In my last post (“PennState/PMA Coverage Battle Heats Up”), I discussed variousGeneral Liability (GL) coverage issues that have arisen in thebattle that Penn State is waging with insurer PMA over liabilityinsurance for the first lawsuit (John Doe A) in the Jerry Sanduskysexual-abuse case. Other arguments undoubtedly will arise as moresuits are filed by other alleged victims.

While the university has purchased its GL insurance from PMAcontinuously since the 1950s, its Educators Legal Liability (ELL)coverage reportedly is written by United Educators. The ELL policyis similar to a Directors & Officers (D&O) policy butaddresses exposures unique to educators and educationalinstitutions. According to its marketing materials, UnitedEducators is a non-assessable reciprocal association owned andgoverned by 1,200 independent schools, public school districts,public school pools, colleges, universities and educationassociations. The company bills itself as “Education's Own”insurer.

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While Penn State is in a heated public debate with PMA overdefense costs and coverage on its GL policy, there has been nopublic debate with United Educators. It is probable that UnitedEducators will work with Penn State on the potential issues insteadof first seeking coverage asylum in the courts. That is what groupssuch as United Educators typically do.

United Educators provides not only typical “wrongful act”coverage for the university's trustees, officers and employees, butit also provides coverage for allegations such as failure toeducate and failure to supervise. While the ELL policy is broaderthan a D&O policy, it still has coverage limitations and isknown to adhere to strict underwriting discipline. The group'sclaims and litigation managers will have to carefully considerseveral potential barriers to payments for defense andindemnification in the Penn State situation.

(Before I begin it is important to qualify these comments: Ido not have a copy of Penn State's ELL policy, and the sampleUnited Educators' coverage form I do have may not be the editionused for Penn State. As a result, this discussion by necessity isgeneral in nature.)

The first potential barrier is the question of the coverageapplication(s) that the university submitted over the years.Applications for D&O and ELL insurance typically includewarranties under which the insureds attest that the information inthe application is complete and correct. Misrepresentations thatmaterially affect the underwriting of the risk can result in claimdenials or total rescission of the policy. It is probable thatpossible application warranty statements will be reviewed.

The ELL form I have includes an exclusion forknowledge of prior circumstances. It states that circumstances thatreasonably might lead to a claim, which any officer knew aboutprior to the date of first coverage, are excluded. There is anexception for claims arising from such circumstances if the claimis made more than three years after the date of first coverage.Application of this exclusion would depend upon the dates whenofficers knew about the alleged abusive situations and the timingof the John Doe A claim.

The form also includes an exclusion for loss related to orarising out of “bodily injury, death, mental injury or emotionaldistress…from any cause including but not limited to assault andbattery, sexual harassment, rape, molestation or any negligencesuch as negligent hiring, training, retention, supervision orreferral of employees…” Serious review of this type of exclusionwill be necessary if it appears on the ELL policies being reviewedfor coverage.

While Pennsylvania has permitted insurers to pay for punitivedamages arising from vicarious liability, the ELL form I havelimits payment for punitive or multiplied damages and penalties tocivil penalties that can be measured by actual damage. This islimited to $1,000,000.

The other potential minefield is similar to that already beingargued with PMA: How long has United Educators provided the ELLinsurance, and is the current policy applicable or will a previouspolicy apply? This issue raises questions that are similar to thosebeing argued with PMA on the GL side.

Only time will tell whether any or all of these issues arise—aswell as what else comes to light. Coverage also may be available onother policies, such as an Umbrella, but no others have beenpublicly discussed. Regardless of public opinion on what shouldhappen here, the courts undoubtedly will be occupied in the comingmonths unraveling and interpreting the insurance coverage that theuniversity is trying to tap for defense and indemnification.