11th Circuit Addresses Coverage for Alleged Knowing FACTA Violations

In its recent decision in Travelers Prop. Cas. Co. of America v. Kansas City Landsmen, 2015 U.S. App. LEXIS 453 (11th Cir. Jan. 12, 2015), the United States Court of Appeals for the Eleventh Circuit, in a matter of first impression, had occasion to consider an insurer’s coverage obligations under a series of general liability policies with respect to the insured’s allegedly willful violations of the Fair and Accurate Credit Transaction Act (“FACTA”).

Travelers issued a number of primary a general liability policies, and St. Paul issued a number of excess liability policies, to a group of related rental car companies that was sued in a putative class-action lawsuit for alleged violations of FACTA. It was alleged that the insureds improperly printed more than the last five digits of the customers’ credit cards, as well as the expiration dates of those cards. The lawsuit sought statutory and punitive damages under FACTA on the basis that the insureds willfully failed to comply with the requirements under FACTA.

The Travelers policies’ Coverage B part for personal and advertising injury was slightly modified from a standard ISO form. The policies afforded coverage for “personal injury” caused by an offense arising out of the insured’s business, excluding advertising, publishing, broadcasting or telecasting. Notably, the Travelers policies defined “personal injury” to include the offense of “oral, written or electronic publication of material that appropriates a person’s likeness, unreasonably places a person in a false light or gives unreasonable publicity to a person’s private life.” The Travelers policies also contained a knowing violation exclusion applicable to personal injury “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal injury.’” The St. Paul policies defined personal injury to include “oral, written or electronic publication of material that violates a person’s right of privacy” and contained a knowing violation exclusion substantially similar to that contained in the Travelers policies.

On motion for summary judgment, the United States District Court for the Northern District of Georgia concluded that the insurers had no duty to defend or indemnify because the underlying suit sought relief as a result of willful violations of FACTA, thus triggering the exclusions for knowing violations. In considering this issue, the Eleventh Circuit noted that the United States Supreme Court has interpreted the term “willful” as used in FACTA to encompass not only “knowing” violations but also those committed in “reckless disregard” of the statute’s requirements. This distinction, explained the court, is crucial since the policies’ knowing violation exclusions do not apply to statutory violations committed with reckless disregard.

With this in mind, the court examined the allegations in the underlying complaint. It observed that while the pleading alleged that the insureds knew of the various requirements under FACTA, it did not also allege that the insureds knowingly violated those requirements. The court noted one example from the underlying complaint that demonstrated this crucial distinction:

Paragraph 65 of the Galloway complaint perhaps best exemplifies the distinction that the Galloway complaint makes between the Car Rental Companies’ mental state with regard to FACTA’s requirements and their mental state as it relates to any alleged violations that they may have committed. It reads, “Notwithstanding . . . the Defendants’ knowledge of the statute’s requirements, they willfully failed to comply with FACTA . . . ,” meaning that they both knew of FACTA’s requirements and that they failed to comply with them either knowingly or with reckless disregard. Even the Insurance Companies’ motion for summary judgment acknowledges that “[the underlying complaint] alleges that Defendants’ violations were willful and that the willful violations entitled the class to recover . . . damages . . . .” Conspicuously absent from the complaint is any allegation that the violations were knowing.

Thus, because the complaint alleged only that the violations were willful, as opposed to knowing, the possibility existed that the insureds acted only with reckless disregard with respect to their customers’ rights, in which case the exclusions would not apply. Thus, concluded the court, the exclusions did not negate Travelers’ duty to defend.

The court then went on to consider whether the allegations in the underlying suit even qualified as a covered personal injury offense – an inquiry not undertaken by the lower court. Central to this question was whether the insureds gave the credit card receipts to the credit card holder, or whether these receipts were given to persons other than the cardholders. All parties agreed that if it was the former, then no coverage would apply since there would be no publication of material as required by the policies’ relevant personal injury offense definitions. As the court explained, “the parties agree that the term ‘publication’ contemplates dissemination to at least someone other than the person who provided the card information at issue to the Car Rental Companies.”

The insureds pointed that while the credit cards are swiped at the time of the car rental, the credit card receipts are not given until the car is returned, and the possibility existed that the person returning the car differed from the person who initially rented the car. The insureds explained that they distribute the receipts in this manner because they consider the person returning the car to be the customer, regardless of whether that is the same person whose credit card was initially used. The court observed that this raised an issue under FACTA as to whether the statute prohibits vendors from providing “non-truncated” credit card receipts to their customers who do not actually own the credit card accounts.

In considering this question, the court turned to the specific provision in FACTA, 15 USC § 1681c(g)(1), which prohibits “print[ing] more than the last five digits of the [credit] card number or the expiration date upon any receipt provided to the cardholder . . . .” The relevant portion of the statute does not define the term “cardholder,” and the court rejected any efforts to look to other sections of FACTA to define the term. Because the issue was not clear, and one of first impression, the court ultimately elected to remand the question to the lower court for further proceedings, noting that:

… we do not conclude that whether § 1681c(g)(1) prohibits vendors from providing non-conforming receipts of credit-card account owners to persons other than the account owners is clear “beyond any doubt.” Under these circumstances, we think that consideration of this issue would benefit from the parties’ and the district court’s focused attention in the first instance. As this appears to be an issue of first impression, the Federal Trade Commission, which is the agency charged with administering the Fair Credit Reporting Act, which FACTA amended, may also wish to seek to intervene in the district-court proceedings under Rule 24(b)(2)(A), Fed. R. Civ. P., and weigh in with its understanding of § 1681c(g)(1).

In so remanding, the court pointed out that in order to resolve the coverage question, further examination was required into whether § 1681c(g)(1) could impose liability on a vendor for providing non-conforming credit card receipts to a person who does not own the account.

- See more at: http://www.traublieberman.com/insurance-law/2015/0116/5793/#sthash.rZBzmUHP.dpuf

In its recent decision in Travelers Prop. Cas. Co. of America v. Kansas City Landsmen, 2015 U.S. App. LEXIS 453 (11th Cir. Jan. 12, 2015), the United States Court of Appeals for the Eleventh Circuit, in a matter of first impression, had occasion to consider an insurer’s coverage obligations under a series of general liability policies with respect to the insured’s allegedly willful violations of the Fair and Accurate Credit Transaction Act (“FACTA”).

Travelers issued a number of primary a general liability policies, and St. Paul issued a number of excess liability policies, to a group of related rental car companies that was sued in a putative class-action lawsuit for alleged violations of FACTA. It was alleged that the insureds improperly printed more than the last five digits of the customers’ credit cards, as well as the expiration dates of those cards. The lawsuit sought statutory and punitive damages under FACTA on the basis that the insureds willfully failed to comply with the requirements under FACTA.

The Travelers policies’ Coverage B part for personal and advertising injury was slightly modified from a standard ISO form. The policies afforded coverage for “personal injury” caused by an offense arising out of the insured’s business, excluding advertising, publishing, broadcasting or telecasting. Notably, the Travelers policies defined “personal injury” to include the offense of “oral, written or electronic publication of material that appropriates a person’s likeness, unreasonably places a person in a false light or gives unreasonable publicity to a person’s private life.” The Travelers policies also contained a knowing violation exclusion applicable to personal injury “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal injury.’” The St. Paul policies defined personal injury to include “oral, written or electronic publication of material that violates a person’s right of privacy” and contained a knowing violation exclusion substantially similar to that contained in the Travelers policies.

On motion for summary judgment, the United States District Court for the Northern District of Georgia concluded that the insurers had no duty to defend or indemnify because the underlying suit sought relief as a result of willful violations of FACTA, thus triggering the exclusions for knowing violations. In considering this issue, the Eleventh Circuit noted that the United States Supreme Court has interpreted the term “willful” as used in FACTA to encompass not only “knowing” violations but also those committed in “reckless disregard” of the statute’s requirements. This distinction, explained the court, is crucial since the policies’ knowing violation exclusions do not apply to statutory violations committed with reckless disregard.

With this in mind, the court examined the allegations in the underlying complaint. It observed that while the pleading alleged that the insureds knew of the various requirements under FACTA, it did not also allege that the insureds knowingly violated those requirements. The court noted one example from the underlying complaint that demonstrated this crucial distinction:

Paragraph 65 of the Galloway complaint perhaps best exemplifies the distinction that the Galloway complaint makes between the Car Rental Companies’ mental state with regard to FACTA’s requirements and their mental state as it relates to any alleged violations that they may have committed. It reads, “Notwithstanding . . . the Defendants’ knowledge of the statute’s requirements, they willfully failed to comply with FACTA . . . ,” meaning that they both knew of FACTA’s requirements and that they failed to comply with them either knowingly or with reckless disregard. Even the Insurance Companies’ motion for summary judgment acknowledges that “[the underlying complaint] alleges that Defendants’ violations were willful and that the willful violations entitled the class to recover . . . damages . . . .” Conspicuously absent from the complaint is any allegation that the violations were knowing.

Thus, because the complaint alleged only that the violations were willful, as opposed to knowing, the possibility existed that the insureds acted only with reckless disregard with respect to their customers’ rights, in which case the exclusions would not apply. Thus, concluded the court, the exclusions did not negate Travelers’ duty to defend.

The court then went on to consider whether the allegations in the underlying suit even qualified as a covered personal injury offense – an inquiry not undertaken by the lower court. Central to this question was whether the insureds gave the credit card receipts to the credit card holder, or whether these receipts were given to persons other than the cardholders. All parties agreed that if it was the former, then no coverage would apply since there would be no publication of material as required by the policies’ relevant personal injury offense definitions. As the court explained, “the parties agree that the term ‘publication’ contemplates dissemination to at least someone other than the person who provided the card information at issue to the Car Rental Companies.”

The insureds pointed that while the credit cards are swiped at the time of the car rental, the credit card receipts are not given until the car is returned, and the possibility existed that the person returning the car differed from the person who initially rented the car. The insureds explained that they distribute the receipts in this manner because they consider the person returning the car to be the customer, regardless of whether that is the same person whose credit card was initially used. The court observed that this raised an issue under FACTA as to whether the statute prohibits vendors from providing “non-truncated” credit card receipts to their customers who do not actually own the credit card accounts.

In considering this question, the court turned to the specific provision in FACTA, 15 USC § 1681c(g)(1), which prohibits “print[ing] more than the last five digits of the [credit] card number or the expiration date upon any receipt provided to the cardholder . . . .” The relevant portion of the statute does not define the term “cardholder,” and the court rejected any efforts to look to other sections of FACTA to define the term. Because the issue was not clear, and one of first impression, the court ultimately elected to remand the question to the lower court for further proceedings, noting that:

… we do not conclude that whether § 1681c(g)(1) prohibits vendors from providing non-conforming receipts of credit-card account owners to persons other than the account owners is clear “beyond any doubt.” Under these circumstances, we think that consideration of this issue would benefit from the parties’ and the district court’s focused attention in the first instance. As this appears to be an issue of first impression, the Federal Trade Commission, which is the agency charged with administering the Fair Credit Reporting Act, which FACTA amended, may also wish to seek to intervene in the district-court proceedings under Rule 24(b)(2)(A), Fed. R. Civ. P., and weigh in with its understanding of § 1681c(g)(1).

In so remanding, the court pointed out that in order to resolve the coverage question, further examination was required into whether § 1681c(g)(1) could impose liability on a vendor for providing non-conforming credit card receipts to a person who does not own the account.