Seventh Circuit Declines to Enforce Plain Language of Distribution of Material Exclusion in Business Liability Policy

On June 15, 2023, in Citizens Insurance Company of America v. Wynndalco Enterprises LLC, the Seventh Circuit Court of Appeals affirmed the U.S. District Court for the Northern District of Illinois’ decision holding that a Citizens’ business liability insurance policy exclusion for the distribution of material in violation of statutes gave rise to an ambiguity.

The ruling stems from two putative consumer class actions filed against Wynndalco Enterprises LLC, an information technology company, alleging that Wynndalco violated the Biometric Information Privacy Act (BIPA), which requires companies using and storing biometric data to abide by certain mandates.

The plaintiffs alleged that Wynndalco violated BIPA when it contracted with Clearview AI to purchase Clearview’s database of more than three billion facial scans scraped from social media, content sharing, and digital payment platforms and sold, licensed, or supplied the database to the Chicago Police Department.

Citizens, Wynndalco’s business liability insurer, sought a declaration from the district court that it had no duty to defend or indemnify Wynndalco for the BIPA violations because claims arising from the statutory violations were excluded under the terms of the policy.

In response to Citizens’ request for a declaration, Wynndalco filed a counterclaim seeking a declaration of its own that Citizens did have a duty to defend it and a separate count alleging that Citizens breached the policy by failing to provide it with a defense.

The Citizens policy provided express exclusions for “personal and advertising injury” claims arising from the violation of several named statutes and provided a catchall exclusion that Citizens argued applied to BIPA:

This insurance does not apply to:

…

q. Distribution of Material in Violation of Statutes

“Bodily injury,” “property damage” or “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), including any amendment of or addition to such law; or

(2) The CAN-SPAM Act of 2003, including any amendment or addition to such law; or

(3) The Fair Credit Reporting Act (FCRA), and any amendment of or addition to such law, including the Fair and Accurate Credit Transaction Act (FACTA); or

(4) Any other laws, statutes, ordinances, or regulations, that address, prohibit or limit the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information. Any other laws, statutes, ordinances, or regulations, that address, prohibit or limit the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.

In its ruling, the district court held that with “neither the plain text nor … canons of construction pointing to a clear meaning, the Court concludes that the Statutory Violation exclusion is intractably ambiguous.”

On appeal, although Citizens argued that the catchall provision unambiguously encompassed the BIPA claims, the Seventh Circuit ruled in favor of Wynndalco, holding:

We agree with the district court that the facial breadth of the catch-all provision gives rise to an ambiguity in the policy, in that the catch-all provision appears to nullify coverage that the policy elsewhere purports to provide.

Curiously, the Seventh Circuit acknowledged that the exclusion did not result in illusory coverage, as personal and advertising injury based on common law was not excluded by the provision. In doing so, the Seventh Circuit effectively conceded that the policy, as interpreted by its plain language, plainly showed that invasion of privacy causes of action based on the distribution of material in violation of common law were covered while statutory violations for such violations were not.

Nevertheless, after conceding that the policy under its plain reading would lead to the enforcement of the exclusion of the class action cases, the Seventh Circuit simply announced that there was an ambiguity for the apparent reason that the exclusion did exactly what exclusions do — exclude certain risks from the insuring agreement. Notably, the Seventh Circuit neglected to cite any case law authorizing it to rewrite the policy.