtain permission to settle the underlying suit or to object to it itself.
¶ 36       Standard does not present any evidence it was prejudiced by the settlement. The amount
       was supported by simple math. Lay’s liability under the Telephone Act was clear. Absent the
       settlement, the result would have been the same. Standard had already filed this declaratory
       judgment action contesting coverage and Standard cannot avoid its responsibilities under its
       policies.

¶ 37                                   III. CONCLUSION
¶ 38      We reverse the trial court’s judgment.

¶ 39      Reversed.




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