Penn State Scandal: Despite Erickson's Claims, Lawsuit Insurance Not a Given

Adam Jacobi@Adam_JacobiBig Ten Football Lead WriterJuly 30, 2012

STATE COLLEGE, PA - JULY 22: Near the entrance of Beaver Stadium, a picture of former Penn State University football coach Joe Paterno hangs on the wall on July 22, 2012 in State College, Pennsylvania. Penn State's president Rodney Erickson made the decision Sunday to remove the Joe Paterno statue in the wake of the child sex scandal of former assistant football coach Jerry Sandusky. It's believed that Paterno had detailed knowledge of Jerry Sandusky sexually abusing children before and after Sandusky retired from coaching at Penn State. (Photo by Patrick Smith/Getty Images)
Patrick Smith/Getty Images

Penn State is gearing up for a round of lawsuits in the wake of the Jerry Sandusky abuse and coverup scandal, and those lawsuits will not be cheap. Penn State's liability in the scandal is essentially accepted as fact at this point, as the school has adopted the Freeh report as fact as part of the consent decree with the NCAA, and there's really no arguing your way out of that situation.

Thus, Penn State's going to try to settle out of court as much as possible (which makes sense for all parties involved). PSU president Rodney Erickson understands that the school is prepared for just this type of situation. Per the New York Daily News:

Erickson told CBS's Face the Nation Sunday that Penn State has general liability coverage like any state university of its size.

"We don't want to, if at all possible, drag victims through another round of court cases and litigation," he said. "If we can come to an agreement with them, with their attorneys, we believe that would be the best possible outcome in this whole very, very difficult, tragic situation."

That's all fine and good, but as the Daily News reports, the issue of whether or not Penn State's covered here is far from a sure thing. And its insurance provider probably has a strong argument against the school in this case:

Penn State's general liability insurer sought last week to deny or limit coverage for Sandusky-related claims. Pennsylvania Manufacturers' Association Insurance argued that Penn State withheld key information needed to assess risk, at least after school officials investigated a May 1998 complaint that Sandusky had inappropriately showered with a boy on campus.

In a memo filed in court in Philadelphia, the company argued that Penn State failed to disclose that it had information about Sandusky that "was material to the insurable risk assumed by PMA."

The company also argued that its policies after March 1, 1992, were amended to exclude "abuse or molestation" and that coverage for such behavior is excluded as a matter of public policy in Pennsylvania.

This is going to get a little heartless, but legal matters are almost always so. That said, Penn State might have a way around that last exclusion by arguing that the lawsuits are about the coverup of the abuse, not the abuse itself. Gross, right? Yep. That's the judicial system. No way around that.

That out of the way, where Penn State is in major trouble here is the previous argument: Since Penn State officials had knowledge of the Sandusky situation as far back as 1998 and never disclosed it to the insurance provider, they essentially lied about the amount of potential risk. 

As preexisting conditions go, that one's a doozy.

If the coverage is denied outright, that would be a complete disaster for Penn State. We're looking at lawsuits that could top $100 million, according to the Daily News. Penn State's endowment is over $1.8 billion, but that's not money that Penn State can just spend. Endowments don't work that way.

What's more likely is that there'll be limitations on what PMA offers, and there's really no telling what that limitation will be. Obviously, Penn State will try to make it as high as possible, and PMA will try to make it as low as possible.

But with the athletic department already hurting hard for cash for the next several years, a substantial penalty on civil suits will directly threaten the health and substantiality of the university itself.