NY Appellate Court Finds Liability Coverage for Obligation to Pay Statutory Damages Under the Fair Credit Reporting Act

Where a liability policy covers the insured's legal obligation to pay compensatory damages and punitive damages "to the extent such amounts are insurable under applicable law,", but not an obligation to pay "penalties," the question sometimes arises as to the possibility of coverage for various statutory damages. In Navigators Insurance Co. v. Sterling Infosystems, Inc., 2016 N.Y. App. Div. LEXIS 8788, ___ A.D.3d ___ (1st Dep't Dec. 29, 2016), a New York appellate court recently set out guidelines for analyzing the nature of, and coverage for, such statutory damages.

The purpose of "statutory damages," to some extent, is to allow injured parties some measure of compensation where actual damages would be too small or too difficult to calculate (of course, while the actual damages incurred by a single plaintiff might be de minimis, the cumulative damages at stake in a class action can be considerable). On the other hand, some courts have also found that an award of statutory damages can be both compensatory and punitive.

The Navigators v. Sterling case involved alleged violations of the federal Fair Credit Reporting Act ("FCRA"), which was enacted in 1970 to ensure the confidentiality and proper use of consumer credit, personnel, insurance, and other information by consumer reporting agencies. With regard to civil liability for violation of the Act, 15 U.S.C. § 1681n, provides in pertinent part:

(a) In general. Any person who willfully fails to comply with any requirement imposed under this title with respect to any consumer is liable to that consumer in an amount equal to the sum of--

(1) "¦ any actual damages sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000;

The underlying plaintiffs in Navigators v. Sterling alleged that Sterling violated the FCRA by providing its employer-customers with outdated information that the employers relied upon in making decisions to terminate their employment. Navigators sued for a judicial determination that it had no duty to defend or indemnify Sterling in the underlying actions. The Navigators errors and omissions insurance policy issued to Sterling defined "damages" as "any compensatory sum" including "a judgement [sic], award, or settlement," as well as including punitive amounts "to the extent such amounts are insurable under applicable law," but excluding "[f]ines, penalties, forfeitures or sanctions." Navigators argued that the statutory damages assessed against Sterling under 15 U.S.C. § 1681n(a)(1) were "penalties," and therefore not covered.

In finding coverage, both the trial court and the Appellate Division noted, citing Bateman v. American Multi-Cinema, Inc., 623 F.3d 708 (9th Cir. 2010), that the statute gives the injured party the option of selecting either actual damages or statutory damages, suggesting that both serve a compensatory purpose. Moreover, the fact that the Act expressly establishes a separate potential recovery of punitive damages, 15 U.S.C. § 1681n(a)(2), and/or a civil penalty recoverable by the Federal Trade Commission, 15 USC § 1681s(a)(2), is further evidence that the statutory damages set out in 15 U.S.C. § 1681n(a)(1) are intended to compensate the injured party, not to punish the violator. Accordingly, Sterling's exposure for statutory damages fell within the coverage of the Navigator's E&O policy.

An important takeaway for practitioners is to examine the language of the relevant statute closely, to find clues as to whether statutory damages, punitive damages, and civil penalties are treated separately. Where there is no separate treatment in the statute, though, other case law suggests that a court might still find a punitive element in an award of statutory damages.