The Illinois Appellate Court determined the insurer must cover a settlement reached by its insured and it independent counsel who was retained due to a potential conflict. Standard Mut. Ins. Co. v. Lay, 2014 Ill. App. LEXIS 20 (Ill. Ct. App. Jan. 23, 2014). 

   The insured, a small real estate agency, hired a fax broadcaster to assist advertising efforts. A blast fax was sent to approximately 5,000 fax numbers. Unknown to the insured, the fax blast violated the Telephone Consumer Protection Act because the recipients did not consent to receipt of the faxes. The insured was sued in a class action which sought damages for willful violations of the Telephone Act and sought treble damages ($1,500 per occurrence).

   The insured tendered its defense to Standard. Standard accepted under a reservation of rights.The letter noted a conflict of interest for any attorney appointed by Standard to represent the insured because the class action sought treble damages for statutory violations that were allegedly willful. Coverage for intentional or non-accidental acts were excluded. The insured was advised it could hire its own attorney at Standard's expense.

   The insured initially agreed to accept counsel hired by Standard. However, the insured later selected is own counsel. The new counsel requested Standard's counsel withdraw from the case. Standard's attorney never withdrew.

   The insured and its new counsel settled with the class for $1.7 million. The class agreed not to execute on an property or assets of the insured other than the insurance policies. The trail court found the settlement was reasonable in light of the numerous unsolicited faxes the insured sent. 

   In the coverage action, Standard was granted summary judgment, finding it had no duty to defend and no further obligation to the insured with regard to the stipulated settlement in the underlying case. The appellate court affirmed, but the Illinois Supreme Court reversed and remanded. The Supreme Court disagreed with the appellate court's holding that the damages provided under the Telephone Act were punitive in nature and uninsurable under Illinois law. 

   The appellate court now held that the insured's actions were not barred as intentional acts. While the insured's action in sending the faxes were intentional, it thought it had authorization to send faxes to the particular recipients. The insured did not intend to injure anyone by sending the fax. The insured's negligent actions, i.e., it knew or should have know sending fax ads were wrongful and without authorization, were covered.

   Further, once new counsel was retained, the insured was entitled to control its defense. Where a conflict existed, the insurer's obligation to defend was satisfied by reimbursing the insured for the costs of the independent counsel selected by the insured. Standard, however, had no right to require the insured to obtain permission to settle the underling suit or to object to the settlement itself. Here, the insured's liability was clear. Absent the settlement, the result would have been the same.