Pennsylvania Court Considers Coverage for Gerry Sandusky Under D&O Policy

In its recent decision in Federal Ins. Co. v. Sandusky, 2012 U.S. Dist. LEXIS 76880 (M.D. Pa. June 4, 2012), the United States District Court for the Middle District of Pennsylvania had occasion to consider whether a D&O insurer was required to defend an employee of the insured in connection with underlying criminal and civil matters arising out of alleged molestation of children.
Federal Insurance Company issued a directors and officers and employment practices policy to The Second Mile, a charitable organization founded in part by Gerry Sandusky, who has received great notoriety for having allegedly molested numerous children both during and after his time as a coach for the Penn State football team.  Following a grand jury investigation, Sandusky was charged with forty criminal counts, including sexual assault and unlawful contact with a minor.  Sandusky and The Second Mile were also named as defendants in a civil suit filed in Pennsylvania.  Sandusky sought coverage under the Federal policy, and Federal advanced Sandusky’s criminal attorney $125,000 in legal fees, subject to a reservation of rights.  Federal thereafter filed a declaratory judgment action.
Federal agreed that Sandusky qualified as an insured person under the policy.  It nevertheless sought a declaration that Sandusky was not entitled to coverage for the underlying criminal and civil matters because he was not acting in an insured capacity as an employee or executive of The Second Mile when he committed the alleged acts.  Federal also contended that the policy’s D&O coverage excluded bodily injury, willful statutory violations and sexual harassment.  Prior to commencing discovery, however, Federal moved for judgment on the pleadings, arguing that “were The Second Mile’s insurance policy ultimately interpreted to cover losses stemming from the allegations of sexual abuse and molestation of minors, the insurance policy would be void as against Pennsylvania’s public policy.”  Thus, before addressing the coverage issues stemming from the policy, Federal sought a judgment based solely on public policy grounds.
The court acknowledged that “[s]exual abuse and molestation of children are ‘so obviously … against the public health, safety, morals or welfare that there is a virtual unanimity of opinion with regard to it.”  This unanimity of opinion, explained the court, is reflected in numerous Pennsylvania laws concerning the safety of children.  The court further observed that “public policy bars enforcement of insurance contracts that indemnify insured persons for damages arising from reprehensible conduct.”  Given these factors, the court determined that Pennsylvania would deem unenforceable, as a matter of law, any contract indemnifying the perpetrator of intentional sexual molestation of children.  As the court explained:
Such a contract would allow an insured to shift the consequences of intentional, reprehensible conduct to an insurance company, thereby abdicating personal responsibility. It is entirely clear, and this Court holds, that the public policy of Pennsylvania as announced by its courts prohibits the reimbursement of Sandusky for any damage award that he may ultimately be found to owe arising from the allegations that he molested and sexually abused children.
While the court concluded that Sandusky was not entitled to indemnification for the alleged conduct, it nevertheless struggled with the issue of whether he was entitled to a defense.  The court noted that the issue of whether providing a defense in a sexual molestation case violates public policy was one of first impression under Pennsylvania law.  The court acknowledged that general rule that there can be no duty to defend allegations that are not potentially covered, but explained that “where, as here, an insurance policy specifically includes defense costs as covered loss, separate and apart from damages, the mechanical process of determining whether there could be coverage for damages in order to determine whether there is a duty to defend cannot be applied.”
Ultimately, the court avoided ruling on the issue of defense costs, explaining that “[w]ithout the benefit of a factual record, it is not entirely clear that Pennsylvania's public policy would prohibit enforcement of the insurance policy to the extent that it provides Sandusky with defense costs.”  The court specifically concluded that further development of facts through discovery could bear on the issue of the court’s public policy determination, such as whether Sandusky himself purchased the Federal policy and did so knowing that criminal charges were imminent.