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Penn State scandal sharpens focus on risks

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Penn State scandal sharpens focus on risks

STATE COLLEGE, Pa.—Allegations of child sexual abuse by a former assistant football coach have rocked Pennsylvania State University, which faces federal allegations, litigation and even a review of its bond rating that will examine reputational damage and financial risk.

The university also may face unlimited legal liability in civil litigation, but Penn State said its directors and officers liability insurance will respond in the case.

Gerald A. Sandusky was arrested Nov. 5 on 40 counts related to the alleged sexual abuse, often on university property, of eight boys dating back to 1994.

Criticized for knowing about but failing to report the abuses to law enforcement officials, Penn State's university trustees removed legendary football coach Joe Paterno and President Graham Spanier. Two other officials have stepped down.

After the announcement of the charges against Mr. Sandusky, and charges of lying to a grand jury and failure to report to police against two senior Penn State officials, Marquette University and Syracuse University last week also faced allegations of failure to report sexual misconduct.

“I would suspect that the focus and the spotlight is on this now, and that would encourage some who may previously not have wanted to or not had the courage to or not felt compelled to step forward with allegations,” said Ron Hayes, risk manager for the Calcasieu Parish School Board in Lake Charles, La.

“One of the possible ripple effects of the Penn State episode will be that...from this point forward, it will be a lot more sober discussion because we're seeing the tremendous ramifications, the tragedy, the effect—all of these things are being amplified by what's happening post-Penn State,” Mr. Hayes said.

There are several steps risk managers at colleges and universities can take to avoid potential liability, experts say (see related story).

Christine Eick, executive director of risk management and safety at Alabama's Auburn University, said risk managers at universities now will pay close attention to areas of the college beyond those that frequently work with children.

“I think risk managers and university administrators are going to be looking at what happened at Penn State and say, "Do we need a broader policy?' instead of the policies specific to the different areas that they know of where children are coming on campus,” Ms. Eick said.

According to prosecutors, the inappropriate conduct by Mr. Sandusky often took place on Penn State premises where his youth charity held athletic camps.

Allegations of sexual misconduct can be very damaging to a school's reputation and “it's very difficult, if not impossible to measure those damages,” said Robert T. Lipps, executive director of Lockton Alliance for Ministry Protection, a San Francisco unit of Lockton Cos. L.L.C.

Moody's Investors Services Inc. already is weighing reputational damage. In a Nov. 11 statement, the New York-based rating agency said that it is reviewing Penn State's bond rating to assess fallout from the sexual misconduct allegations and that it “will evaluate the potential scope of reputational and financial risk arising from these events.”

“I'm not sure that reputations can be repaired once this occurs. I think it's a huge risk,” said Mr. Hayes.

The way to mitigate reputational risks would be “obviously to prevent it from occurring in the first place. It's a very simplistic answer but it's got to be there,” he said.

Exacerbating the problem, Penn State may face unlimited liability in civil litigation because it may not be able to invoke sovereign immunity, which protects state entities and employees from tort claims and imposes limits on liabilities, experts say.

“The most significant hurdle in the Penn State case is the (Pennsylvania) Sovereign Immunity Act,” said Larry Jackson, partner in the complex liability practice group at Nelson Levine de Luca & Horst L.L.C. in Blue Bell, Pa. “Arguably, Penn state would have sovereign immunity.”

However, Penn State Risk Officer Gary W. Langsdale, who declined to comment for this story, told Business Insurance in a 2009 interview that, “We are almost unique in that we don't enjoy any sovereign immunity.”

Penn State officials declined to comment on the sovereign immunity issue.

In addition, Mr. Hayes said insurers likely would look at all counts in the Penn State allegations as one occurrence.

“That means that the insurance resources would be even more limited because they pool everything together into one claim with one policy limit,” he said.

In an effort to prevent legal costs from falling on the public, the university's D&O insurance will help cover the costs of any lawsuits, Penn State's office of public information confirmed. Coverage details were not available.

Allegations of sexual misconduct typically are covered under a general liability policy, said John Roskopf, Chicago-based vp of risk management for Educational & Institutional Insurance Administrators Inc. in Chicago.

“However, some larger institutions may find it more appropriate to carve out sexual misconduct and either purchase the coverage separately or fund for it other ways and that would be through a captive or a large retention,” he said.

Mr. Roskopf noted that increasingly he's seen large deductibles for sexual misconduct, or in some instances a cap on the coverage, with punitive damages often excluded.

Typically, colleges buy CGL, D&O and educators legal liability polices, said Bonney Hebert, president of Academic Risk Resources & Insurance L.L.C. in Boston.

While the CGL policy steps in to cover third-party bodily injury and emotional distress, the D&O and educators legal liability would cover trustees, directors and officers, and the organization itself, she said. Such policies often include separation of insureds or severability provisions.

“The policy, according to these provisions, is not going to protect the individual who was untruthful, but continues to provide insurance for the rest of the institution and the other individuals,” Ms. Hebert said.

NOV. 4: A grand jury report investigating allegations of sexual misconduct against former Penn State assistant football coach Gerald A. Sandusky is released.

NOV. 5: Mr. Sandusky is arrested for allegedly sexually abusing eight boys since 1994. Tim Curly, Penn State's athletic director, and Gary Schultz, Penn State's senior vp of finance and business, are charged with perjury and failure to report.

NOV. 7: Penn State releases a statement that Messrs. Curley and Schultz have stepped down from their positions.

NOV. 9: Penn State announces that university President Graham Spanier and head football coach Joe Paterno were removed from their posts, effective immediately, for failing to

report the allegations against Mr. Sandusky.

NOV. 11: Trustee Ken Frazier is named as chair of a committee to undertake a complete investigation of the events that gave rise to the grand jury report.

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