I remember sitting in a continuing legal education class once, where the speaker was an experienced employment defense lawyer. He said that, normally, he liked to open his talks with a funny story or a joke, but he couldn’t do that during this particular talk, because there was absolutely nothing funny about sexual harassment; in many instances, it ruined lives. While I like to keep most of these posts somewhat light, the horrible events that took place at Penn State University fall into that “nothing funny” category. I’m sure you’re aware of the widely-reported situation, so there’s no need to provide great detail. Briefly, Jerry Sandusky, an assistant football coach to the legendary Penn State head coach Joe Paterno, was a pedophile who abused young boys on and around the Penn State campus for many years. He’s now in jail, where he belongs, and a good argument can be made that the whole debacle literally killed Coach Paterno.

As you can imagine, the terrible events spawned numerous legal proceedings, and wherever there are liability suits, there are usually insurance claims. Penn State paid out millions in settlements to Sandusky’s victims, and one of the issues was whether Penn State’s commercial general liability insurer, Pennsylvania Manufacturers, should cover some or all of those costs.

Under many of the insurance policies, that issue turned on whether Sandusky was acting within the scope of his employment when he committed his terrible crimes. That’s because the policies contained a “Abuse or Molestation” Exclusion (or “AME”), which provided that coverage would not apply to bodily injury arising out of “the actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured.”  The policies defined “insured” to include Penn State’s employees, “but only for acts within the scope of their employment by [Penn State],” or “while performing duties related to the conduct of [Penn State’s] business.”

I think you can see where this is going.

(By the way, the question of whether an employee is acting “within the scope of employment” can be very important in a number of different contexts. For example, depending upon the circumstances, the answer to that question may govern whether an injured employee will be compensated by workers’ compensation or general liability insurance. Sometimes, a corporate policyholder has an interest in having a claim processed under one of those types of policies and not the other.)

The carrier, naturally, took the position that all of Sandusky’s acts of molestation took place while Sandusky was “performing duties related to the conduct of [Penn State’s] business’” and that therefore there was no coverage.  The trial court agreed, essentially ruling that because Sandusky used his status as a Penn State football coach to attract his victims, he was acting as an “insured” within the meaning of the policy. In so holding, the court wrote the following (very unfortunately worded) sentences: “When he brought the children on campus and abused them in the locker room, or took them with him to PSU football games and abused them in motel rooms, he was simultaneously enjoying the privileges and perquisites of his position as a PSU Assistant Coach. His concurrent, non-abusive, acts on campus and at games were ‘acts within the scope of his employment by [PSU]’ or ‘duties related to the conduct of [PSU’s] business.’”

The Court also wrote: “Sandusky’s acts of abuse were obviously not part of his job. To use an employee’s job description to protect the insured from application of the AME would render the exclusion meaningless in every instance of abuse. The court will not do so.”

Respectfully, I can’t help but conclude that this case is a paradigm example of bad facts making bad law. If this Court is correct, it means that even if an employee goes rogue and commits horrendous (criminal) acts not authorized by the employer, he or she is potentially acting within the “scope of employment” for insurance purposes.  If that’s what carriers want the AME to mean, then they should write it that way.

The coverage case, by the way, is being handled by my old boss Jerry Oshinsky, one of the best insurance lawyers in the country.  Penn State has moved for an interlocutory appeal of the Court’s ruling, and this is part of  what Jerry wrote in his brief: “The opinion could be argued to turn the law of vicarious liability on its head…by seeking to impose ‘some responsibility’ upon employers for any tortious or criminal act their employees commit, based solely upon the title of the employee, regardless of whether the conduct occurs off-site, outside working hours, and well beyond the scope of the employee’s job duties and responsibilities. Under the opinion’s reasoning, the employee’s title supersedes the nature of the employer-employee relationship and its relation to the unlawful conduct.”

Interlocutory appeals (that is, appeals taken before all proceedings are closed in the trial court) are almost never granted.  If the appeals court declines to accept this interlocutory appeal, though, they’re going to hear about the issue again at the end of the trial court proceedings, for sure.

As an aside, this case goes to the heart of what risk management is all about. Insurance coverage should always be a last resort. Never count on it, because if a carrier can figure out a way not to cover a loss, the denial letter is coming. The best way to lessen your chances of liability is to have appropriate supervision and controls in place at all times, and to foster and encourage a proper reporting system within your organization, regardless of the potential bad publicity.  Larry Donnithorne’s little gem of a book “The West Point Way of Leadership” is required reading at our firm, and sets forth the following steps for ethical decision-making (also known as “choosing The Harder Right”), which should be considered by all leaders:

  1. What are the relevant facts of the situation?
  2. What are the alternative actions available?
  3. Who will be affected?
  4. What moral principles are involved?
  5. How would these principles be advanced or violated by each alternative action?

You can read the trial court’s Sandusky decision here.  The case raises several other important issues, and I will discuss some of them in future posts.