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Sandusky case means complex civil lawsuits for Penn State

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Sandusky case means complex civil lawsuits for Penn State

STATE COLLEGE, Pa.—Pennsylvania State University faces civil lawsuits that may prove to be complex and difficult to resolve following the conviction of former Assistant Football Coach Gerald A. Sandusky of child sexual abuse.

The university has urged victims to participate in a program to quickly address their concerns and compensate them for claims related to the university resulting from Mr. Sandusky's conduct, the State College, Pa.-based school said in a statement hours after Mr. Sandusky's conviction.

He was found guilty of 45 of the 48 sex-related counts for child sexual abuse involving 10 victims over 18 years, often on Penn State property.

“The purpose of the program is simple—the university wants to provide a forum where the university can privately, expeditiously and fairly address the victims' concerns and compensate them for claims relating to the university,” Penn State President Rodney Erickson said in the statement.

Penn State's commercial general liability insurer, Pennsylvania Manufacturers' Assn. Insurance Co., filed suit in January seeking a declaratory judgment that Penn State is not entitled to coverage and a defense under certain policies issued by the Blue Bell, Pa.-based insurer.

Penn State countersued PMA for refusing to provide coverage in a civil lawsuit filed in November alleging that the university knew of and failed to prevent Mr. Sandusky's sexual misconduct. No trial date has been set yet.

According to news reports, eight of the known victims have hired attorneys to explore civil litigation against Penn State.

Penn State declined to comment on whether any claims have been settled.

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As Penn State attempts to resolve civil litigation, “it's going to be very complicated and difficult,” said Teena Hostovich, executive vp at Lockton Insurance Brokers L.L.C. in Los Angeles.

The criminal conviction of Mr. Sandusky strengthens the position of any claimants because it's been established by a court that the perpetrator was in fact guilty, Ms. Hostovich said.

“I think there will be a lot of discussion between the various law firms and counsel for the university and for the insurance company, because it is obviously a good thing to resolve these claims swiftly,” she said. “It brings closure for the families, and it also allows Penn State to get through this, regroup and move on. But it's going to be very difficult and challenging.”

With an operating budget of $4.5 billion in 2011, 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.

Penn State has a captive insurer, Nittany Insurance Co., which it formed in 1993 in Vermont. Coverage provided by the captive includes general and professional liability, according to Penn State's website. The university said it expects its general liability and directors and officers insurance policies to cover the defense claims brought against the school, its officers, employees and trustees. If funds to pay claims and legal costs are exhausted, other sources of revenue other than alumni donations, student tuition and taxpayer money will be used, according to the university's website.

Nittany writes a relatively small deductible-reimbursement coverage before the commercial D&O policy attaches, a Penn State spokeswoman said in an email.

While Penn State's D&O liability insurers have tentatively agreed to reimburse the university for defense costs related to the Sandusky case, “discussions with our insurer are ongoing, as the claims subject to coverage evolve over time,” a Penn State spokesman said.

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The university said in its countersuit against PMA that its policies with the insurer are standard form CGL policies using the policy form devised by the Insurance Services Office Inc. Each policy period has an aggregate limit of $3 million and a limit of $2 million per occurrence, according to court documents.

“The university purchases excess liability insurance from various insurers, which have changed over the years,” the Penn State spokesman said in an email.

From Penn State's perspective, the coverage litigation may prove to be useful, said Tom Baker, professor of law at the University of Pennsylvania Law School in Philadelphia.

“That actually can give Penn State more freedom in handling the settlements itself because if the insurance company isn't stepping up to the plate, they can't very well say, "Don't take this settlement,'” Mr. Baker said. “It's just a question of how big the check it's going to be writing.”

Steven B. Davis, partner and chair of the insurance practice group for Stradley Ronon Stevens & Young L.L.P. in Philadelphia, said an insurance coverage dispute sometimes drives an organization's settlement strategy.

“It's often a dicey position for both parties to be in,” he said. The insured, in this case Penn State, may want to say things during civil litigation that may negatively impact their coverage. Conversely, it's not usually the insurer's desire to have to say things in the coverage litigation that might impact the underlying civil litigation, Mr. Davis said.

“In a case of this nature, with the reputational risk issues involved, I can certainly agree that an early resolution strategy makes complete sense...especially if there's little likelihood of success with insurance coverage monies,” Mr. Davis said.

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Penn State's willingness to resolve claims quickly shouldn't be taken at face value, said John Roskopf, Chicago-based vp of risk management for Educational & Institutional Insurance Administrators Inc. in Chicago.

“Their desire to settle these matters does not necessarily equate into a willingness to simply roll over and pay a lot of money,” he said, noting that the university most likely will look at each claim individually and assess damages and determine potential actions.

“For them to put a fence around their own liability and try to get this resolved and get releases is the right thing to do in terms of managing their reputation, focusing on the future, and definitely the right thing to do between managing that balance between litigation and settlement costs,” Mr. Roskopf said. “The legal fees in this could be huge, and it could take years.”