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Federal Insurance Company v. Gerald A. Sandusky

June 4, 2012

FEDERAL INSURANCE COMPANY,
PLAINTIFF
v.
GERALD A. SANDUSKY, DEFENDANT



The opinion of the court was delivered by: (Chief Judge Kane)

MEMORANDUM

Plaintiff Federal Insurance Company brought this civil action seeking a declaration of its obligations under an insurance policy issued to The Second Mile, a non-profit organization. (Doc. No. 1.) Currently pending before the Court is Plaintiff's motion for judgment on the pleadings. (Doc. No. 23.) In its motion, Plaintiff asks the Court to strike as against public policy any obligations it may owe to provide indemnity or defense costs to one Gerald A. Sandusky, an officer or agent of The Second Mile. The Court heard argument on the motion on May 22, 2012. The motion is now ripe, and for the reasons that follow, the Court will grant the motion in part and deny the motion in part.

I. BACKGROUND

A. The Insurance Policy

On March 22, 2011, Federal contracted to insure The Second Mile and all of its directors and officers for the period of April 1, 2011, to April 1, 2012, on a "claims made" basis for both Directors & Officers Liability and Entity Liability Coverage Section ("D&O") and Employment Practices Liability Coverage Section ("EPL").

The D&O section provides that Federal shall indemnify any "Loss" which an Insured Person becomes obligated to pay for a wrongful act committed, attempted, or allegedly committed by an Insured Person. The EPL section provides that Federal shall pay "Loss on account of any Third Party Claim," which includes amounts that an insured becomes obligated to pay for civil proceedings arising from "sexual harassment, including unwelcome sexual advances, requests for sexual favors or other conduct of a sexual nature against a Third Party." Under both the D&O and EPL coverage, Federal has included within the definition of "Loss" the costs of defending civil actions and criminal prosecutions. The policy liability section of the policy includes a $1,000,000 liability limit for all claims under all liability sections of the policy for each policy year, exclusive of defense costs. The parties agree that Defendant Sandusky, who has served in various roles for The Second Mile, facially meets the definition of an "Insured Person" under both the D&O and EPL sections of the insurance policy.

B. The Sandusky Claim

On November 5, 2011, Pennsylvania's Thirty-Third Statewide Investigating Grand Jury returned a report regarding an investigation of Defendant Sandusky. The Grand Jury report identified eight minor male children whom Defendant Sandusky allegedly sexually abused. As a result of the Grand Jury report, Defendant Sandusky has been charged with forty criminal counts, including but not limited to counts for involuntary deviate sexual intercourse, aggravated indecent assault, unlawful contact with a minor, endangering the welfare of a child, and corruption of minors. Subsequently, the Grand Jury found that Defendant Sandusky engaged in unlawful acts with two additional male minors, and Defendant Sandusky was charged with twelve additional criminal counts of sexual abuse. Defendant Sandusky denies the criminal allegations against him and maintains his innocence.

Defendant Sandusky has also been named as a defendant in a civil action filed in the Court of Common Pleas of Philadelphia, John Doe A v. The Second Mile, Gerald Sandusky, and The Pennsylvania State University. In the civil action, John Doe A alleges that Defendant Sandusky sexually abused him over one hundred times and that he molested multiple other victims. Defendant Sandusky denies the allegations of the civil complaint.

On December 16, 2011, Defendant Sandusky informed Plaintiff that he is seeking coverage under the insurance policy for loss related to the civil complaint and the criminal charges under both the D&O and EPL sections of the policy. (See Doc. No. 32-3 at 2.) In response, on December 23, 2011, Plaintiff informed Defendant Sandusky that it would provide him with a defense in the civil and criminal matters, with a reservation of all rights available at law to deny coverage. (Id. at 9-10.) Thereafter, Federal advanced $125,000 to Sandusky's criminal defense attorney, subject to its reservation of rights.

C. Plaintiff's Complaint and Motion

On December 23, 2011, Federal brought this declaratory judgment action seeking a declaration that it is not required to provide insurance coverage to Defendant Sandusky with respect to the criminal charges and civil complaint against him. Federal alleges that no coverage is owed to Sandusky under the contract because Sandusky was not acting in an insured capacity as an employee or executive of The Second Mile, if and when he committed the alleged criminal acts, and because the exclusions contained in the D&O policy -- for bodily injury and emotional distress, willful statutory violations, and sexual harassment of persons that are not insured -- limit or exclude coverage. No discovery has occurred that would enable the Court to resolve these coverage issues. However, Federal suggests that the Court should decide Sandusky's rights under the insurance policy at this early stage, without the benefit of a factual record. Federal urges the Court to set aside the outstanding issues regarding coverage and decide Sandusky's right to coverage purely on public policy grounds.

Plaintiff argues 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. Therefore, Plaintiff argues that it should not be required to defend or indemnify against damages arising out of ...


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