(This post also appeared in the July 25, 2012 issue of IIABNY Insider.)
Since last Wednesday’s issue of IIABNY Insider, two events have dominated the news: The NCAA’s disciplinary actions against Penn State and the horrible massacre of patrons at a Colorado movie theater. The most important consideration in both of these stories is the harm done to the victims – the children that former Penn State assistant football Coach Jerry Sandusky sexually abused, and the people who paid with their lives and their health for the crime of going to a midnight movie showing. The human loss is immeasurable. However, there are also measurable insurance considerations in these situations. As insurance professionals, we can use these events as reminders of how to advise clients on their insurance programs.
If you insure schools, small colleges, or entertainment venues, here are some questions to consider:
Is the movie theater liable for the injuries and deaths resulting from the attack?
That’s a legal question to be determined by lawyers negotiating a settlement or a judge or jury. The theater has legal liability if it was negligent. For it to be negligent, four things must be true:
- The theater owed a duty of care to the patrons
- The theater breached its duty
- The patrons suffered injuries
- The theater’s breach of its duty resulted in the patrons’ injuries and deaths.
The first and third points are indisputable. The question is whether the theater breached its duty by not preventing the attack. In other words, is this an event that the theater could reasonably have foreseen and prevented? If the answer is yes, then the fourth point also becomes indisputable and the theater will be legally liable. Otherwise, it will not.
Will the theater’s liability insurance policy provide coverage if the theater is liable?
Yes, if a theater has a standard ISO Commercial General Liability Insurance Policy. That policy covers the insured’s legal liability for bodily injury caused by an occurrence that takes place during the policy term. The standard policy contains a number of coverage exclusions, but none of them apply to an event like this. (The policy excludes coverage for expected or intended injury, but the theater owners did not expect or intend for this to happen.) The Colorado theater is part of the Cinemark corporate chain, so it likely has some sort of alternative risk financing plan, such as self-insurance or a high deductible.
What about the legal bills?
Even if the theater ultimately has no legal liability, reaching that conclusion will cost a small fortune in legal bills. Courts in the U.S. have tended to find that, if there is a reasonable chance that a liability policy’s coverage will apply to a loss, the insurer is duty-bound to provide a legal defense for the insured. Therefore, a theater that has suffered this type of event will have coverage for its legal defense.
An important question is whether the policy covers defense costs in addition to the policy’s limit of liability or if those costs actually reduce the limits available to pay the claim. If the policy has a $2 million limit but the $250,000 in legal costs come out of that limit, the amount left over to compensate the victims shrinks significantly.
If the theater is liable and the insurance covers it, is the theater worry-free?
That depends on how much insurance it bought. A dozen people died in the hours after the shooting, others may not live, and more than 50 suffered wounds of varying severity. In a situation like that, $2 million of liability insurance will not go very far. Even an umbrella policy with a $5 or $10 million limit may not fully cover the theater’s liability.
Switching to the Penn State situation, why is State Farm claiming that it doesn’t cover Jerry Sandusky?
According to reports, Sandusky had homeowners insurance coverage from State Farm. The insurer has sought a declaration in court that it does not have to pay for his defense or any legal judgments on his behalf. A standard ISO homeowners policy provides no coverage for bodily injury arising out of the insured’s intentional acts unless the acts included the use of reasonable force to protect persons or property. State Farm’s policy doesn’t even cover reasonable force. The insurer is saying that Sandusky intentionally acted to harm the children in question and therefore its coverage does not apply.
Does a college’s liability insurance cover it for molestation claims?
PMA Insurance Co., which provided Penn State’s liability insurance, has refused to pay for the university’s defense in the Sandusky matter. A small private college that has purchased a CGL policy might have the same problem. Whether the policy will provide coverage depends on whether it contains a specific endorsement. If the policy includes ISO endorsement CG 21 46 07 98, Abuse or Molestation Exclusion, it provides absolutely no coverage for incidents of this type. The endorsement specifically excludes coverage for the actual or threatened abuse or molestation by anyone of any person in an insured’s care, custody or control. It also excludes coverage for the negligent employment, investigation, supervision, retention, or reporting to the proper authorities or failure to so report of a person for whom an insured has legal responsibility.
Clearly, a college faced with a situation like the one facing Penn State would have no coverage under this endorsement. Even without the endorsement, the policy would not cover Sandusky, again because he acted intentionally. It would, however, cover the school and the school’s cost of defending the claim.
Would the college’s liability limits be high enough?
How much is high enough for the physical and emotional damage done to these children? Awards and settlements in cases like this are likely to be very large. Institutions that have this kind of exposure should be thinking about liability limits in the tens of millions.
Insurers, agents and brokers don’t have it in their power to erase the harm that results from events like these. However, by thinking about the financial implications, they can help prepare their clients for the worst while hoping that it never happens.