PhillyDeals: Who will pay Penn State's costs for Sandusky case?

Pennsylvania State University assures students, taxpayers, and donors that their money won't pay the $100 million or more the school faces in costs and damages from the Jerry Sandusky child sex abuse and alleged cover-up.

Insurance policies - and interest on loans the university makes to some of its own programs - will pay the costs of the case, Penn State officials say.

But Penn State's longtime insurers say they won't pay, and it is doubtful that the school can force them.

The university is financed mostly by tuition, totaling around $1.4 billion in 2011; taxpayers, who gave Penn State around $900 million in state and federal funding; and donors, who provided around $300 million in gifts, pledges, private grants, and endowment spending.

Penn State faces $60 million in NCAA penalties, more than $10 million in investigative and public relations costs, and the possibility of many millions more in defense and damages for claims by victims of Sandusky's abuse. The failure to deal with Sandusky's behavior and the alleged cover-up of the years-long abuses, as detailed in the Freeh report, have wrecked the careers and reputations of the late head football coach Joe Paterno and some of the highest-ranking officers of the university.

"We will not use state or philanthropic money to pay the fine," the school said in a statement, referring to the $60 million penalty imposed by the NCAA. Similarly, legal defense and public relations costs "are not funded by student tuition, taxpayer funds or donations," the university said.

Instead, the university's general-liability and directors-and-officers insurance policies should "cover the defense of claims," while Penn State can use the interest from loans it makes to its own affiliated programs to pay larger costs, according to the school.

Of course, at today's low interest rates, you'd have to divert the income from a very large asset base, or over many years, to raise many millions.

Insurers say they won't pay, either.

Pennsylvania Manufacturers' Association Insurance Co., the Blue Bell company formerly owned by the state's largest industrial employers, covered Penn State against general-liability claims since at least the 1970s.

But in January, PMA served notice on Penn State, in a lawsuit in Philadelphia Common Pleas Court, that it had no intention of paying costs or damages to cover lawsuits by Sandusky's victims from the policy then in force.

PMA was responding to Penn State's request to defend one of the first lawsuits by an alleged Sandusky victim. But the policy, written in 2004, does not cover that lawsuit, PMA argued. It made the following points: The policy excludes claims of "bodily injury and mental anguish," the alleged sexual abuse took place before the policy was in force, an earlier policy excludes claims of abuse or molestation, and the policy excludes "intentional acts."

The suit at first left open the possibility PMA might pay defense costs for any abuse committed before March 1992.

But PMA amended its complaint following the Freeh report, which criticized administrators' failure to stop Sandusky. The amendment argued that the school's administrators concealed knowledge of Sandusky's abuses, giving PMA another legal reason not to pay.

Penn State spokesman David La Torre said the university stood by its earlier statement about how it would pay costs and claims.

Could Penn State claim protection under the old doctrine of "sovereign immunity," which limits suits against government institutions?

The school claims to be public when it comes to qualifying for taxpayer-funded retiree pensions. But it insists it is private when it doesn't want to reveal secrets under the state right-to-know law. Plus, sovereign immunity does not typically protect even publicly supported schools from serious liability claims, notes Peter Prinsen, general counsel at Graham Co., a Philadelphia-based commercial-insurance broker with a national clientele.

What about directors' and operators' insurance that covers claims against executives? "Even if a policy doesn't have a sexual-molestation exclusion, it would probably have a bodily-injury exclusion" that could force the school, not the insurer, to pay, said Jeanne Oronzio, senior technical specialist at Graham.

Insurers have been demanding tougher protections against potential staff abusers at religious institutions since damage awards against Catholic groups exploded in the 1990s, says Terry Tracy, head of the executive-risk practice group at Conner Strong & Buckelew, a Philadelphia-based commercial insurance brokerage. (Conner Strong chairman George Norcross is a partner in the company that owns The Inquirer.)

"This has changed the field," Tracy told me. Insurers who cover churches "are asking for a lot more documentation of policies and procedures. They're much more careful where and when they offer broad sexual-abuse coverage." He expects colleges will now follow.

That includes, for example, demanding top administrators and boards of directors to know and enforce the use of background checks, mandatory incident reporting, and other anti-abuse policies, said Conner Strong managing director Frank C. Proctor.

Meanwhile, claims against Penn State pile up.

"Who ultimately pays is the million-dollar question," said Proctor.

We invite you to comment on this story by clicking here. Comments will be moderated.