The Wall Street Journal: Battle Over ZIP Codes — Insurer Fights Retailers

Jul 13, 2011

The following article was published in The Wall Street Journal on July 12, 2011:

Battle Over ZIP Codes: Insurer Fights Retailers


The Wall Street Journal

A battle is shaping up in California that pits two big retailers against a big insurer over who will pick up the costs of a new breed of consumer class-action litigation tied to merchants’ collection of ZIP codes for credit-card purchases.

Hartford Financial Services Group Inc. is resisting efforts by Crate & Barrel and Children’s Place Retail Stores Inc. to use their liability-insurance policies to pay legal bills in defending against lawsuits alleging violation of consumers’ privacy, according to court filings by Hartford. The insurer maintains that the insurance policies exclude coverage for alleged violations of certain privacy statutes.

Hartford’s fight against the two retailers is believed to be the first of many showdowns to come as insurers seek court rulings that their policies don’t obligate them to pony up what is likely to total hundreds of millions of dollars for the costs of defending against the burgeoning number of ZIP-code lawsuits.

Hartford and the two merchants declined to comment.

ZIP-Code Disputes

Key points in a coverage spat between Hartford and two policyholders

  • Two retailers were sued in California over collection of ZIP codes when consumers paid with credit cards.
  • The retailers, Crate Barrel and Children’s Place, filed claims under liability policies to cover costs of legal bills.
  • Hartford said the insurance policies exclude coverage for alleged violations of certain privacy statutes.
  • Hartford asked federal courts to affirm its interpretation of the policies.

The two retailers are among more than 100 merchants facing separate lawsuits in California courts since February. That is when the California Supreme Court ruled that ZIP codes qualify as personal-identification information under a longstanding state privacy statute. The statute prohibits merchants from requesting personal-identification information when customers pay by credit card. The court noted that ZIP codes can be used by retailers to deduce a customer’s full address, which can be sold to other businesses.

The lawsuits seeking class-action status accuse the merchants of violating the statute and contend customers are owed as much as $1,000 for each time they were asked for their ZIP code in the past year.

Other retailers named in the separate lawsuits include Macy’s Inc., Best Buy Co., Tiffany & Co. and Home Depot Inc. They either declined to comment or couldn’t be reached.

Some retailers named in class-action suits earlier this year previously have said they use the ZIP-code information as part of data mining to measure buying habits and target promotions. Also, some retailers ask customers for ZIP codes as a security measure to guard against fraudulent transactions.

Some retailers named in the suits have said in public statements that they care about their customers’ privacy and take many measures to safeguard any private information that the customers’ voluntarily provide.

In May, plaintiffs’ attorneys in Massachusetts opened a new front, citing the California ruling in a putative class-action case against arts-and-crafts chain Michaels Stores Inc. That pending federal suit argues that asking for ZIP codes is a violation in Massachusetts, too. Michaels declined to comment.

“These companies are going to be turning around and looking to their insurance companies for help,” said Linda Kornfeld, a partner at law firm Jenner & Block LLP in Los Angeles who represents companies in coverage disputes with insurers.

Insurers and commercial policyholders often go to court when they disagree about whether a new, unexpected type of claim is covered under an existing policy. If courts rule against insurers, as they have done with some asbestos and mold claims, it can result in billions of dollars in claims and a rewording of policy language to eliminate the vulnerability in new policies.

Hartford rejected a claim from Euromarket Designs Inc., Crate & Barrel’s parent, according to a suit it filed in federal court in Illinois in May seeking affirmation of the insurer’s conclusion that it isn’t obliged to pay legal costs stemming from four federal suits seeking class-action status in California. A hearing is set for July 27.

Hartford filed a similar suit in June against Children’s Place in federal court in New Jersey. No hearing has yet been scheduled in the Children’s Place suit.

Hartford contends in the two lawsuits that it shouldn’t have to pay the claims partly because the liability policies in question exclude coverage for privacy violations and the “distribution of material in violation of statutes,” according to court filings.

Ms. Kornfeld said she is aware of similar coverage disputes between policyholders and insurers over the ZIP-code issue but declined to discuss them because the disagreements haven’t spilled into court. She represents companies in coverage disputes with insurers.

Charles Spevacek, a partner at law firm Meagher & Geer PLLP in Minneapolis who defends insurers, said insurers adjusted their policies in the early 2000s to exclude coverage for the distribution of material in violation of privacy rights. They made the change when coverage disputes arose from alleged violations of a U.S. law that bans sending unsolicited advertisements to fax machines.

Lawyers following the credit-card suits in California said the fight between insurers and merchants is likely to be bigger and costlier than previous spats over privacy-related claims. The reason: Defendants in the latest lawsuits include some of the largest U.S. retailers, including Coach Inc., Nordstrom Inc. and J.C. Penney Co. Those companies also either declined to comment or didn’t respond to messages seeking comment.

The California Supreme Court reversed a lower court’s decision that retailers had been relying on to justify asking for ZIP codes from customers. The Supreme Court said the lower-court ruling can be used by retailers to argue their liability should be smaller than the $1,000-a-violation maximum set by California law.

But even that fight could require a million dollars or more in legal costs, estimated Donna Wilson, a partner at law firm BuckleySandler LLP in Los Angeles. She represents retailers that are defendants in the class-action lawsuits. Her estimate excludes the potential cost of settling suits or paying damages.

Write to Erik Holm at

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