Management Liability Insurer Must Defend Insured Accused of Sexual Molestation

The criminal trial in which Jerry Sandusky, the former defensive coordinator of Penn State's football team, stands accused of sexually abusing at least 10 boys over a 15-year period began Tuesday, June 4, 2012, in Bellefonte, Pa. Sandusky has been charged with forty criminal counts. Sandusky has also separately named as a defendant in a civil action in which one of the alleged victims seeks damages.

Sandusky, who denies the allegations in both the criminal and civil actions, has sought coverage for the claims against him under the management liability insurance policy issued to a non-profit group, The Second Mile, of which Sandusky had been an officer. Second Mile's insurer filed an action in the Middle District of Pennsylvania seeking a judicial declaration that it is not obligated to provide Sandusky with coverage under its policy, which incorporated both D&O and EPL coverage. The insurer contends that Sandusky was not acting in an insured capacity when he committed the alleged wrongful acts. The insurer contends that certain policy exclusions preclude coverage under the Policy for the claims against Sandusky.

The insurer moved for judgment on the pleadings in the coverage action, arguing that even if the policy were interpreted to cover the losses stemming from the allegations against Sandusky, the policy would be void as against Pennsylvania public policy. The insurer argued that it should not be required to defend or indemnify against the damages arising out of the claims.

In an opinion issued June 4, 2012, the same day that Sandusky's criminal trial began, Middle District of Pennsylvania Chief Judge Yvette Kane held that while Pennsylvania's public policy would not permit enforcement of the Second Mile policy to the extent that it provides for indemnification to Sandusky for civil liability for damages arising from sexual molestation, in the absence of any findings or factual record, the Court must defer the question whether any obligation the insurer owes to Sandusky to provide a legal defense to the civil claims or criminal prosecution are void as against Pennsylvania public policy. A copy of Judge Kane's June 4 opinion can be found here.

Judge Kane began her analysis with a confirmation that Pennsylvania public policy "prohibits the reimbursement of Sandusky for any damage award that he may ultimately be found to owe arising from the allegations that he molested and sexually abused children." What is not clear, however, and "must not be prejudged" is whether the same public policy bars coverage for The Second Mile or any other principal of that organization.

Judge Kane also found that Pennsylvania has not "squarely addressed the remaining and most pressing issue before the Court; whether in light of the strong public policy against allowing a perpetrator to insure against the consequences of his own intention wrongdoing, "the insurer's duty to provide Sandusky a defense to the civil and criminal proceedings "is likewise unenforceable as against public policy because of the nature of the conduct alleged." On this issue, the Court 'writes on a blank slate."

After reviewing relevant case law and public policy considerations, Judge Kane concluded that "without the benefit of a factual record, it is not entirely clear that Pennsylvania's public policy would prohibit enforcement of the insurance policy to the extent that it provides Sandusky with defense costs." Accordingly, Judge Kane concluded that she must "defer issuance of a ruling on the public policy question as it relates to [the insurer's] obligation to provide for Sandusky's legal costs to defend the civil action and criminal prosecution."

Discussion

The alleged wrongful acts of which Sandusky is accused are highly repugnant. At first  I didn't even want to write about Judge Kane's opinion in the insurance coverage action. However as offensive and shocking as the allegations against Sandusky are, they remain at this point only that - allegations.

It is very frequently the case that individuals insured under management liability policies are accused of misconduct that is exceptional or extraordinary. But until the allegations are established, they remain only unproven charges. If mere allegations alone were sufficient to vitiate defense cost protection, the accused individuals would regularly find themselves compelled to defend themselves without the benefit of insurance to fund their defense.

At least in recent times, management liability insurance is typically  structured to provide that conduct exclusions do not apply unless the underlying allegations have been proven. It seems to me that this operation of the insurance policy should not change merely because the basis on which the insurer seeks to disclaim coverage is public policy rather than an express policy exclusion.

It comes as no surprise that Pennsylvania's public policy would prohibit insurance for damages caused by the type of egregious and reprehensible conduct of which Sandusky is accused. However, in the absence of any factual determination or record, it would not be appropriate for the public policy principles to prohibit him from obtaining insurance protection for his defense. Insured persons accused of wrongdoing and who maintain their innocence rightfully ought to be able to look to applicable insurance coverage to provide their defense. These principles should apply regardless of how repugnant the misconduct of which the insured is accused.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

For more information about LexisNexis products and solutions connect with us through our corporate site.