NY Appeals Court Holds FCRA Statutory Damages Are Covered Damages

A New York state intermediate appeals court has affirmed a lower court’s holding that statutory damages paid as part of a settlement of a Fair Credit Reporting Act (FCRA) suit are covered compensatory damages, rather than non-covered penalties under the relevant errors and omissions liability policy.  Navigators Ins. Co. v. Sterling Infosystems, Inc., 2016 WL 7470505 (N.Y. App. Div. Dec. 29, 2016).

The insured was sued by a putative class that alleged that the insured’s business practices violated the FCRA and caused them injury including, in some cases, termination from employment. With its errors and omissions liability insurer’s consent, the insured settled with the putative class. The insurer then sought a declaration that it was not obligated to indemnify the defendants for the settlement because the statutory damages that the insured paid to settle the action constituted a penalty, rather than covered compensatory damages. The trial court rejected this argument, and held that the settlement was covered, and the insurer appealed.

The appellate court affirmed, concluding that the FCRA damages were not “penalties.” The FCRA allows the consumer to elect either actual or statutory damages, and may also provide punitive damages, so the appeals court concluded that the actual and statutory damages serve the same purpose. It further reasoned that the statute provides separately for a civil penalty, recoverable by the Federal Trade Commission (FTC). The court indicated that the insurer’s argument that the payments were “penalties” for willful conduct was unavailing because the statute’s willfulness standard included reckless violations as well as knowing violations. The court therefore held that the damages were compensatory and, as a result, covered by the policy.