With jury selection under way this week in the criminal child sex-abuse trial of Jerry Sandusky, the former Penn State assistant football coach suffered a setback in federal court when a judge ruled that the insurance company from which he was seeking coverage is not responsible for indemnifying him for damages that may arise from the allegations.

U.S. District Chief Judge Yvette Kane of the Middle District of Pennsylvania also discussed whether or not Federal Insurance Co. would be obligated to pay for Sandusky’s defense, but deferred answering the question until discovery provides a factual record.

On Dec. 16, Sandusky informed the company that insures the nonprofit organization that he started 35 years ago to help “at-risk” youth that he would be seeking coverage from its policy. The organization, The Second Mile, announced last month that it planned to transfer its assets and programs to a similar nonprofit, called Arrow, because after the allegations against Sandusky, “there would not be adequate support, including financial, from donors, volunteers and referring social service agencies to continue The Second Mile as its own entity.”

For a year starting from April 1, 2011, Federal Insurance Co. had a contract to cover The Second Mile and all of its directors and officers, which included a section stating that the company would indemnify any “‘loss’ which an insured person becomes obligated to pay for a wrongful act committed, attempted, or allegedly committed by an insured person,” according to Kane’s 12-page opinion.

However, she wrote, “significantly, in a case with facts analogous to the instant matter, the United States District Court for the Eastern District of Pennsylvania held that the defined and dominant public policy of Pennsylvania bars ‘insuring against damages resulting from sexual contacts between a public school teacher and his student.’”

Citing both judicial and legislative assertions, Kane held that well-defined public sentiment abhorrent of child sex-abuse would bar the enforcement of a contract that would indemnify a person convicted of such acts for damages.

“Such a contract would allow an insured to shift the consequences of intentional, reprehensible conduct to an insurance company, thereby abdicating personal responsibility,” Kane said. “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.”

Turning next to an issue of first impression, Kane said, “the Pennsylvania courts have not squarely addressed the remaining and most pressing issue before the court: whether in light of the strong public policy against allowing a perpetrator to insure against the consequences of his own intentional wrongdoing, Federal’s duty to provide Sandusky with a defense to a civil action or a criminal indictment is likewise unenforceable as against public policy because of the conduct alleged. On this issue, the court writes upon a blank slate.”

The general rule for determining whether an insurer has an obligation to defend the insured is if the allegations include claims that would be covered by the policy, according to the opinion.

“However, 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,” she said.

Kane noted that insurance policies that include coverage of defense costs in criminal cases are rare, but, she said, “it is possible to imagine valid public interest considerations that would favor the issuance of these policies.”

One argument in that regard could be that such a policy could enhance a nonprofit’s ability to recruit volunteers and executives “who might otherwise decline to serve because of the fear of vexatious lawsuits or even criminal prosecutions.

“It might also be argued that the presumption of innocence that remains a bedrock principle of our Constitution makes insurance to cover defense costs in the public interest,” she said.

Without the factual background that would come with discovery, Kane declined to answer a question that would have such broad implications: whether or not the insurance company was obligated to cover Sandusky’s defense costs.

It is “important to consider that issue on a full factual record,” because the opinion won’t just affect Sandusky, but will have a broad impact, said Brian Osias of McCarter & English, who represented Sandusky. “I think it was prudent for the court to carefully consider all angles,” he said.

Of why Sandusky wouldn’t have pursued coverage from the insurance company when he was first arrested in November, Osias said he was unsure.

“I could speculate,” he said. “He may just not have known about the coverage.”

It’s unusual for criminal defendants to seek coverage from an insurance policy as late in the process as this, said Michael Engle, a criminal defense attorney in Philadelphia.

“I find it unusual that they’d be seeking funds on the eve of trial,” he said, adding that it could suggest that Sandusky may be running out of money. Assuming that Sandusky knew about the policy early on, coverage likely could have been pursued immediately after the ex-coach’s arrest, he said.

“It’s curious,” Engle said of the action. But, he said of the case as a whole, “nothing’s been the norm.”

Daniel Rivetti of Robb Leonard Mulvihill in Pittsburgh represented Federal Insurance Co. and could not be reached for comment.

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the 12-page opinion in Federal Insurance Co. v. Sandusky, PICS No. 12-1081, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •