Lessons From Penn State Scandal

It will take years before the tight-knit community at Penn State University can put its horrendous scandal behind. This awful event is a reminder of just how important risk management can be. It behooves Penn State (and indeed other major universities) to take additional steps to help prevent such horrific events in the future.

Actually, they may not have a choice. From now on, insurers may require schools to implement strict risk management policies and guidelines.

There are many insurance ramifications to this Penn State disaster, says Loretta Worters, vice president at the Insurance Information Institute. This is a disaster on a number of levels.

The university and former football team head coach Joe Paterno will likely soon be facing civil lawsuits from victims of former assistant coach Jerry Sandusky’s alleged sexual abuse. Furthermore, Penn State may face unlimited liability in civil litigation because it may not be able to invoke sovereign immunity, which protects state entities and employees from tort claims and imposes limits on liabilities. This could be devastating for the university since this could involve millions of dollars.

Typically, colleges buy commercial general liability (CGL), directors and officers (D&O) and educators legal liability policies. Allegations of sexual misconduct are usually covered under a CGL policy. While the CGL policies step in to cover third-party bodily injury and emotional distress, the D&O and educators legal liability would cover trustees, directors and officers, and the organization itself. (At Penn State, insurance resources may be more limited because it may be considered one claim with one policy limit.)

At Penn State, D&O liability insurance will handle some of the legal liability in civil litigation, though there is the question of whether its coverage amount is enough. There could be reputational risks and costs, which would include hiring a PR agency to rebuild the college’s image. If Penn State loses students, that could have an impact on its finances as well.

So what should colleges and universities do going forward? First, if they haven’t done so already, it would be helpful to hire a risk manager to assess risks. I.I.I. also recommends more thorough background checks for faculties and more attention paid to areas in which universities work with children.

Schools should ask themselves: are their policies broad enough to address these potential risks? Schools should make sure that there is broader and higher liability limits on their CGL and D&O policies. In the future, sexual misconduct training would be needed and, indeed, would probably be mandated by insurers.

Schools could also benefit from strict guidelines for reporting without delay any suspicious activities to the police and to the school authorities. In fact, insurers may require such guidelines in the future for many schools.

This scandal is a reminder that even a venerable institution like Penn State isn’t immune to horrific disasters and that sound risk management practices can help.