The evolving Jerry Sandusky scandal continues to impact the professional liability community. Most recently, the Middle District of Pennsylvania reached a decision with major implications on the application of D&O – Director’s and Officer’s Insurance. In deciding that Sandusky’s acts occurred outside the scope of his role with the Second Mile even though the conduct occurred during Second Mile events, the court may have also exposed directors and officers to increased risk of personal exposure.
A key issue in Federal Insurance Co. v. Sandusky, No. 4:11-cv-2375 (M.D. Pa. Mar. 1, 2013) was whether an insurance carrier had a duty to defend Sandusky under a blended D&O and EPLI (Employment Practices Liability Insurance policy) against the well publicized sex abuse charges. The policy had been issued to the Second Mile. Sandusky was considered an insured under that policy because of his status as an executive of the organization during the relevant time period.
Middle District of Pennsylvania Chief Judge Yvette Kane wrote in the court’s opinion that the insurance carrier was not required to provide coverage to Sandusky in the criminal or civil actions. In reaching this conclusion, Judge Kane considered whether Sandusky’s actions were performed within the scope of his duties as a director and officer and, if so, whether coverage would apply. Although Sandusky met some of his victims through the nonprofit and at least some of the wrongdoing allegedly occurred during the course of Second Mile activities, the court held that Sandusky’s actions were outside the scope of his role as an officer. The court concluded that his conduct with the victims was “personal” and performed in his individual capacity.
Although most would not question the specific application of this decision to Sandusky, the holding has broader implications particularly on the application of D&O insurance moving forward. An excellent source for D&O discussions and fellow blogger, The D&O Diary, aptly questioned this decision as follows:
“When Judge Kane says that her conclusion that Sandusky was not acting in an insured capacity applies even though he allegedly abused victims “during the course of activities of Second Mile,” that’s when I get uncomfortable with this result. It would be very easy to shrug this result off because of the terrible things for which Sandusky was convicted. But because Judge Kane’s conclusion does not depend on the conviction, this same result could apply to any nonprofit official, even one who is falsely accused and would otherwise be forced to defend him or herself against outrageous allegations without insurance and at their own expense.”
The Sandusky court arguably set the precedent that an officer’s actions that have any personal undertones will not be considered a covered offense even if the action coincided with an event related to the organization. This may open the door to increased individual liability on the part of the officer and less vicarious liability for the organization. Query whether this decision will have a potentially unintended chilling effect on the participation level in nonprofit organizations due to fear of personal exposure.