Second Circuit Holds that TCPA Contractual Consent Cannot be Revoked

By on July 17, 2017
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In Reyes v. Lincoln Auto. Fin. Servs., No.162104-cv, 2017 U.S. App. LEXIS 11057 (2d Cir. June 22, 2017), the Second Circuit affirmed the trial court decision and held that the Telephone Consumer Protection Act (“TCPA”) does not permit a consumer to unilaterally revoke consent to be called when that consent is given as part of a bargained-for exchange.

The facts of the case are brief.  In 2012 Reyes leased a new Lincoln MKZ luxury sedan, which was financed by Lincoln Automotive Financial Services (“Lincoln”). Reyes provided his cell phone number in the lease application and the lease itself contained a number of provisions to which Reyes assented when finalizing the agreement. Specifically, Reyes consented to receive manual or automated telephone calls from Lincoln. When Reyes defaulted on his payments, Lincoln called Reyes on several occasions in an attempt to cure his default. Reyes claimed that he mailed a letter to Lincoln, revoking his consent to be contacted by Lincoln. Nonetheless, Lincoln continued to call Reyes. Reyes subsequently filed a lawsuit in the Eastern District of New York alleging TCPA violations, seeking $720,000 in damages for Lincoln’s 530 calls to him. The trial court granted summary judgment to Lincoln, holding that (1) Reyes failed to produce sufficient evidence from which a reasonable jury could conclude that he had ever revoked his consent to be contacted by Lincoln and (2) that, in any event, the TCPA does not permit a party to a legally binding contract to unilaterally revoke a bargained-for consent to be contacted by telephone.

On appeal, the Second Circuit first addressed whether Reyes introduced sufficient evidence to create a triable issue of fact regarding Lincoln’s alleged notice of Reyes’s revocation of consent. The Court stated that summary judgment on this issue was improper. Reyes submitted his sworn deposition testimony; a copy of the letter revoking his consent; and an affidavit stating that he had revoked consent. Based on these documents, the Court found that the lower court erred in concluding that no reasonable jury could find that Reyes revoked his consent.

Next, the Court addressed the issue of whether the TCPA permits a party to revoke consent, even if that consent was given as part of a contractual agreement. The Court explained that “consent” is not always revocable, and distinguished the instant case from other cases, which held otherwise. In Gage v. Dell Fin. Servs. and Osorio v. State Farm Bank F.S.B., the Third and Eleventh Circuit Courts, respectively, found, as confirmed by a 2015 FCC ruling, that consumers can revoke consent when it is given gratuitously, and is not incorporated into a binding legal agreement. The Second Circuit agreed with that proposition. But in the present case, when consent is provided as consideration to a bargained-for bilateral contract, consent is not revocable. Indeed, the Second Circuit observed that black-letter law dictates that a party cannot alter a bilateral contract by revoking a term without the consent of the counterparty.

Reyes also argued that the TCPA permits a party to revoke consent because “consent” was not an “essential” term of the contract. The Court dismissed Reyes’s claim on the ground that a contractual term does not need to be “essential” in order for it to be enforced. Instead, the Court explained that a fundamental rule of contract law is that parties may bind themselves to terms so long as the principles of contract formation are met. And a party who has agreed to a particular contractual term in a valid contract cannot unilaterally renege at a later time.

Lastly, Reyes contended that because the TCPA is a remedial statute, enacted to protect consumers from unwanted telephone calls, any ambiguities should be construed to further its purpose. Although the Court agreed that a liberal reading of an ambiguous term in the statute might favor a right to revoke consent, the Court ultimately rejected Reyes’s contention because the statute is not ambiguous in the first place.

The Court concluded by noting it was sensitive to the argument that businesses may undermine the effectiveness of the TCPA by inserting “consent” clauses into contracts, thereby making revocation impossible in many instances. The Court properly acknowledged that this hypothetical concern, if valid, is grounded in public policy considerations; an issue for Congress, not the courts, to resolve.

Reyes is a significant decision because it addresses an emerging issue of whether consent can be unilaterally revoked by a consumer under the TCPA. The Second Circuit’s decision is a big win for financial institutions and other defendants that have consent provisions within their binding agreements. Going forward, financial institutions litigating in the Second Circuit will be shielded, or at least have a powerful defense, from TCPA claimants who claim that they revoked consent. In addition, while Reyes is only binding in Connecticut, Vermont and New York, this decision may lend itself as the hallmark to other circuit courts that have yet to address this issue. In the meantime, businesses who are faced with TCPA lawsuits should consider adding a consent provision within their contracts to limit exposure to future TCPA liability and current TCPA defendants should consider dispositive motions if the plaintiff consented to be called.

Filed under TCPA

Big Victory for Debt Buying Industry: Supreme Court Holds That Debt Buyers Are Not “Debt Collectors” Under The FDCPA

By on June 21, 2017
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The U.S. Supreme Court recently held in Henson v. Santander Consumer USA Inc., 582 U.S. ___ (2017), that a company may collect on debts that it purchased for its own account without triggering the statutory definition of “debt collector” under the Fair Debt Collection Practices Act. The unanimous decision penned by Justice Gorsuch, his first as a Supreme Court Justice, was a resounding victory for the debt buying industry, especially given ever increasing individual and putative class actions alleging violations of the FDCPA in the multibillion dollar debt collection industry.

The FDCPA authorizes private lawsuits and heavy fines to debt collectors who engage in unscrupulous collection practices. Under the Act, “debt collectors” are defined as anyone who “regularly collects or attempts to collect . . . debts owed or due . . . another.” 15 U.S.C. § 1692a(6). But because the practice of buying and managing consumer debt has become more commonplace, the issue of whether consumer finance firms who purchase consumer debt are included within the Act’s coverage was unclear.  While everyone agrees that the term embraced the repo man, the person hired by the creditor to collect an outstanding debt, it was unclear whether the person buying a debt and then trying to collect on it for himself made that person a debt collector. Circuit courts were divided on the issue, with some courts classifying debt buyers as creditors and other courts classifying them as debt collectors. In Henson, the Supreme Court resolved this Circuit split and held that debt buyers attempting to collect on that debt are excluded from the Act’s coverage because they do not qualify as debt collectors.

The complaint filed in the Henson case alleged that CitiFinancial Auto loaned money to the petitioners to finance the purchase of their cars. The petitioners defaulted on their loan and Santander later purchased the defaulted loans from the original lender, CitiFinancial Auto. After purchasing the defaulted loans, Santander engaged in collection practices that petitioners believed violated the FDCPA. The District Court and Fourth Circuit both ruled in favor of Santander on the ground that Santander did not qualify as a debt collector because it did not regularly seek to collect debts “owed . . . another,” but instead sought only to collect debts that it purchased and owned.

The Court explained that debt buyers are not subject to the FDCPA because the Act’s language only focuses on third-party collection agents. In its holding, the Court rejected petitioners’ argument that debt buyers are also debt collectors because of Congress’s use of the past participle of the verb “to owe.” Petitioners claimed that the statute’s definition of a debt collector includes anyone who regularly collects debts previously owed to another. Instead, the Court found that past participles are commonly used as adjectives to describe the present state of things, and that the word “owed” is used to refer to present debt relationships. As a result, the Court observed that the text of the statute indicates that one has to attempt to collect debts owed to another in order to qualify as a debt collector under the Act.

The Court also rejected petitioners’ alternative argument that the FDCPA treats defaulted debt purchasers as traditional debt collectors because doing so best furthers the spirit of the Act. Petitioners contended that if Congress had been aware of the business involving purchasing defaulted debt, then it would have included them as traditional debt collectors because they pose similar risks of abusive collection practices. The Court explained that it was not its job to rewrite a statute under the banner of speculation. Likewise, the Court found that petitioners’ policy arguments were not unassailable, because reasonable legislators could argue both ways on whether debt buyers should be treated as debt collectors under the Act. Certainly, the Court noted that these matters are for Congress to resolve, not the Supreme Court.

The Henson decision has far reaching implications on the debt collection industry and provides comfort to companies who purchase bad-debt and then go out to collect on it. Because the Henson decision reveals that debt purchasers are not defined as debt collectors under the FDCPA, Congress’s attempt to protect consumers from unfair or deceptive practices as a means to recoup money is severely weakened. The decision also clarifies that purchasers of defaulted debt now face less regulation in their collection process. Whether Congress decides to amend the FDCPA, and further regulate the debt collection industry, is something that the industry will keep a close eye on.

Filed under Fair Debt Collection Practices Act, FDCPA

Connecticut Legislation Requiring Homeowners Policies to Provide Coverage for Collapse and Mitigation Crumbles, But All Is Not Lost for Homeowners

By on July 27, 2016
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*Republished with permission of the Connecticut Law Tribune and The Insurance Coverage Law Bulletin.

A bill requiring homeowners insurance policies in Connecticut to provide coverage for the peril of collapse and mitigation undertaken to prevent all or part of a covered dwelling from falling down or caving in recently failed in the Connecticut Legislature. Following a very narrow 10-9 joint favorable report from the Insurance and Real Estate Committee, the Connecticut Legislature did not act on House Bill No. 5522, An Act Concerning Homeowners Insurance Policies and Coverage For The Peril Of Collapse (“HB 5522”). The demise of HB 5522 is significant for insurers since homeowners policies are not intended to serve as a home warranty or cover non-fortuitous/non-accidental losses, latent defects, improper workmanship/construction and defective materials. More significantly, HB 5522, aside from myriad coverage issues created by the bill’s language, would have likely resulted in premium hikes for Connecticut homeowners to cover what courts have repeatedly found to be uncovered claims.

HB 5522 would have required every insurance company delivering, issuing for delivery, renewing, amending, or endorsing a homeowners policy in Connecticut on or after the effective date (from passage of the legislation) to provide coverage for:

  1. the peril of collapse, including partial or total impairment of a covered dwelling’s structural integrity due to facts such as (a) hidden decay or (b) defective materials or construction methods used in constructing or renovating part or all of the building; and
  2. any mitigation taken to prevent all or part of a covered dwelling from falling down or caving in.

The impetus behind HB5522 is to provide insurance coverage to homeowners for the period of collapse and mitigation following the discovery of crumbling concrete foundations of numerous homes generally located in eastern Connecticut. The cause(s) of the crumbling foundations is unclear at this point, though it appears that the mineral pyrrhotite in stone aggregate used in the production of concrete is a factor in crumbling foundations. It has been alleged that degradation to foundations has happened over a period of years, and appears to impact homes built in the 1980s and 1990s. The crumbling concrete issue has spawned numerous individual and class action lawsuits by impacted property owners seeking coverage under their homeowners policies.

But All Is Not Lost

Despite HB5522’s loss of footing, the Connecticut Legislature overwhelmingly passed House Bill No. 5180/Public Act 16-25, An Act Concerning Concrete Foundations (“PA 16-25”). Governor Dannel P. Malloy signed the legislation on May 25, 2016. PA 16-25, which has various effective dates, establishes requirements concerning residential and concrete foundations, including: (1) establishing additional requirements to obtain a certificate of occupancy for a new residential or commercial building for which a concrete foundation was installed on or after October 1, 2016; (2) requiring municipalities, at the owner’s request, to reevaluate residential properties with foundations made from defective concrete; (3) requiring the Connecticut Department of Consumer Protection, after consulting with the Connecticut Attorney General, to investigate the cause(s) of failing concrete foundations and submit the report to the Legislature’s Planning and Development Committee no later than January 1, 2017; and (4) requiring executive agencies to maintain records concerning faulty or failing concrete foundations in residential buildings as confidential for at least seven years (notably P.A. 16-25 exempts these records from disclosure under the Connecticut Freedom of Information Act).

Additionally, on October 6, 2015, in response to the crumbling concrete issue, the Connecticut Insurance Department issued a formal notice (“Notice”) to all insurers writing homeowners insurance in Connecticut. The Notice informs insurance companies that they cannot cancel or non-renew a homeowner’s policy due to a crumbling foundation. The Notice specifically “directs that no insurer take any action to cancel or non-renew an affected homeowner’s insurance coverage as a result of a foundation found to be crumbling or otherwise deteriorating.” The Notice warned that any non-renewal action taken by an insurer be strictly in accordance with its underwriting guidelines and rules filed with and recorded effective by the Insurance Department.

The State Continues to Investigate

In July 2015, Connecticut Governor Dannel P. Malloy called on the Department of Consumer Protection and the Office of the Attorney General to conduct an investigation into the crumbling foundation issue. The focus of the investigation is to determine if there is a basis to initiate legal action under the Connecticut Unfair Trade Practices Act, based on the manufacture, sale or installation of concrete foundations in eastern Connecticut. As part of that investigation, the state has retained a civil engineer to take core samples from crumbling foundations in eastern Connecticut and test and analyze them to determine the cause of the deterioration and determine the number of impacted homeowners. At this point, the investigation has determined that pyrrhotite is a factor in crumbling foundations, and the investigation continues to search for other conditions that contribute to deteriorating foundations, but that it does not appear that any consumer protection laws were violated. And only a month ago the state reached an agreement with two eastern Connecticut companies taking concrete products off the residential foundation market until June 2017.

To view the CT Law Tribune article, click here.

Filed under Collapse, Construction Defect, First Party Policy

BREAKING: Connecticut Legislation Requiring Homeowners Policies to Provide Coverage for Collapse and Mitigation Crumbles

By on May 6, 2016
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A bill requiring homeowners insurance policies in Connecticut to provide coverage for the peril of collapse and mitigation undertaken to prevent all or part of a covered dwelling from falling down or caving in failed in the Connecticut Legislature. Following a very narrow 10-9 joint favorable report from the Insurance and Real Estate Committee, the Connecticut Legislature did not act on the bill. The demise of House Bill No. 5522, An Act Concerning Homeowners Insurance Policies and Coverage For The Peril Of Collapse (“HB 5522”), is significant for insurers since homeowners policies are not intended to serve as a home warranty or cover non-fortuitous/non-accidental losses, latent defects, improper workmanship/construction and defective materials. More significantly, HB 5522, aside from myriad coverage issues created by the bill’s language, would have likely resulted in premium hikes for Connecticut homeowners to cover what courts have repeatedly found to be uncovered claims.

HB 5522 would have required every insurance company delivering, issuing for delivery, renewing, amending, or endorsing a homeowners policy in Connecticut on or after the effective date (from passage of the legislation) to provide coverage for:

  1. the peril of collapse, including partial or total impairment of a covered dwelling’s structural integrity due to facts such as (a) hidden decay or (b) defective materials or construction methods used in constructing or renovating part or all of the building; and
  2. any mitigation taken to prevent all or part of a covered dwelling from falling down or caving in.

The impetus behind HB5522 is to provide insurance coverage to homeowners for the period of collapse and mitigation following the discovery of crumbling concrete foundations of numerous homes generally located in north-central and northeastern Connecticut. The cause of the crumbling foundations is unclear at this point, and it has been alleged that degradation to foundations has happened over a period of years, and appears to impact homes built in the 1980s. In July 2015, Connecticut Governor Dannel P. Malloy called on the Department of Consumer Protection (“DCP”) and the Office of the Attorney General to conduct an investigation into the crumbling foundation issue. Since that time, other state agencies, including the Insurance Department, Department of Banking, Department of Administrative Services, and Department of Housing, as well as federal, state and municipal officials, have worked with DCP on the issue. During this time, numerous individual and class action lawsuits have been instituted by impacted homeowners seeking coverage under their policies.

Also significant for insurers is that on October 6, 2015, in response to the crumbling concrete issue, the Connecticut Insurance Department issued a formal notice (“Notice”) to all insurers writing homeowners insurance in Connecticut. The Notice informs insurance companies that they cannot cancel or non-renew a homeowner’s policy due to a crumbling foundation. The Notice specifically “directs that no insurer take any action to cancel or non-renew an affected homeowner’s insurance coverage as a result of a foundation found to be crumbling or otherwise deteriorating.” The Notice warned that any non-renewal action taken by an insurer be strictly in accordance with its underwriting guidelines and rules filed with and recorded effective by the Department.

Filed under Collapse, Construction Defect, First Party Policy

No Insurance Coverage Stinks: South Carolina Court of Appeals Denies Coverage for Sewage Odor Lawsuit

By on April 21, 2016
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The South Carolina Court of Appeals recently held that a state-run insurance company owed no defense to a county public service district for offensive odors emanating from a sewage valve based on the policy’s pollution exclusion. The decision in S.C. Ins. Reserve Fund v. E. Richland Cty. Pub. Serv., No. 5393, 2016 S.C. App. LEXIS 32 (S.C. Ct. App. Mar. 23, 2016) is significant for insurers since it rejects the notion that odors must be regulated or harmful to be considered pollutants, and instead, following several other jurisdictions, applies the plain language interpretation in finding that foul odors – comprised of irritating and offensive gases – are encompassed by the pollution exclusion.

The facts are straightforward. In 2010, East Richland resident Coley Brown (“Brown”) filed a complaint against the East Richland County Public Service District (“District”) for inverse condemnation, trespass, and negligence in connection with the District’s installation of a sewage force main and air relief valve on Brown’s street that released offensive odors on Brown’s property multiple times per day. The stench ultimately caused Brown to leave the property, and he was unable to find a buyer. The District tendered the complaint to the state-run South Carolina Insurance Reserve Fund (“Fund”), which denied coverage.

The Fund initiated a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify the District in the Brown matter. The Fund denied coverage based on the pollution exclusion, which barred coverage for personal injury or property damage “arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritant, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental[.]” The Fund also denied coverage based on its position that the damages alleged by Brown did not qualify as “property damage” caused by an “occurrence.”

During trial, the District’s executive director and former maintenance superintendent testified that the sewage odor was the result of naturally occurring hydrogen sulfide and methane, that the District was not required by the Department of Health and Environmental Control to control these gases, and that in response to odor complaints, the District employed several novel corrective measures to mask or eliminate the odors.

The trial court found that the policy’s pollution exclusion barred coverage for the inverse condemnation claim. As to the negligence and trespass claims, the court determined that the pollution exclusion’s reference to gases and fumes encompassed the offensive odors delineated in Brown’s complaint. The court also found that the discharge of offensive odors were a part of the District’s ordinary operations such that the pollution exclusion’s “sudden and accidental” exception was inapplicable. Finally, the court found that there was no ambiguity between the policy’s definition of “occurrence” and the pollution exclusion. Consequently, the court determined that the Fund owed no duty to defend or indemnify the District.

On appeal, the District first argued that the pollution exclusion was void because it conflicted with provisions of the South Carolina Tort Claims Act (“Act”), which required the Fund to provide coverage for all risks for which immunity has been waived under the Act. Further, the District argued that because its decision to purchase insurance from the Fund precluded it from purchasing additional insurance from other sources, it was improperly exposed to liability for any excluded risks.

The Appellate Court rejected these arguments, finding that neither the Act nor the Act’s insurance provision expressly stated whether a pollution exclusion was a proper addition to a tort liability policy issued through the Fund. Moreover, because other state regulations mentioned pollution exclusions for general liability policies, the Appellate Court found that the inclusion of such pollution exclusions is strong evidence that the legislature did not intend to preclude the use of such exclusions in policies issued under the Act. Accordingly, the Appellate Court held that the pollution exclusion at issue was valid.

The District next argued that the pollution exclusion was inapplicable because it did not mention offensive odors or explain why such odors should be considered pollution when they are not harmful and not regulated. The Appellate Court rejected these arguments, finding the pollution exclusion applicable because the odors at issue could properly be classified as “fumes” or “gases,” both of which were listed in the exclusion. Giving these words their plain and ordinary dictionary meaning, the Appellate Court found that the word “gas” is defined as “a substance that can be used to produce poisonous, asphyxiating, or irritant atmosphere” and “fume” is defined as “a smoke, vapor, or gas esp[ecially] when irritating or offensive.” Although the District argued that the odors must be harmful in some way to be considered pollutants, the Appellate Court declined to impose such a limitation on the plain language of the policy, finding that the fact that the odors were comprised of irritating and offensive gases satisfied the ordinary meaning of the pollution exclusion’s terminology. The Appellate Court also noted that its decision comported with several other jurisdictions holding that foul odors (e.g., compost facility, animal rendering plant, pig farm manure, and treatment plant) are encompassed by such pollution exclusions.

The District lastly argued that even if the pollution exclusion applied, the exception to the exclusion created coverage because the circumstances surrounding the release of the odors were unique and unexpected. The Appellate Court dismissed this argument, holding that the release of the odors were not accidental and unexpected. Based on the testimony, the Appellate Court found that the District’s knowledge that the pumps would turn on occasionally was sufficient to demonstrate that the releasing of the odors was not only expected, but a necessary, routine and expected function of the system.

Filed under Pollution Exclusion

Georgia Supreme Court Denies Coverage for Lead-Based Paint Injuries Based on the Pollution Exclusion

By on April 12, 2016
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In a matter of first impression, the Georgia Supreme Court recently held that personal injury claims arising from lead poisoning due to lead-based paint ingestion were excluded from coverage under an absolute pollution exclusion in a commercial general liability insurance policy covering residential rental property. The decision in Ga. Farm Bureau Mut. Ins. Co. v. Smith, S15G1177, 2016 Ga. LEXIS 245 (Ga. Mar. 21, 2016) is significant for insurers since it expressly rejects the notion that a pollution exclusion clause is limited to traditional environmental pollution.

The facts are straightforward.  Amy Smith (“Smith”), individually and as next friend of her daughter Tyasia Brown (“Brown”), sued her landlord, Bobby Chupp (“Chupp”), for injuries Brown allegedly sustained as a result of ingesting lead from deteriorating lead-based paint at the house Smith rented from Chupp. Georgia Farm Bureau Mutual Insurance Company (“GFB”) insured the house under a CGL policy issued to Chupp. Chupp tendered Smith’s claims to GFB, and the insurer filed a declaratory judgment action against Smith and Chupp seeking a determination that Brown’s injuries were not covered under the policy and that it had no duty do defend Chupp against Smith’s claims.

GFB contended, among other things, that Brown’s injuries from lead poisoning were excepted from coverage by the policy’s pollution exclusion, which defined “Pollution” as “‘[b]odily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ . . . .” The policy defined “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

In granting summary judgment to GFB, the trial court relied on the Georgia Supreme Court’s decision in Reed v. Auto-Owners Ins. Co., 284 Ga. 286 (2008), which addressed the proper construction of an identical pollution exclusion in a CGL policy insuring residential rental property wherein a tenant sued her landlord for carbon monoxide poisoning. Although not explicitly listed in the policy as a pollutant, the Reed Court held that carbon monoxide gas fell within the policy’s definition of a pollutant and concluded that all of the plaintiff’s injuries arising therefrom were excluded from coverage under the pollution exclusion.

On appeal, the Georgia Court of Appeals reversed the trial court’s grant of summary judgment to GFB.  The Court of Appeals observed that the specific issue of whether lead-based paint should be considered a “pollutant” under the pollution exclusion clause was one of first impression in Georgia, and noted that a conflict existed among other jurisdictions on this issue. The Court of Appeals sided with those foreign courts holding that a pollution exclusion similar to the instant one did not bar coverage for injuries arising out of the ingestion or inhalation of lead-based paint. The Court of Appeals rejected the trial court’s interpretation of Reed, finding that while a straightforward reading of the pollution exclusion in Reed compelled the conclusion that carbon monoxide gas was a pollutant, it was unclear whether identical language in the instant policy was expansive enough to unambiguously include lead, lead-based paint or paint as a pollutant.

In its analysis, the Georgia Supreme Court found that GFB’s CGL policy contained an absolute pollution exclusion that precludes recovery for bodily injury or property damage resulting from exposure to any pollutants. Overviewing the genesis and development of the absolute pollution exclusion, the Court highlighted the litany of Georgia decisions, including Reed, that have repeatedly applied such clauses outside the context of traditional environmental pollution. Further, the Court rejected the notion that the pollutant at issue must be explicitly named in the policy to be enforceable.

In reversing the Court of Appeals, the Georgia Supreme Court followed Reed and found that GFB’s CGL policy unambiguously governed the factual scenario. Simply put, the Court of Appeals failed to apply the plain language of the contract. Accordingly, the Georgia Supreme Court held that lead present in paint unambiguously qualifies as a pollutant and that the plain language of the policy’s pollution exclusion excluded Smith’s claims against Chupp from coverage.

*** On March 9, 2016, this author published a related blog article on a recent Vermont Supreme Court decision holding that the plain language interpretation of a pollution exclusion in a homeowner policy barred coverage for property damage to a home rendered uninhabitable by an over-application of a bed bug pesticide.

Filed under Commercial General Liability, Pollution Exclusion

Exterminating Coverage Under a Pes[t]y Pollution Exclusion: Vermont Supreme Court Denies Coverage for Pesticide Contamination

By on March 9, 2016
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The Vermont Supreme Court recently held that the plain language interpretation of a pollution exclusion in a homeowner policy barred coverage for property damage to a home rendered uninhabitable by an over-application of a bed bug pesticide. The decision in Whitney v. Vt. Mut. Ins. Co., 2015 VT 140 (2015) is significant for insurance carriers because it restates the principle that pollution exclusions are not limited to traditional environmental pollution.

The facts are straightforward. A pest control company sprayed plaintiffs’ home, “corner to corner” and “wall to wall” with the pesticide chlorpyrifos to eradicate bed bugs. Notably, and very much relevant to the court’s analysis of the pollution exclusion, chlorpyrifos is not labelled for residential use and the spraying of the plaintiffs’ home with chlorpyrifos violated federal and state law. The homeowners complained to a state agency that the amount of chemicals sprayed in their home, which included walls and surfaces visibly dripping with the pesticide, was grossly excessive. After testing confirmed elevated pesticide levels, the plaintiffs were evacuated from the home for safety reasons.

Shortly after the testing was performed, the plaintiffs filed a claim with the defendant-insurer. Coverage A of the policy insured against a “physical loss to property.” Among the exclusions to coverage in Coverage A was a pollution exclusion, which stated that the policy did not insure loss caused by:

Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by a Peril Insured Against under Coverage C of this policy. Pollutants means any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

The defendant-insurer denied the plaintiffs’ claim under the absolute pollution exclusion. Plaintiffs thereafter filed suit seeking a declaratory judgment that the losses incurred by the spraying of chlorpyrifos within their home were covered by the homeowners policy. On cross motions for summary judgment, the trial court ruled in plaintiffs’ favor, reasoning that the terms “pollution” and “discharge, dispersal, release, and escape” were ambiguous and therefore must be construed in favor of coverage. The trial court relied on the California Supreme Court decision of McKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (Cal. 2003), which held that pollution exclusion clauses are generally ambiguous and therefore apply only to traditional environmental contamination.

On appeal, the issue was whether the pollution exclusion barred coverage for the loss of their home due to the spraying of chlorpyrifos inside the dwelling. The court began its analysis by relying on its then recently filed Cincinnati decision, wherein it enforced an unambiguous pollution exclusion in a commercial general liability policy. In Cincinnati, the court reviewed the evolution of the pollution exclusion clauses in the insurance industry and discussed the leading cases construing those clauses. The court considered two divergent lines of cases construing these clauses. In one, following the California Supreme Court in MacKinnon, courts have construed pollution exclusions very narrowly, concluding that they are inherently ambiguous, and that the purpose of the exclusions was to address liability arising from traditional environmental pollution, and not ordinary acts of negligence involving harmful substances. In the other, courts have concluded that by their plain language, pollution exclusion clauses exclude all injuries caused by pollutants.

The court stated that the “main lesson of Cincinnati . . . is that pollution exclusions are not presumed, as a class, to be ambiguous or to be limited in their application to traditional environmental pollution. They should be construed in the same as any other insurance contract provisions” to ascertain and carry out the parties’ intentions by looking at the plain language of the policy. Examining the policy language, the Vermont Supreme Court determined that the pollution exclusion excluded coverage for the pesticide contamination insofar as the spraying of chlorpyrifos constituted a “discharge, dispersal, seepage, immigration, release, or escape” of the pesticide.

The key issue was whether chlorpyrifos qualified as a “contaminant” or “irritant” to fall within the definition of “pollutant.”  The court quickly answered the question, relying on the undisputed facts that chlorpyrifos may be toxic to humans, can cause nausea, dizziness, confusion, and at very high exposures, respiratory paralysis and death, and is banned for residential use. The pesticide applicator’s use of chlorpyrifos in plaintiffs’ home violated EPA regulations, and federal and state law. The concentration levels in the plaintiffs’ home were consistently higher than EPA action levels, thereby preventing plaintiffs from inhabiting their house. Accordingly, the court concluded, in reversing the trial court, that the terms “irritant,” “contaminant,” and “pollutant” plainly and unambiguously encompassed the chlorpyrifos sprayed “corner to corner” and “wall to wall” throughout the plaintiffs’ home.

Filed under First Party Policy, Pollution Exclusion

SCOTUS Holds That Unaccepted Rule 68 Settlement Offer Doesn’t Moot Consumer Class Action Lawsuit

By and on January 20, 2016
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The U.S. Supreme Court ruled today (January 20, 2016) in Campbell-Ewald Co. v. Gomez (No. 14-857) that an unaccepted Rule 68 offer of judgment for full relief does not moot a consumer lawsuit. Gomez will undoubtedly have far reaching implications for future class action cases, especially those filed under the Telephone Consumer Protection Act (“TCPA”), where damages per violation are set by statute, and are generally easy to quantify. While the decision seems to favor class action plaintiffs by precluding defendants from “picking off” named class representatives, it leaves open the question of whether the result would be different where a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.

The facts of the case are straightforward. The U.S. Navy hired Campbell-Ewald Company (“Campbell”) to assist it with a recruiting campaign. As part of that campaign, Campbell hired a third party to sent text messages to the cell phones of over 100,000 recipients who had supposedly consented to receiving such solicitations. Jose Gomez filed a nationwide class action in the District Court for the Central District of California, alleging that Campbell violated the TCPA by sending him a text message without his consent.

A successful plaintiff in a TCPA action may recover her actual monetary loss or $500 for each violation, whichever is greater, and the penalty can be trebled for a knowing or willful violation. Gomez sought treble damages, costs, attorney’s fees, and an injunction against Campbell.

Prior to the agreed-upon deadline for a class certification motion to be filed, and before Gomez moved for class certification, Campbell made an offer of judgment to Gomez under Rule 68. Specifically, Campbell offered to pay Gomez his costs, excluding attorneys’ fees, and $1,503 per message—thereby satisfying any claim for potential treble damages. Campbell also proposed a stipulated injunction, whereby Campbell would agree to be barred from sending texts in violation of TCPA. However, the proposed injunction denied liability and disclaimed the existence of grounds for such an imposition. Campbell did not offer attorney’s fees as such fees are not available under the TCPA. Gomez did not accept the offer, and it lapsed by operation of time under Rule 68.

Thereafter, Campbell moved to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction. Campbell argued that no Article III case or controversy remained, since its offer mooted Gomez’s individual claim by providing him with complete relief. The District Court denied the motion. The Ninth Circuit agreed, finding that an unaccepted offer of judgment can not moot a class action. The Supreme Court granted certiorari to resolve a split among the Courts of Appeals over whether an unaccepted offer can moot a claim, thereby depriving federal courts of Article III jurisdiction.

On review, opinion author Justice Ginsberg relied heavily on Justice Kagan’s dissenting opinion in Genesis HealthCare. In that case, Justice Kagan wrote that “[a]n unaccepted settlement offer—like any unaccepted contract offer—is a legal nullity, with no operative effect. As every first-year law student learns, the recipient’s rejection of an offer leaves the matter as if no offer had ever been made.” Reasoning that nothing in Rule 68 changed that result, the Court expressly adopted Justice Kagan’s analysis and held that Campbell’s unaccepted offer did nothing to alter the course of his claim. Thus, the Court held that “in accord with Rule 68 of the Federal Rules of Civil Procedure, [] an unaccepted settlement offer has no force. Like other unaccepted contract offers, it creates no lasting right or obligation. With the offer off the table, and the defendant’s continuing denial of liability, adversity between the parties persists.”

The Court distinguished several cases that seemed to go the other way. In each of those cases, the defendants’ payments had fully satisfied the asserted claims. In contrast, even though the offer of judgment appeared to resolve Gomez’s claims, the Court reasoned that his individual claim was not made moot by the expiration of a settlement offer that was never accepted. Once the offer of judgment to Gomez expired, he was left with nothing; his TCPA claim was “wholly unsatisfied.”

The Court seemed to hint at a potentially different result had Campbell admitted liability. Over the course of the relatively short opinion, the court mentioned at least five times that Campbell continued to deny liability despite the offer of judgment. The Court also left open the question of “whether the result would be different if a defendant deposits the full amount of the plaintiff ’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.”

The decision also discussed whether Campbell should be entitled to derivative sovereign immunity, having performed its actions at the direction of the Navy. The Court found that Campbell was not entitled to share such immunity.

Notably, Justice Thomas concurred in the judgment, but rejected the majority’s reliance on modern contract principles and Justice Kagan’s dissent in Genesis HealthCare concerning Rule 68. Instead, Justice Thomas stated that he would rely on the common law history of tenders (that led to Rule 68), which demonstrates that a mere offer of the sum owed is insufficient to eliminate a court’s jurisdiction to decide the case to which the offer related.

Chief Justice Roberts, joined by Justices Scalia and Alito (Justice Alito also wrote separately), sharply dissented. The dissenting Justices found that Campbell offered to pay Gomez the maximum he could recover under the TCPA (e.g., $1500 per text message, plus the costs of filings suit), but that Campbell wanted more – “He wants a federal court to say he is right.” The dissenting Justices stated that the real problem for Gomez is that federal courts exist to resolve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking. They agreed with the majority that Gomez’s rejection of the offer was a legal nullity as a matter of contract law, but that the question is not whether there is a contract, but rather whether there is a case or controversy under Article III. Thus, they argued that because the District Court found that Campbell agreed to fully satisfy Gomez’s claims by giving him everything he asked for, there is no case or controversy to adjudicate and the case is moot.

Filed under Class Action, TCPA