Class Actions Against California Retailers Arising from ZIP Code Recording Give Rise to Insurance Coverage Disputes

April 25, 2011

The Class Action Cases

Following the recent California Supreme Court decision in Pineda v. Williams-Sonoma Stores, Inc., 2011 WL 446921 (Cal. Feb. 11, 2011), California plaintiffs have filed more than 70 class action lawsuits seeking damages under the Song-Beverly Credit Card Act of 1971, a statute designed to protect the personal privacy of credit card users. These lawsuits expose California businesses to significant defense costs and substantial damage awards arising from the improper recording and use of ZIP codes provided by credit card customers in retail transactions. To mitigate these losses, California retailers may be able to tap their commercial general liability, E&O and D&O insurance policies to defend and indemnify them against Song-Beverly claims.

The Song-Beverly Credit Act and its federal counterpart, the Fair and Accurate Credit Transactions Act of 2003, were designed to protect consumer privacy. Under the Song-Beverly Act, a business may not require an individual to provide personal identification information in order to use a credit card as payment for goods or services.

On Feb. 10, 2011, the California Supreme Court addressed a new issue regarding the application of the Song-Beverly Act – whether a business violates Song-Beverly by requesting ZIP code information from customers. In Pineda v. Williams-Sonoma Stores, Inc., the California Supreme Court unanimously held that retailers do violate Song-Beverly when they ask credit card customers for ZIP codes. The court reasoned that because ZIP codes constitute personal identification information, requesting and recording that data violates the act. In the decision, the court noted that Williams-Sonoma added each cardholder’s name and ZIP code to its database and used that information to “market products” and also observed that Williams-Sonoma “may also sell” the compiled information. The court found that in enacting the Song-Beverly Act, the legislature sought to prevent retailers from improperly using personal and private data for marketing purposes.

Commentators accurately predicted the wave of lawsuits that have followed Pineda. The lawsuits seek damages of up to $1,000 per violation of the act, as well as attorneys’ fees, costs and prejudgment interest.

Bring Your Insurance Assets to Bear

A retailer facing a Song-Beverly claim may find protection under several types of liability insurance.

CGL Coverage

First, commercial general liability insurance policies may provide coverage. A CGL insurer is obligated to defend and indemnify its insured for damages because of "advertising injury," as long as the injury is caused by an offense arising out of the insured's business. Advertising injury typically is defined to include the "oral or written publication, in any manner, of material that violates a person's right of privacy."

The Pineda court stressed that the California legislature enacted the Song-Beverly Act to protect the personal privacy of consumers making payments with credit cards. It held that Williams-Sonoma violated the act when, in its regular course of business, it requested and then recorded Pineda's ZIP code for marketing and advertising purposes. In light of Pineda, a policyholder facing a Song-Beverly claim has a good argument that the claim is insured by the advertising injury coverage included in standard CGL policies. If the policyholder simply recorded ZIP code information into a database it will have to show that this amounts to a “written publication” of private information. If the retailer distributed the ZIP code information to third parties or used it for its own marketing purposes, coverage is more likely to exist under the advertising injury component of a CGL policy.

Errors & Omissions Policies

E&O policies typically provide coverage for claims arising from acts committed by the insured in the course of providing "professional services." E&O policies are less standardized than CGL policies and today, professional liability policies often provide coverage for damages arising from the violation of “privacy laws.” E&O policies with this broader coverage may offer protection for Song-Beverly claims.

Directors & Officers Policies

The claims asserted in Song-Beverly class actions also may be covered under a company’s D&O policy. Private D&O policies often cover a range of broadly defined “wrongful acts” that encompass the allegations in these types of lawsuits. In order for coverage to exist, however, the applicable D&O policy would need to provide “entity” coverage in addition to coverage for the individual directors and officers, because class actions of this type most likely will not include claims against individual corporate directors or employees.

Conclusion

The effect of the ruling in Pineda is limited because the Song-Beverly Act applies solely to California residents shopping at retail stores in California. Pineda does not impact retail business outlets in other states. Other states have statutes similar to Song-Beverly, but to date, courts have not interpreted those statutes as prohibiting the recording of  ZIP codes.

Because class actions are costly to defend and settle, it is vitally important for policyholders to evaluate all potential sources of insurance coverage, provide prompt notice to all insurers of claims and suits, and proactively pursue the insurers with potential coverage obligations.

McGuireWoods’ Insurance Coverage Practice

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