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Clash of the Courts: How the Illinois Appellate Court’s Discord with the Seventh Circuit Continues to Shape the Evolving Landscape of Insurance Coverage for BIPA Claims

12/27/23

By: Amy Frantz, Michael Sanders, Patrick Eckler, and Jonathan Schwartz

On December 19, 2023, the Illinois Appellate Court, First District unanimously held the insurers in National Fire Insurance Co. v. Visual Pak Co. Inc. have no duty to defend their policyholder, Visual Pak, against a lawsuit alleging violations of the Illinois Biometric Information Privacy Act, finding that the policies’ Violation of Law Exclusion precludes coverage under Illinois law. 2023 IL App (1st) 221160. In doing so, the court meticulously picked apart the recent Seventh Circuit decision in Citizens Insurance Co. v. Wynndalco Enterprises, 70 F.4th 987 (7th Cir. 2023), which reached the opposite conclusion. This decision tees up what will assuredly be a hard-fought battle before the Illinois Supreme Court.

Visual Pak’s insurers filed a declaratory judgment action regarding their obligation to defend Visual Pak in a BIPA class action. The trial court granted the insurers’ motion for judgment on the pleadings, holding that the insurers had no duty to defend under their policies because the Recording And Distribution Of Material Or Information In Violation of Law (“Violation of Law”) exclusion precluded coverage for the BIPA Lawsuit, and, thus, the question of estoppel was inapplicable.

On appeal, the Appellate Court addressed the trial court’s application of the Violation of Law Exclusion, which provides, in relevant part, that coverage is excluded for:

“Personal and advertising injury arising directly or indirectly out of any action or omission that violates or is alleged to violate: (1) The Telephone Consumer Protection Act (TCPA) . . .; (2) The CAN-SPAM Act of 2003 . . . (3) The Fair Credit Reporting Act (FCRA) and. . . the Fair and Accurate Credit Transactions Act (FACTA); or (4) Any federal, state or local statute, ordinance or regulation. . . that addresses, prohibits, or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.”

The Appellate Court found that claims for damages under BIPA are excluded by the Subsection (4) catchall provision, concluding, “[I]t is simply impossible to deny that it describes BIPA. BIPA regulates the collection, dissemination, and disposal of one’s biometric identifiers and information.” The opinion, notably, concludes: “the catchall provision is amenable to a reasonable limiting construction of statutes or other laws that protect personal privacy. BIPA is clearly one such statute. So an underlying lawsuit alleging a violation of BIPA would fall under the catchall phrase of the violation-of-laws exclusion. But even if we were wrong and the ejusdem generis canon is incapable of limiting the scope of the catchall phrase, the result would be the same. Absent some limiting gloss, the phrase receives its full breadth. The catchall, without a limiting gloss, plainly and obviously includes BIPA lawsuit.”

As part of its decision, the Appellate Court dissected the Seventh Circuit’s decision in Wynndalco, which found the same provision ambiguous. The Appellate Court pointed out that although Wynndalco court recognized “[t]hat there is no dispute that a literal, plain-text reading of the catch-all provision would include BIPA violations”, the court concluded that the catchall provision was unduly broad and, in turn, unenforceable. The Appellate Court found the Wynndalco analysis to violate long-standing Illinois law in two fundamental ways.

First, the Appellate Court explained that, contrary to Wynndalco’s belief that the catchall was unenforceable because it was overly broad, an exclusion’s breadth does not make coverage illusory; rather, coverage is only illusory when the exclusion has the effect of “swallowing” the coverage entirely. It then pointed to and relied upon well-established doctrine in Illinois that if a policy provides coverage against some liabilities, the coverage is necessarily not illusory. The Appellate Court observed that while the Violation of Law Exclusion applies to statutory invasion-of-privacy claims, it does not exclude common law invasion-of-privacy claims. Hence, the Exclusion cannot create illusory coverage.

Second, the Appellate Court took issue with Wynndalco’s approach to nullify the entire Exclusion as illusory based on a purported conflict between policy provisions not at issue, i.e., based on the Seventh Circuit’s purely hypothetical scenario. This dovetails with settled Illinois law that instructs courts to resolve only the controversies actually before it. The Appellate Court also cautioned courts against necessarily finding “conflicts” in policy language in order to render them ambiguous, aptly noting that every exclusion, to some degree, conflicts with the insuring agreement. That is, of course, the very purpose of an exclusion – omitting specific risks, which would otherwise fall within the scope of coverage. To find such a conflict renders the policy ambiguous would render nearly all exclusions meaningless.

The Appellate Court’s holding and meticulous review of case law misapplied by the Seventh Circuit reaffirms the application of long-standing Illinois contract interpretation law, in the context of insurance coverage for alleged BIPA violations. While this decision does not yet “win the war” of coverage for BIPA claims for insurers, it is indicative of how courts interpreting Illinois law would rule, assuming the courts follow Illinois’ established precedent and doctrine. All eyes will now be on the Illinois Supreme Court to see whether it will be asked to consider these issues, and if so, whether it will accept the task. Given the Court’s track record of accepting BIPA-related issues, the odds of that are high.

In the meantime, Visual Pak should reset the Illinois coverage landscape in two important ways. First, policyholders are arguing that Wynndalco renders unenforceable all sorts of exclusions, not just ones identical or nearly identical to the Violation of Law Exclusion, which they allege create “wholly illusory” coverage. Hopefully, the Seventh Circuit heeds the Illinois Appellate Court’s guidance and puts a swift end to the “wholly illusory” coverage theory. In fact, the Seventh Circuit currently has pending another BIPA coverage lawsuit in which the insurer argued that Wynndalco was wrongly decided as respects the Violation of Law Exclusion. It is fortuitous that the Seventh Circuit has a ripe opportunity now to right this wrong.

Second, BIPA class action plaintiffs have been contending, ever since Wynndalco, that exclusions like the Violation of Law Exclusion are ambiguous and unenforceable. Knowing that the exclusions insurers believed to limit or eliminate their risk as respects BIPA claims were not being applied by Illinois courts, in accordance with insurers’ proffered construction, the class plaintiffs have been demanding ever-increasing amounts to settle their class action lawsuits. However, Visual Pak should take the proverbial wind out of their sails, thereby giving insurers a chance to settle these lawsuits on more equitable terms.

For more information, please contact Amy Frantz, Michael Sanders, Patrick Eckler, or Jonathan Schwartz.