9/13/2012

The Freeh Report and Liability Issues

What follows is a discussion of how the Freeh Report will affect the civil lawsuits that will undoubtedly be filed, those that have already been filed, and the potential effects of these lawsuits from a defense and insurance coverage prospective.

By Mitchell Ayes

A lot has happened since the 33rd Statewide Grand Jury sitting in Centre County, Pennsylvania handed down its presentment, for what would be the beginning of criminal charges filed against Gerald “Jerry” Sandusky, the former assistant coach on the Penn State University’s football staff. 

Sandusky was first indicted in early November 2011, and now, less than one year later, so much has changed in State College, Pennsylvania, which has affected the university and the entire State College community. 

Ever since the university retained its special investigative counsel, former FBI Director Louis Freeh’s law firm, the university probably had an idea that potential civil liability would follow, and that details of Sandusky’s use of university facilities to abuse his victims would be uncovered. However, the university probably did not know the extent of evidence that would be found.

What follows is a discussion of how the Freeh Report, released on July 12, 2012, will affect the civil lawsuits that will undoubtedly be filed, those that have already been filed, and the potential effects of these lawsuits from a defense and insurance coverage prospective.

The Freeh Report

In releasing the Freeh Report to the public, Penn State University waived its attorney-client privilege in an effort to be open and transparent, even though the report contained damaging evidence with respect to potential allegations of civil liability. 

The Freeh Report concluded that, based on the available witness interviews and the documents reviewed, it was more reasonable than not to conclude that, in order to avoid bad publicity, former members of the Penn State administration (Graham Spanier, president; Gary Schultz, senior vice president-finance and business; Timothy Curley, athletic director; and Joseph Paterno, head football coach) concealed pertinent facts from public authorities, law enforcement officials, the board of trustees, the Penn State community, and the public relating to Sandusky’s child abuse. 

The Freeh Report concluded that before May 1998, several staff members and football coaches regularly observed Sandusky showering with young boys in the football locker rooms. However, none of the individuals who observed the conduct—and which were interviewed for the report—ever notified their supervisors, for fear of retaliation. Further, the report found that despite knowing of a pending criminal investigation involving Sandusky, Spanier, Schultz, Curley and Paterno took no action to limit Sandusky’s access to the school’s athletic facilities. 

The report also found that the criminal investigation into Sandusky’s actions in May 1998 with a young male in the locker room showers was not investigated in great enough detail, especially as State College police officers had listened to the victim’s mother talk to Sandusky from inside her home about showering with her son. 

During the conversation, the officers heard Sandusky tell the boy’s mother that he had showered with other boys before, but he denied having sexual feelings. Even after the officers heard these statements, they never interviewed Sandusky or further investigated the matter. Also, while knowing of these allegations—and he himself admitting that he showered with young boys—Sandusky was not referred to the Penn State Office of Human Resources. According to interviews with the investigating officer, there was no written policy to determine in what situations Human Resources should be notified. However, when an incident between an employee and law enforcement occurred, referrals were routinely done. 

The report further references a discussion that occurred in February 2001 between Spanier, Schultz, and Curley regarding how to handle the second reported incident of Sandusky’s behavior with a minor male in the football team’s house shower.

This meeting occurred after Mike McQueary, a graduate assistant working with the football team, observed sexual activity between Sandusky and a minor in the coach’s shower room.  Upon observing the conduct, McQueary reported the incident to his supervisor, Paterno, and likewise, Paterno then reported the incident his supervisors, Schultz and Curley. 

During the February 2001 meeting between Spanier, Schultz, and Curley, Schultz’s handwritten notes appear to indicate a plan was discussed that included notifying the chairman of the nonprofit charity that Sandusky founded, The Second Mile; contacting the Department of Public Welfare; and informing Sandusky to stop bringing children alone into the football team’s building. 

A few days after this meeting, the administrators decided to change the plan. According to email correspondence from Curley, which is contained in the report, he and Paterno decided that the plan should be to assist Sandusky in obtaining professional help and assist Sandusky in informing The Second Mile about the allegations against him. If Sandusky cooperated, they would not inform the Department of Public Welfare. 

Both Spanier and Schultz approved the new plan, although stating that if their message to Sandusky was not “heard,” they then would become vulnerable for not having reported the incident.

A few weeks later, Curley met with Sandusky and told him that he was not permitted in Penn State’s athletic facilities with any young people and that he was going to inform The Second Mile’s executive director about Sandusky’s behavior. The executive director was informed of the allegations and Penn State’s intended plan of proceeding. The executive director then notified the Second Mile’s board of trustees, who concluded that it was a non-issue for The Second Mile and no further action needed to be taken. 

While The Second Mile’s board of trustees was briefed on the issue, it appears that Penn State’s board of trustees was never provided any information about Sandusky’s behavior until after the grand jury had indicated him.

The report also discussed the responsibility of Penn State’s board of trustees. It found that the board had an obligation to its constituents—in this case, the university and all of its representatives—to inquire about major risks facing the university. Even though Spanier was never forthcoming about the potential civil and criminal liability facing the university related to Sandusky’s actions, and what he knew prior to Sandusky’s indictment, the board should have made reasonable inquiry into any risks facing the university. Furthermore, the board should have performed more thorough due diligence prior to agreeing to sell a parcel of Penn State’s property to The Second Mile in September 2001, and may have uncovered details of Sandusky’s behavior at that time. 

How the Freeh Report Impacts Civil Lawsuits

The Freeh Report provides multiple documents that would undoubtedly have been requested by plaintiffs as they attempt to pursue their civil lawsuits against Penn State, Sandusky, and the Second Mile. To date, Penn State has not challenged the findings of the Freeh Report; rather, some trustees have challenged the NCAA consent decree regarding multiple sanctions against the athletic department—and, more specifically, the football team—based on the findings in the Freeh Report. By not challenging the findings, Penn State has implicitly accepted them, which will be used against the school in the potential civil lawsuits.

Statute 42 Pa.C.S. § 5533 states that a minor (an individual under the age of 18) shall have 12 years from the time they reach the age of majority in order to file suit. In this case, the victims alleging abuse must file their complaints by the time they reach 30, or else they may be barred from asserting a cause of action for sexual abuse. 

Additionally, only the cause of action alleging child sexual abuse can be brought against Sandusky, while causes of action against Penn State and The Second Mile could sound in any number of negligent causes of action, including negligent hiring, supervision, entrustment, and breach of fiduciary duties. 

With respect to The Second Mile, a non-profit organization that was organized to help and serve the children of Pennsylvania, the doctrine of charitable immunity has been eliminated. Pursuant to 42 Pa.C.S. § 8332.4, officers, directors, and trustees who do not receive compensation for their services are not liable “for any civil damages...unless the conduct of the person falls substantially below the standards generally practiced and accepted in like circumstances by similar persons performing the same or similar duties, and unless it is shown that the person did an act or omitted the doing of an act that the person was under a recognized duty to another to do, knowing or having reason to know that the act or omission created a substantial risk of actual harm to the person or property of another.” 

In this matter, discovery needs to be conducted to determine whether any of the directors of The Second Mile may be subject to liability. According to the statute, civil liability may only be imposed where an officer is compensated, and at this time we do not know whether any of The Second Mile’s board members were compensated.  This information will be revealed through discovery; however, The Second Mile, as an organization, can be liable for negligently employing and supervising its staff and allowing the abuse to occur.

With respect to the potential liability of Penn State, the board of trustees may be liable for breaching its duty of care and loyalty to the Penn State community and the public.

According to 15 Pa.C.S. § 5712, a director of a nonprofit corporation “shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill, and diligence, as a person of ordinary prudence would use under similar circumstances.” 

Should this matter reach trial, the board of trustees could be found liable by implicitly adopting the findings in the Freeh Report for their failure to make reasonable inquiry into Sandusky’s actions, which occurred on Penn State’s premises.

Coverage Concerns

The other aspect to consider is whether the insurance carriers for Penn State and The Second Mile must assume coverage and provide a defense and indemnification for any potential litigation. These issues will have to be assessed as the lawsuits are filed and the allegations are known, but the greatest potential for disclaiming coverage is through any notification provisions or an abuse and molestation exclusion clause, which many insurance policies contain.  In this case,

There may be an argument advanced on behalf of the insurers that the sexual abuse was known many years before November 2011, and both Penn State’s and The Second Mile’s failure to notify their respective insurance carriers has severely prejudiced the carrier’s ability to defend and indemnify the cases.

Additionally, the abuse and molestation exclusion contained in many insurance policies disclaims coverage for abuse or molestation of the victim while in the care, custody, or control of any insured. The exclusion may also contain further limiting language that the carrier will not provide a defense or indemnify its insured for allegations of negligent employment, supervision, reporting to the proper authorities, or failure to so report; or retention of a person for whom any insured is or ever was legally responsible. 

While an argument can be made for disclaiming coverage, the carriers would need to closely examine the policy language to determine the specific exclusionary language and whether it existed at the time the abuse and molestation occurred, as the date of occurrence controls. If the policy contains the exclusionary language, depending on the circumstances in which the abuse occurred, an argument can be made by Penn State or The Second Mile that at the time of the abuse, the care, custody, or control provision of the exclusion was not met as the abuse did not occur at a Penn State or Second Mile function, and therefore a defense ultimately may need to be provided.

While there are many causes of action for plaintiffs to pursue, most likely these lawsuits will not advance past the initial filing phase, as Penn State President Rodney Erickson has indicated that he wants to resolve many of the cases as quickly as possible to not cause any further harm to the victims. He stated that the best solution to resolve this tragic situation would be to settle these potential cases. 

Based on the evidence already available to plaintiffs, the best course of action may be to settle these lawsuits as quickly as possible and allow the university to move on from the terrible events that have come to life in the past 10 months. However, should the university decide to defend these allegations, it will face an uphill battle due to the evidence contained in the Freeh Report. 

Most likely The Second Mile will also fall in line with Penn State’s settlement position, as it too could be exposed to liability since it was aware of the allegations against Sandusky and, like Penn State, did not take an active role to end the abuse and save the children.


Mitchell Ayes is an attorney at Callahan & Fusco, LLC, where he focuses primarily on insurance defense litigation in the areas of personal injury, premises liability, construction, commercial, and other general liability issues. He can be reached at (973) 618-9770, mayes@callahanfusco.com, www.callahanfusco.com.

 



Mitchell Ayes is an attorney at Callahan & Fusco, LLC, where he focuses primarily on insurance defense litigation in the areas of personal injury, premises liability, construction, commercial, and other general liability issues. He can be reached at (973) 618-9770, mayes@callahanfusco.com, www.callahanfusco.com.

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