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D&O, employment practices insurers sing the Varsity Blues

Stanford University

Universities that have been drawn into the Operation Varsity Blues admissions scandal have put their directors and officers and employment practices liability insurers on notice of possible claims, observers say.

Doing so, experts say, helps ensure coverage under their policies this year and forestalls future policy exclusions.

But even if institutions are sued for their alleged parts in the scandal, they may have a relatively easy time defending the claims based on the circumstances surrounding the bribery scheme, experts say.

The FBI has charged 50 individuals, including some well-known celebrities, with participating in a plot to ensure their children’s admission into elite universities.

At least one lawsuit that names universities as defendants has been filed. Tyler Bendis et al. v. William “Rick” Singer et al. was originally filed in U.S. District Court in San Francisco in March, then transferred to federal court in San Jose, California.

The lawsuit, filed by students denied admission to a university caught in the scandal and their parents and which seeks class action status, charges eight universities were “negligent in failing to maintain adequate protocols and security measures in place to guarantee the sanctity of the college admissions process, and to ensure that their own employees were not engaged in these types of bribery schemes.”

Also named as defendants in the suit were Mr. Singer, who has been accused of being the scheme’s ringleader, and associated entities. Mr. Singer and his company, The Edge College & Career Network LLC, which is also known as The Key, allegedly helped wealthy students score better on college standardized tests by helping them cheat on their exams.

He was also accused of bribing college coaches and athletic officials to say a prospective student should be accepted because the student was a recruit for their sports team. Mr. Singer has pleaded guilty to charges including racketeering and money laundering.

The plaintiffs attorney in the case had no comment.

Michael B. Krackov, associate vice president and associate general counsel for resolutions management for Bethesda, Maryland-based United Educators Insurance, a Reciprocal Risk Retention Group, said United Educators policyholders that were named in the litigation have filed notice of possible claims, although he did not identify who they are.

In response to a query as to whether it had informed its insurers about possible claims, a spokeswoman for the University of Southern California in Los Angeles pointed to an April 24 statement in which it said two employees associated with the allegations have been placed on leave. Other universities did not respond to a request for comment.

William Passannante, a shareholder with Anderson Kill P.C. in New York, said it is possible universities are submitting a “notice of circumstance” to their insurers that a claim may arise.

“It’s a way to permit future claims to come into a current policy,” Mr. Passannante said.

Peter McDonough, vice president and general counsel of the Washington-based American Council on Education, a higher education association, said, “It would be reasonable to see whether (universities’) insurance vehicles might possibly be responsive to damages they have suffered as a result of being victimized, including the costs they may incur in dealing” with their legal expenses.

Bret Murray, national higher education practice leader for insurance brokerage Risk Strategies Brokerage Inc. in Boston, said institutions “certainly would make sure their carriers were on notice” about possible claims.

Complaints may fall under universities’ D&O polices, or their EPLI policies, if there are charges the institutions did not properly oversee the admissions process, although criminal allegations would be excluded under the coverage, Mr. Murray said.

Mr. McDonough said, “It seems quite clear to me that the institutions are victims” as well as the students who were denied admission because of the situation.

Mr. Krackov said the first legal battle with respect to the litigation filed will be whether the Northern District of California is the proper venue, given that most of the unviersities sued are located elsewhere.

Eric Pan, Rolling Meadows, Illinois-based managing director in the higher education practice for Arthur J. Gallagher & Co., said the scandal involves rogue employees, not a systemic issue, which presents more challenges for plaintiffs attorneys seeking to successfully sue the universities.

“It’s a very difficult case for those families to win,” he said. Assuming most of the universities had acceptance rates of less than 20%, it would-be “very hard to prove’” their children were next on the list to be admitted, “or jeopardized as a result of one person or a couple of people who got into the institution the wrong way. I think it’s hard to prove that, when the acceptance rates of these institutions are as low they are,” he said.

Mr. Pan said, “At this time, we don’t see a catastrophic exposure facing colleges and universities. We don’t see our insurance carriers being overly concerned about the allegations right now.”

Mr. Krackov said while he agrees it will be difficult for the plaintiffs to prevail, “The larger issue, at this point, is whether or not the claims, as they’re currently pled, are really amenable as to class treatment. I don’t think they are, but that will be up to the court to decide.”

He said he expects there will be “a lot of preliminary motions before this is even getting down to the substance of the matter.”

Other insurers had no comment or did not respond to requests for comment.



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