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Mixed Ruling for Penn State Insurer as New Allegations Surface in Jerry Sandusky Coverage Case

Posted on: July 13th, 2016

By:  Bill Buechner

Approximately 4 years ago, former Penn State defensive coordinator Jerry Sandusky was convicted on 45 counts of child sexual abuse arising out of the molestation of 10 boys over a period of 15 years.   Sandusky was sentenced to a minimum of 30 years.   He has appealed these convictions, and his appeal is still pending.    Several other Penn State administrators, including the former president and the former athletic director also were indicted on various charges relating to Sandusky’s misconduct, and they are awaiting trial.

The Sandusky story is one of the biggest and most shocking scandals in the history of college athletics.  The initial allegations of Sandusky’s sexual abuse of children surfaced in the fall of 2011 and led to the termination of legendary Penn State football coach Joe Paterno (who subsequently died of lung cancer in January 2012), amidst allegations that Paterno was informed of at least one incident in 2001 and failed to take appropriate corrective action.    The NCAA subsequently imposed severe sanctions on Penn State (some of which were later reduced or rescinded) as a result of the Sandusky scandal.

As one might expect, numerous victims asserted civil claims and/or filed lawsuits contending that Sandusky sexually abused them and that Penn State negligently supervised and retained him.   According to published reports, the university has paid up to almost $93 million to resolve at least 30 of these civil claims.  The university has acknowledged that at least one settlement relates to claimed sexual abuse dating back to 1971.

One aspect of the Sandusky story that had not received much public attention is Penn State’s lawsuit in a Pennsylvania state court against its insurer, Pennsylvania Manufacturers’ Association Insurance Co., to recover most or at least some of the money Penn State has paid to settle the Sandusky civil claims under policies from 1969 through 2011.  This changed dramatically when the court recently issued an order granting in part and denying in part summary judgment motions filed by the parties (see order here).  The new publicity was not due to the coverage rulings (discussed below), but rather because of new allegations that were revealed in the order.

The most explosive new allegation revealed in the court’s ruling was an allegation by one victim that Sandusky molested him in 1976, and that he informed Paterno of this shortly thereafter.  The order also summarized deposition testimony that assistant coaches witnessed inappropriate conduct by Sandusky toward children in 1987 and 1988, and that one of the 1988 incidents was reported to the athletic director at the time.   Yesterday, the court unsealed deposition transcripts that provide additional details concerning these new allegations (see here), which lawyers for Sandusky and the Paterno family have denied.  Various assistant coaches also have denied the new allegations that they knew of alleged misconduct by Sandusky.

These new allegations have created a media firestorm and raised new questions about the scope of Sandusky’s misconduct, as well as what Paterno and his assistant coaches knew about it.  However, these new allegations did not help the insurer defeat coverage for claims prior to 1992.   The court ruled that, even if assistant coaches, Paterno or even the athletic director had knowledge of Sandusky’s alleged sexual abuse of children in 1976, 1987 or 1988, coverage was not barred under the notice provisions of the policies applicable at that time because those provisions only charged Penn State with knowledge by its executive officers, trustees or its risk manager.   The court concluded that, because there was no evidence in the record that any of these individuals had knowledge of Sandusky’s alleged conduct during that time frame, Penn State did not have a duty to notify the insurer of these alleged occurrences at that time.

However, the insurer did prevail on other significant issues.  The court determined that reports of potential misconduct by Sandusky in 1998 and 2001 (including the report by Paterno to his superiors in 2001) did reach the president and the senior vice president for business and finance, whom the court concluded were executive officers.   Consequently, the court held that Penn State’s failure to report Sandusky’s misconduct at that point could be sufficient to void the policies in subsequent years with respect to “bodily injury” caused by Sandusky, and that Penn State could have expected or intended subsequent abuse of children by Sandusky.  The court also enforced a sexual abuse/molestation exclusion that was in the policies from March 1, 1992 through March 1, 1999.  In addition, the court ruled that Sandusky’s alleged abuse of a victim over the course of several years constituted a single “occurrence” under the policy.

Thus, depending on the outcome of the trial and any subsequent appeals, Penn State’s insurer could be required to indemnify Penn State for some of the settlements reached to resolve the Sandusky child sexual abuse claims, but perhaps substantially less than what Penn State has sought.

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