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Standard Mutual Insurance Company v. Norma Lay

April 20, 2012


Appeal from Circuit Court of Macoupin County No. 09MR32 Honorable Patrick J. Londrigan, Judge Presiding.

JUSTICE KNECHT delivered the judgment of the court, with opinion. Justices Steigmann and Cook concurred in the judgment and 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 (TCPA) (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 TCPA claim against Lay was a potential multimillion-dollar claim which would bankrupt the agency if a verdict were entered against it and it was not covered by insurance. Lay opted for independent counsel to represent it 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 appeals and we affirm.


¶ 5 Lay, a small real estate agency located in Girard, Macoupin County, Illinois, hired a fax broadcaster to assist in his advertising effort in selling a property listing. The fax broad-caster (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 who 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 on behalf of Lay.

¶ 6 Unbeknownst to Lay, it had violated the TCPA because the recipients of the faxes had not consented to receipt to 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 TCPA in Madison County (the underlying action). The underlying action sought damages from Lay for alleged willful violations of the TCPA 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. Specifically noted was 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 (CGL) 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. Further, Standard noted both the CGL policy and an additional business liability policy (business-owners' policy (BOP)) 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 does not seek damages because of "bodily injury" as defined in the policies; (3) the class does not seek damages because of "property damage" to which insurance applies (caused by an "occurrence"); (4) the class does not seek damages because of "property damage"caused by non-intentional, accidental conduct; (5) the class does not seek damages because of "personal injury" as defined in the policies; (6) the class does not seek damages because of "advertising injury" as defined in the policies; (7) the policies exclude coverage for personal injuries arising from advertising; thus 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 TCPA may constitute penal statute as contemplated by the policies; and (9) the BOP 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 appointed 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, Theodore 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. Lay decided to replace counsel Mendillo with counsel of its own. On October 30, 2009, its 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 are taken as representative of the class.

¶ 11 On December 18, 2009, Rees wrote to 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 from the case.

ΒΆ 12 On April 19, 2010, the executed settlement agreement was filed with the court in the underlying action. On June 7, 2010, the district court entered an order preliminarily approving the settlement and directing notice of settlement be sent to all class members. 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. Lay assigned to Locklear all of Lay's claims ...

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