Panel: insurers are not relieved of duty to defend just because facts of underlying suit may potentially trigger exclusion clause

An insurance company will have to defend a Glenview company being sued by the Federal Trade Commission over allegations it used misleading tactics to persuade consumers to buy a health care discount plan marketed as health insurance, an appeals panel held.

The First District Appellate Court in an April 14 unpublished order reversed the lower court and determined New Jersey-based North River Insurance Co. must cover the defense of several related businesses in Chicago’s north suburbs against the FTC action.

Justice Maureen E. Connors delivered the court's order and Justices Thomas E. Hoffman and Mathias W. Delort concurred.

The order overturns a decision handed down by Cook County Circuit Court Judge Diane J. Larsen. She ruled in favor of North River, who had sued Glenview-based Guarantee Trust Life Insurance Co., Vantage American Solutions Inc., and others, claiming certain exclusions within its policy absolved it of the duty to defend their insured in the FTC suit.

In 2010, the FTC filed a complaint against Guarantee, Vantage American and a number of other companies, accusing them of violating federal telemarketing and trade laws in their marketing of health care discount plans.

The FTC claimed representatives of the companies would locate people seeking “major medical health insurance,” then contact them to try to sell them a discount plan, which the marketers “either expressly or implicitly clamed was health insurance, but was in fact a medical-discount plan.”

To complete sales, the FTC claimed the companies would use “a variety of fraudulent and high-pressure tactics,” and misled consumers about the available discounts, as well as the plans’ cancellation and refund policies.

Guarantee, Vantage American and the other defendants insured by North River filed a claim, asking their liability insurer to defend them against the federal agency.

North River, however, argued that the policy didn't obligate indemnification or a defense, as an exclusion clause in the policy stated it was not liable for losses that came as a result of “an actual or alleged violation” of several specific federal laws, including the Federal Trade Commission Act of 1914.

One of the counts in the FTC complaint alleges the companies violated the FTC Act.

On those grounds, Larsen, the trial judge, granted North River’s request for summary judgment, affirming the insurance company's lack of obligation to defend.

The defendant companies appealed, however, and the appellate justices agreed with them.

The appeals panel noted the allegations in the FTC complaint present a possibility the policy exclusion clause precludes the need for North River to defend, but that the suit also accuses the companies of violating other federal laws, specifically the Telemarketing Sales Rule within the Telemarketing and Consumer Fraud and Abuse Prevention Act.

And since that law was not mentioned in the exclusion clause of the policy at issue, the appeals panel determined it obligates insurers to defend on all counts if they are obligated to defend on any count.

Further, Connors wrote for the panel that the duty to defend is interpreted far more broadly than the duty to indemnify.

“An insurer is not relieved of the duty to defend when the facts of an underlying complaint are potentially excluded from coverage,” she explained. “Rather, it is the other way round.”

Since the Telemarketing Act “does not clearly fall within the coverage exclusion,” the panel held that “the FTC action is therefore potentially covered and plaintiff is obligated to defend defendants in the lawsuit.”

The appeals panel did not determine whether North River is obligated to indemnify the companies facing the FTC action and remanded the case for further proceedings.