In Part One of this series [link], we gave the background to the insurance coverage dispute between Jerry Sandusky and Federal Insurance Company, which wrote D&O and employment practices liability insurance to The Second Mile, a charity Sandusky founded. I explained how Sandusky was seeking coverage under those policies for the criminal and civil cases against him, and how, in response, Federal filed suit, arguing that it did not have to indemnify or defend him because he was not “acting in his capacity” as an executive of Second Mile when the alleged sexual abuse happened.
Last week, the court held that Federal did not have a duty to reimburse Sandusky’s defense costs, as we’ll explain below. But first, let me get on my insurance-lawyer soapbox and explain a couple of key terms. Insurance in its most common form (and certainly the policies Federal wrote here) does two things: 1) indemnify someone, or some business, for judgments or settlements against them in civil cases, and 2) defend someone, or some business – or pay defense costs in civil (and, in rare cases, criminal) matters. Indemnity and defense are two distinct obligations that the insurer has.
Now, earlier on in this case – in June 2012 – the court held that Federal did not have a duty to indemnify Sandusky for any judgment in the civil case against him. The court held that it would be against public policy to allow someone to pass the damage caused by sexual abuse on to an insurer, because that type of conduct is intentional and reprehensible.
The issue the court decided last week, in contrast, was whether Federal would have to pay Sandusky’s defense bills in the criminal and civil case against him. Whether an insurer has to support a defense is determined by a different standard than whether the insurer has to indemnify – as a general rule, the defense duty is much broader, and not necessarily subject to the public policy limitations that keep Federal from indemnifying Sandusky.
So, it’s been frustrating to read many articles about last week’s ruling that say Federal doesn’t have to “indemnify” Sandusky. That’s just wrong – indemnity was determined back in June. I won’t link to these articles that confuse indemnity and defense, but use caution with what you read about this case.
OK, off my insurance soapbox and on to last week’s holding on defense costs. Federal’s main argument was that even though plaintiff Doe’s complaint said he met Sandusky at Second Mile events, and the grand jury’s report referenced Sandusky’s work with Second Mile, Sandusky wasn’t acting in an “insured capacity” – meaning acting “as an employee or executive” of Second Mile – when he committed the alleged sexual abuse. It also argued that paying Sandusky’s bills, like indemnifying him, would be against public policy.
This time – unlike last June’s decision – the court didn’t have to get to the public policy argument. In a rather succinct opinion, the court held that it was quite clear that Sandusky wasn’t acting on behalf of Second Mile when he abused and molested his victims. It drew analogies to cases holding that day care center employees who molest children do so outside of the scope of their employment, and concluded that Sandusky’s conduct was “personal in nature, and performed in his individual capacity” - not on behalf of the Second Mile.
What can SuitsbySuits’ esteemed readers – who won’t test the limits of their insurance policies in quite the way Sandusky did – learn from this case? Three things:
- First, understand that every insurance policy of whatever type has limits on the scope of its coverage. Those limits are set by the language of the policy itself;
- Second, recognize that some conduct – like Sandusky’s sexual abuse – isn’t insurable at all, no matter what the policy says, as a matter of public policy: while states vary on what is or is not insurable, there are just some things that would create a moral hazard problem if the risk of them could be transferred away; and
- Third, remember that – subject to the public policy exception right above – the breadth of your D&O and employment practices coverage is almost always negotiable. It’s prudent to periodically review your policies, ask your broker or coverage advisor to go over them with you to help you understand what your insurer is agreeing to cover and not cover, and then approach the insurer to expand the “basket of risks” the insurer is taking from you and putting on its own books.
While we’re done with this chapter of the Sandusky insurance coverage saga, there may be more to come: Penn State itself has sued one of its insurers, seeking coverage for a host of lawsuits it faces arising out of the abuse scandal. We’ll keep an eye on these and see if they yield any lessons; if so, we’ll pass them along.