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Western District of Washington Decision Enforces "Violation of Statutes" Exclusion to Preclude Coverage for Underlying Class Action Alleging Improper Disclosure of Customer Information by Insured

In National Union Fire Insurance Company of Pittsburgh, PA v. Coinstar, Inc., No. C13-1014-JCC (W.D. Wash. Feb. 28, 2014), the U.S. District Court for the Western District of Washington recently held that National Union had no duty to defend or indemnify Redbox , a subsidiary of defendant Coinstar, Inc. for an underlying class action lawsuit claiming disclosure of customer information in alleged violation of the Video Privacy Protection Act ("VPPA").

The underlying class action claimed that Redbox, an operator of automated DVD machines, violated the VPPA by using customers' personal information for marketing purposes and for disclosing the information to third parties without customers' express consent. Redbox tendered the claim to National Union which agreed to defend under a reservation of rights and subsequently filed a declaratory judgment action. The underlying action remains on appeal in the Seventh Circuit.

Regarding the declaratory judgment action, the two Commercial General Liability policies issued by National Union both provided coverage for "personal injury and advertising injury" liability and included a "Violation of Statutes" exclusion which precluded coverage for any loss resulting from "any act that violates any statute...that addresses or applies to the sending, transmitting or communicating of any material or information, by any means whatsoever."

The court, in comparing the "Violation of Statutes" exclusion to the language of the VPPA, concluded that the sole purpose of the VPPA is to protect consumers' privacy by prohibiting the "sending, transmitting or communicating" of their personal information which was exactly the plain language of the "Violation of Statutes" exclusion. As the exclusion was unambiguous, Redbox had no basis to obtain coverage under the policies.

At least one federal decision in Pennsylvania has similarly barred coverage where a "Violation of Statutes" clause contained in a policy excluded coverage when there was "deliberate violation of any federal, state, or local statute, ordinance, rule or regulation committed by or with the knowledge and consent of the insured" in the sexual abuse context. See, National Casualty Company v. Christopher Young, No. 07-cv-4836, 2009 U.S. Dist. LEXIS 61353 (E.D. Pa., Jul. 14, 2009). However, in the privacy context, it does not appear that Pennsylvania has yet examined similar exclusionary clauses designed to address the Video Privacy Protection Act.

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