ANALYSIS

The legal troubles faced by Penn State in the wake of the Jerry Sandusky sex-abuse scandal took a big turn last month when reports surfaced that the university's board of trustees has agreed to pay $60 million to resolve a majority of claims Sandusky's accusers made against the school.

Though there are some unresolved cases and little information about when those claimants will settle, Penn State's biggest legal concern will likely soon become recovering the money from its various insurers and other parties liable for Sandusky's serial child molestation.

Penn State has been in court with its main primary liability carrier of decades, Pennsylvania Manufacturers' Association Insurance Co., over the extent to which the insurance company must cover the university's defense costs and payouts tied to the Sandusky scandal. The insurance case came just months after Sandusky and two former Penn State administrators were criminally charged and as civil claims against the university by Sandusky's accusers became increasingly likely.

From the day of Sandusky's arrest in November 2011, Penn State has been faced with a public relations challenge of unprecedented proportions in American higher education.

View these two realities together and the result is a clash between a somewhat traditional insurance coverage fight, which tends to take a long time to resolve, and the school's massive institutional PR prerogative to resolve things quickly.

Accordingly, Penn State has indicated it will pay the claimants first and try to recoup from other parties second.

Asked whether the school will wait to pay the settlements until the insurance litigation is complete, Penn State spokesman David La Torre said claimants will be paid in full once the settlements are finalized and "there won't be any delay due to insurance litigation."

Now, the question becomes how the announcement of the tentative resolution of many of the cases will affect the insurance case's resolution.

PMA's attorney, Steven J. Engelmyer of Kleinbard Bell & Brecker, declined to comment for this story.

Penn State's lead counsel in the insurance dispute said the school's position remains the same as it was when PMA first sued the school.

"The university believes that the claims being settled should be covered by insurance," said Jerold Oshinsky of Kasowitz Benson Torres & Friedman in Los Angeles. "We now have concrete numbers to present to the insurers."

'Informal Discovery'

As for which of the university's PMA policies are invoked, and whether excess carriers' policies are triggered, Oshinsky said that depends on which claims have settled.

Accordingly, sources close to the negotiations said the university conducted "informal discovery" during the settlement negotiations, with the help of the mediation firm Feinberg Rozen, in order to pave the way for recouping costs from other liable parties — such as Sandusky's charity, The Second Mile — and insurance companies.

"It was no secret to me that Penn State needed formal and significant documentation of not only [my client's] claims but all the claims for the purposes of justifying payments to the Penn State board of trustees but also for making claims against any applicable insurance policies," said Thomas R. Kline, an attorney representing the man known as Victim 5.

The fact of the matter, Kline said, is that Penn State has "the time and wherewithal" to pay now and recover later.

And some legal precedent, he added.

Kline pointed to a 1987 decision out of the U.S. Court of Appeals for the Third Circuit, which he said had "many similarities" to Penn State's case.

In Trustees of the University of Pennsylvania v. Lexington Insurance, the Third Circuit ruled that Lexington Insurance Co. was not prejudiced after it alleged the Hospital of the University of Pennsylvania gave it late notice of a woman's medical malpractice claims.

The court affirmed a $4.8 million judgment out of the U.S. District Court for the Eastern District of Pennsylvania in favor of HUP and against Lexington, the hospital's excess carrier.

Pointing to the case, Kline said if a carrier is going to deny coverage, it "better do so with very good and sound basis before walking away from an insured," which he said is "highly disfavored" by the courts.

Asked about what effect the accusers' apparent settlements with Penn State will have on the PMA case, Kline said: "I think it makes it much clearer when most of the claims are liquidated as to what is at dispute."

Details about most of the individual Sandusky cases, however, will probably never be made public outside of the accounts of the 10 victims identified in criminal charges against Sandusky.

But representatives of Penn State do have facts from the informal discovery during their settlement negotiations that will likely serve as a roadmap as to questions like which policies are triggered and which exclusions apply.

The university had paid close to $47 million in legal fees and to consultants and PR firms because of the Sandusky matter as of the end of April, according to its website.

That includes payment of one-fifth of the $60 million fine the National Collegiate Athletic Association imposed on Penn State, more than $8 million to a legal team Penn State hired led by Louis Freeh to investigate the university's handling of allegations against Sandusky, $6.5 million to lawyers and consultants for the board of trustees, $10 million for the university's legal services and defense costs, and close to $6 million for the defense of indemnified persons. Based on some of the lawyers and law firms mentioned on that list (Farrell & Reisinger, Caroline M. Roberto, Vaira & Riley and Schnader Harrison Segal & Lewis), the figure includes the defense costs of three former administrators now headed to trial on charges that they covered up reports of Sandusky molesting children.

At the top of Penn State's public bill, the university notes: "Some of the fees and costs set forth below are expected to be reimbursed under the university's insurance policies."

The Insurance Case

The case of Pennsylvania Manufacturers' Association Insurance v. Pennsylvania State University, since it was filed in January 2012, has mostly been a protracted venue dispute in which the university has tried and failed several times to get the case out of Philadelphia.

PMA even moved for sanctions to stop the school from fighting the venue issue. The presiding judge declined to penalize the university but did issue an opinion in April of this year making it clear that the case would be tried in the Philadelphia Court of Common Pleas, where PMA first filed its declaratory judgment at the beginning of last year.

Penn State filed two of its own lawsuits in the Centre County Court of Common Pleas, alleging breach of contract, anticipatory breach of contract and bad faith.

In PMA's initial filing, however, the insurer pointed to an "abuse or molestation exclusion" in the second of three consecutive general liability policies that the company said would excuse it from paying for the school's legal costs.

However, PMA acknowledged at that time that a lot would depend on discovery in the lawsuit that triggered the complaint — Doe A v. The Second Mile — the first lawsuit naming Penn State as a defendant related to Sandusky's sexual abuse. In the lawsuit, the insurer stated that if it were to be established that the alleged abuse by Sandusky started before March 1, 1992, then Penn State could claim coverage under a previous policy. Two other policies from 1992 and 2004 barred coverage, it said, despite contentions to the contrary in the university's claim for coverage.

Penn State initially sought coverage under its 2004 policy, claiming a "'continuous trigger'" theory, according to the complaint, meaning that allegations in Doe A's lawsuit triggered coverage under any policy from the time the victim was allegedly first molested through the time period in which he suffered as a result of the abuse.

Reached last week, Oshinsky said the university's position on the continuous trigger theory remains the same.

PMA said in its complaint that the allegations of the Doe A complaint trigger only the policy in place when Sandusky allegedly started abusing him and when injury was manifested.

Doe A, whose real name is Travis Weaver, has since gone public with his claims that Sandusky abused him more than 100 times between 1992 and 1996. Weaver, however, was not one of the 10 victims whose accusations were part of the 48 counts of child sex abuse on which Sandusky was tried. (The former assistant football coach was convicted of 45 of those counts in June 2012.)

Since Weaver's lawsuit, it has been reported that more than 30 claimants have been negotiating with Penn State, and a majority of those claims have settled pending final paperwork, according to knowledgable sources.

When Penn State sued PMA for the second time, the school's 18-page complaint identified five lawsuits naming the university as a defendant and another 25 claimants whose attorneys have written letters to the school related to accusations against Sandusky. The lawsuit reserved Penn State's right to amend its complaint if more people bring similar claims.

Penn State also noted in the second suit that it provided notice to PMA as it received communications and court summons from each complainant. The lawsuit again alleged breach of contract, anticipatory breach of contract and bad faith against PMA.

At the time, a lawyer representing the school deferred comment to a Penn State press release.

"Having been a major client of PMA since the 1950s, Penn State is disappointed by the response of this insurance firm to the university's situation," the release said. "By refusing to honor its obligations to provide [full] coverage to Penn State, PMA has essentially abandoned a decades-long client. Penn State will aggressively pursue the coverage for which it has paid over $23 million since 1983 and to which it is entitled."