August 23, 2011
By: Michael A. Hamilton and Christopher J. DiIenno
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
Consequences continue to grow for retailers and their insurers stemming from the California Supreme Court's ruling in Pineda v. Williams & Sonoma, 51 Cal.4th 524, 246 P.3d 612 (Cal. 2011). As reported in March 2011, the Court in Pineda held that zip codes are personal identification information (PII) and, therefore, collecting zip codes during a credit card transaction violates California's Song-Beverly Act. The Act prohibits businesses from requesting and recording certain personally identifying information in order to complete a credit card transaction.
The Pineda decision has resulted in more than 100 new class actions in California. Just last week, Whole Foods Market California, Inc. was hit with a class action in the state. Class actions are being filed throughout the country based on similar claims of violations of consumer privacy statutes. One such class action was recently filed in Massachusetts. At least nine other states and Washington, D.C. have consumer protection statutes regulating the collection or use of certain PII during credit card transactions.
With the filing of these class actions, and more likely to come, insurers are struggling over where their insureds might find coverage in commercial general liability policies for claims involving intangible and expanding personal identification information. Hartford is one of the first insurance companies to bring this issue to court by filing declaratory judgment actions in Illinois and New Jersey, seeking declarations that it has no duty to defend or indemnify its insureds who were sued in these consumer class actions.
Under CGL policies, insureds may attempt to seek coverage under the personal and advertising injury portion of the policies, which typically provide coverage for "publication of material that violates a person's right of privacy." Whether there was a "publication" of zip codes, as defined under the policy, would likely be an important issue in any coverage analysis. Furthermore, plaintiffs may have to prove that a retailer intentionally violated the applicable consumer protection statutes. Liability based on such intentional conduct, however, is excluded under most policies. Lastly, many insurers added exclusions to their policies in recent years, barring coverage for claims arising from statutes prohibiting or limiting communication of personal information. The policy change was a reaction to another recent wave of consumer class actions involving a federal statute prohibiting the distribution of unsolicited fax advertisements. This exclusion, however, may also bar coverage for claims arising from collecting zip codes.
As the number of class action lawsuits continues to rise, insurers should be prepared to address the numerous coverage issues implicated by these claims.
For further insight on issues involving the insurance industry's response to consumer class actions, please contact Michael Hamilton at 215.358.5172 or via email at mhamilton@nldhlaw.com or Chris DiIenno at 215.358.5161 or via email at cdiienno@nldhlaw.com.
