Illinois case changes court ruling on duty to defend?

January 30, 2024

Recently, the Appellate Court of Illinois, First Judicial District found that two insurance companies did not owe a duty to defend an employer in an underlying class-action lawsuit centered on the Illinois Biometric Information Privacy Act.[1]

The case

In Nat’l Fire Ins. Co. of Hartford v. Visual Pak Co., a temporary employee of the insured brought a lawsuit in 2018 against Visual Pak Co., in which he alleged BIPA violations.[2] It was alleged that the insured “‘collected, stored, used, or disseminated’” the temporary employee’s fingerprints without his consent and without policies in place regarding their retention and deletion from the database and without informing the temporary employee of how this information would be used.[3] Then, this biometric information was used to monitor the time worked by this temporary employee and other hourly workers, and for payroll purposes.[4] Initially, National Fire Insurance Co., acknowledged a duty to defend in April 2020, but refused coverage the following month citing a violation-of-law exclusion as the basis for denial.[5]

The violation-of-law exclusion at issue in the case stated that coverage did not apply to personal and advertising injury arising directly or indirectly out of any action or omission that violates or is alleged to violate a list of statutes that the Illinois court found to have a “theme of privacy.”[6] Thus, as stated by Justice David Ellis—who delivered the judgment of the Illinois state court—because BIPA is a statute intended to protect personal privacy, it was determined that coverage for the BIPA suit was barred by this exclusion.[7]

Changing precedent?

Stunningly, this holding diverged from federal precedent set by the U.S. Court of Appeals for the Seventh Circuit in the 2023 decision Citizens Ins. Co. of Am. v. Wynndalco Enters., LLC,[8] in which another insured—acting as an intermediary between various companies—was sued in two separate class-action lawsuits for the alleged sale and/or licensing of biometric information in violation of BIPA.[9]

In that case, the insured notified its insurance carrier of the lawsuits and requested defense under a business liability policy, with the insurance carrier ultimately filing a lawsuit to seek a declaratory judgment that the two lawsuits were not covered by the policy due to a violation-of-law exclusion.[10] In this case, nearly identical exclusion language was found not to preclude defense of an underlying BIPA lawsuit, thus the insurer in that case did in fact owe a duty to defend.[11] The Seventh Circuit argued that the exclusion language was ambiguous because “‘the broad language of the catch-all exclusion purports to take away with one hand what the policy purports to give with the other in defining covered personal and advertising injuries’” and therefore the ambiguity must be “resolved in favor of coverage.”[12]

The judge in the Illinois state court found a flaw in the circuit court’s reasoning that “broad sweep” or catch-all language of an exclusion rendered coverage illusory.[13] Justice Ellis reasoned that if the exclusion wiped out all coverage, that would be an instance in which it would be deemed illusory, but the “mere breadth of an exclusion, alone, does not equate to ambiguity” or render coverage illusory.[14] The catch-all exclusion in this case would not destroy the coverage provision of the policy on which the insured relied—it just eliminated all statutory causes of action and does not exclude any common law causes of action for invasion of privacy.[15] Justice Ellis also explained that just because an exclusion may conflict with other provisions of the coverage that are not presently at issue in the case at hand, it is not a basis to invalidate such exclusion as applied to that case—the court should only adjudicate on the present controversy.[16]

In further explanation of the disagreement with the circuit court, Justice Ellis stated that the court was “not bound by a federal court’s interpretation of Illinois law” despite the issue of “nearly identical policy exclusions that insurers pointed to” in defense of not having to owe a duty to defend.[17] The Illinois state court considered all case law as they are “open to persuasion by any of them.”[18]

The takeaway

Cases such as these stress the importance of understanding the language used in insurance policies to better advise clients about what is and is not covered. A central tenet of insurance coverage law is that the interpretation of insurance policies leans heavily in favor of coverage in instances of uncertainty.[19]

Generally, most courts nationwide agree that ambiguities should be read in favor of a policyholder.[20] However, this case could be an indication that courts are more willing to not default in favor of the policyholder as easily as they have in the past.

While the decision of this case is limited to the jurisdiction under the Illinois state court, it is worthy of keeping an eye on as courts in other states are more than able to follow suit in their interpretations of similar exclusions in the future.

PIA Northeast will continue to monitor any developments in relevant case law and provide updates to its members accordingly.

[1] New precedent? Illinois court shield insurers from duty to defend lawsuit

[2] Nat’l Fire Ins. Co. of Hartford v. Visual Pak Co., 2023 Ill. App. 221160 (Ill. App. Ct. 2023)

[3] Ibid.

[4] Ibid.

[5] Violation-of-law Exclusion Defeats Duty to Defend BIPA Lawsuit

[6] Ibid.

[7] Ibid.

[8] New precedent? Illinois court shield insurers from duty to defend lawsuit

[9] Seventh Circuit Holds Insurer Must Defend BIPA Lawsuit: Broad Violation-of-Statutes Exclusion Creates Ambiguity

[10] Ibid.

[11] New precedent? Illinois court shield insurers from duty to defend lawsuit

[12] Nat’l Fire Ins. Co. of Hartford v. Visual Pak Co., 2023 Ill. App. 221160 (Ill. App. Ct. 2023).

[13] Ibid.

[14] Ibid.

[15] Ibid.

[16] Ibid.

[17] New precedent? Illinois court shield insurers from duty to defend lawsuit

[18] Ibid.

[19] Bedrock Principles of Insurance Contract Interpretation May Aid Policyholders Seeking Coverage for Losses Due to COVID-19

[20] Ibid.

Danielle Caswell, Esq.
PIA Northeast | + posts

Danielle Caswell joined PIA Northeast as associate counsel in the Government & Industry Affairs Department in 2023. She earned her bachelor’s degree from New York University and her law degree from Brooklyn Law School with a particular focus on intellectual property, information, and media law. Prior to joining PIA, Danielle was an associate at a law firm in New York City where she focused primarily on intellectual property and entertainment-related transactional and litigation matters.

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