IADC Committee Newsletter

On March 1, 2013, U.S. District Judge Yvette Kane of the Middle District of Pennsylvania held that Federal Insurance Co. (“Federal”) owed no duty to indemnify Jerry Sandusky’s for legal fees incurred defending his criminal and civil actions.  The Second Mile, Sandusky’s charity, purchased Directors & Officers Liability and Entity Liability Coverage (“D & O”) and Employment Practices Liability Coverage (“EPL”) from Federal effective April 1, 2011 through April 1, 2012. The policy provided coverage for The Second Mile, its directors and officers on a “claims made” basis.  This claim for reimbursement of legal fees arose from the Pennsylvania Grand Jury which charged Sandusky with multiple crimes related to his alleged sexual abuse of several male children, the criminal trial in which he was found guilty and sentenced to prison and the civil action filed against him in the Philadelphia Court of Common Pleas.

In December 2011, Sandusky filed a claim with Federal seeking coverage under the D & O and EPL policies purchased by The Second Mile. Federal responded by agreeing to defend him under a reservation of all rights and to advance $125,000 to Sandusky’s criminal defense attorney. On the same day, Federal brought a declaratory judgment action against Sandusky, seeking a ruling that it was not obligated to provide coverage.  In March 2012, Federal moved for a judgment on the pleadings, arguing that insurance coverage for the allegations against Sandusky violated public policy.  The Court held that Pennsylvania’s public policy does not permit the enforcement of the insurance policy issued to The Second Mile to the extent that it requires the indemnification of Sandusky for civil liability arising out of his alleged sexual abuse of children.  However, the court deferred answering the question of whether Federal was obligated to provide Sandusky with a legal defense in his civil and criminal actions. Because Federal’s motion related solely to its argument that coverage should be voided as contrary to public policy, the court did not determine whether the policy actually covered Sandusky’s defense costs.

In its latest motion for summary judgment, Federal sought a declaration that it had no duty to defend or indemnify Sandusky, arguing that his alleged wrongful acts were not committed in an “insured capacity,” i.e. in his role as a director, officer or employee of The Second Mile.  Federal also renewed its argument that coverage for Sandusky’s acts violated public policy. It also argued that no further discovery was necessary as collateral estoppel precluded the denial of facts underlying his criminal conviction.

Sandusky opposed the motion, arguing that “insured capacity” as defined in the policy was ambiguous.  He also requested the opportunity to conduct discovery related to language contained in other Federal policies to exclude coverage for sexual abuse or molestation, information related to that exclusion that Federal submitted to the Pennsylvania Department of Insurance and Federal’s underwriting manuals.  Finally, Sandusky requested the opportunity to review the claims files related to the Federal policy.

Judge Kane rejected Sandusky’s arguments, holding for Federal because she found that Sandusky’s serial child abuse did not take place in his role as an agent of the charity, despite Sandusky’s meeting his victims through his work with The Second Mile.  She wrote that, “[a]pplying the facts set forth in the criminal and civil claims against defendant Sandusky to the language of the insurance policy leads to the clear conclusion that defendant Sandusky’s offenses against children . . . were not conducted in his capacity as an employee or executive of The Second Mile.”  Specifically, Judge Kane reasoned that the sexual assaults described in the Grand Jury report took place in the “basement of Defendant Sandusky’shome, at a hotel, in Defendant’s car, and on the Penn State campus.”  Similarly, the civil complaint contained allegations that Sandusky’s abuse took place in the “facilities of Penn State, including the football locker room, within Philadelphia County, at out-of- state facilities connected with a Penn State bowl game, and at the Sanduskyhome.”

However, the civil complaint also contained allegations that Sandusky “molested multiple victims through his activities with Second Mile and Penn State, dating back to the 1970’s,” and that some of the abuse occurred “during the course of activities of Second Mile.”  Judge Kane concluded that those allegations did not trigger coverage reasoning that the sexual molestation which occurred “during the course of activities of Second Mile . . . cannot be said to have been in Sandusky’scapacity as an executive or employee of The Second Mile.”  To support this conclusion, Judge Kane reasoned that Sandusky did not engage in wrongful conduct “in furtherance of his duties for The Second Mile.”  The fact that Sanduskymet his victims through his work with The Second Mile “did not change that his sexual abuse of children was personal in nature, and performed in his individual capacity.” Consequently, the court ruled that the Federal policy did not cover Sandusky’s acts of sexual abuse and that no further discovery was necessary.

This decision is consistent with Pennsylvania law which has traditionally upheld the insurer’s right to disclaim coverage in sexual molestation cases. In finding for insurers, the Courts have held that public policy cannot condone requiring insurance coverage for such abhorrent conduct. Insurers have utilized this public policy argument to support their contention that this type of conduct does not constitute an occurrence, that the expected or intended exclusion would apply, or in this case, his conduct did not fall within Sandusky’s capacity as an executive or employee of Second Mile.