Corporations: It’s Our Fault, But You’ll Have To Pay

[Update: June 23, 2012: In the wake of Sandusky's guilty verdict, Penn State has changed its tune, and has indicated a willingness to discuss settlement. Reuters has an article that quotes me.]

Whenever a corporation is caught causing a catastrophe — an oil company that destroys an ecosystem through shoddy maintenance, a drug manufacturer that sells a drug which they know causes cancer, et cetera — the corporate entity goes through a three-stage public relations process to avoid responsibility.

First, there’s denial. Nothing happened and if it did happen it’s not so bad.

Second, there’s phony regret. It’s not our fault, but we’re sorry something happened.  This tragedy was unpredictable, but if it was predictable, then it was unavoidable, but if it was avoidable, then we were doing everything we could to avoid it.

Third, there’s let’s move on — or else.  It happened, maybe we could have done more, but it’s in the past.  If we’re held accountable for our own mistakes, we’ll fire employees, run to the government for subsidies, or raise prices.

When it was revealed that Penn State had (allegedly) protected a child molester for more than twenty years, PSU went through the first two quickly.  (Don’t kid yourself: universities these days have far more in common with major corporations than charities.)  When the grand jury presentation came out, President Spanier was smart enough to avoid supporting the man accused of multiple counts of sexually abusing children, but nonetheless inexplicably stated his “complete confidence” in Penn State athletic director Timothy Curley and university Senior Vice President Gary Schultz, despite their indictments for perjury and failing to report child abuse.

The Penn State trustees went quickly to step two, firing coach Paterno as well as President Spanier, without saying why, exactly, either had been fired.  Consider this hand-wringing equivocation by some of the trustees:

“We felt those people should have done more,” Hetherington said, referring to Paterno and Spanier. “And there’s been 13 years of questioning and investigation by the grand jury, and it looks like some people didn’t do enough. People did the minimum required by the laws of Pennsylvania but, in most cases, it didn’t pass the moral test.”

Eckel addressed Thursday why the board has not fired either Curley or Mike McQueary, the assistant football coach who told the grand jury he saw Sandusky sodomize a 10-year-old boy in a shower at a school athletic facility in 2002.

Those decisions are normally up to the president of the university and the board decided to leave them up to Spanier — who decided not to fire either — and now to interim President Rod Erickson.

Eckel pointed out that Curley has not been convicted and McQueary, as a whistleblower in the case, could sue the university for retaliation if he were fired, Eckel said.

Hetherington would not comment Thursday on why the board acted so quickly in making its decisions or why the board had not conducted its own investigation first.

“If you ask me specific questions about what the board did or said, that’s confidential information that’s privy to the board. We’re not going to say what was said at a meeting or how we came to a decision. We’re not going to discuss that. We made a promise to each other not to do that,” Hetherington said.

They did what was required by Pennsylvania law, but we fired them anyway, because they could have done more.  What “more,” exactly?  Well, that’s confidential, let’s move on for the future of the university.

And so begins stage three:

HARRISBURG — Penn State University and former assistant football coach Jerry Sandusky are among those potentially facing millions of dollars in civil lawsuits as the allegations of child sexual abuse against Sandusky continue.

If the university is sued and found civilly liable, students and their families could face higher tuition to offset the damages or settlements. Tuition increased this year because of cuts in state funding.

“There is no reason not to file even before the criminal case because the standard of proof in a civil case is much lower. You could have an acquittal in the criminal case where the state has to prove its case beyond a reasonable doubt. Civil liability would need only to be a preponderance of the evidence or a 51 percent chance that the incident happened,” [Pitt Law Professor Jessie] Allen said.

Insurance may not cover this.

The university may have liability insurance coverage but, with potentially dozens of victims in the Sandusky case, civil awards could amount to tens of millions and may easily surpass insurance liability limits, experts said.

A Penn State University spokesman hung up the phone Thursday without answering ‘s questions about liability insurance and the university’s preparations for possible civil lawsuits.

It’s hard to say if this article was the result of bad journalism — some writer has been so thoroughly programmed by years of tort reform propaganda that his or her brain jumps right past concerns about justice to concerns about protecting the bottom line — or a deliberate public relations effort by Penn State.  I suspect the latter.  I doubt a spokesman a billion-dollar institution in the middle of a PR crisis actually hung up on an Associated Press reporter.  It’s a show.  Potential jurors are the audience.

The “let us off the hook or we’ll punish the innocents” argument is usually trotted out by doctors threatening to abandon states that don’t give special legal protections to the negligent ones.  It’s a meritless argument — states with pro-patient civil liability laws have better access to medical care — but it’s all they have left after the tactics of denial or phony regret fail.  Seeing the success the health care industry has had nonetheless, corporations and other big institutions have jumped on the bandwagon.  We saw it recently with the table saw SawStop verdict, which brought saw manufacturers come out of the woodwork to claim their humble way of life was threatened.

Now Penn State’s doing it.  Administrators were caught covering up allegations of systematic child abuse, and the argument against accountability is, without even the slightest sense of shame, “think of the children — no, not those children we hurt, look at these other children we’ll make pay for it.”

Part of the show detailed in the Associated Press article involved the PSU spokesman hanging up rather than answering insurance questions, but the answers aren’t hard to find.  PSU conducts some of its activities through a related non-profit, The Corporation for Penn State (here’s their March 2011 annual report), which in turn owns the for-profit Nittany Insurance Company, which serves PSU entities, like their medical school in Hershey.

That’s not to say PSU is “insured,” per se, because they’re insured through their own insurance company. [UPDATE: PSU says "It is the expectation of the university administration that our liability insurance will cover any obligation arising from civil lawsuits."]  But look at the fine print of that annual report:

The Nittany Insurance Company is a captive insurance company incorporated in the State of Vermont, organized for the purpose of providing access to the reinsurance market for various insurance programs.

If PSU had any sense at all — which I wouldn’t necessarily assume, given how they didn’t even have a general counsel until 2010 — they would have productively used that access to the billion-dollar reinsurance market to obtain multi-million or multi-billion dollar excess liability insurance policies.  This isn’t absurd to suggest; the tugboats you see pushing oil tanks up and down the rivers of Pennsylvania often have multi-billion dollar insurance policies to cover clean-up costs if necessary.  PSU has over 50,000 employees and thousands of acres of property.  It would have been absurdly negligent for the trustees and administration to not protect it with reinsurance.

Most likely, then, we’re having a debate about nothing: PSU will pay some costs, but nothing that would even remotely threaten the future of the university.  Assuming PSU would have to pay out of its pockets, then, just raises another question: what’s so sacrosanct about their $1.5 billion endowment?  Instead of raising tuition (which is already priced more like a private college), Penn State could simply take responsibility for what its officials did.  It’s a sad comment on our society that we accept an institution — an educational one, no less — casually absconding any sense of responsibility for the damage it causes in favor of protecting the size of its endowment.  Think of the children.  All of them.

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  • Guest

    Penn State seems to have taken the play book from the U.S. Chamber of Commerce and followed it to a T… Having spent way too much time in Tallahassee, Florida for legislative sessions during the last ten years helping the Florida Justice Association, I’ve witnessed the medical/business/insurance lobby use this strategy with uncanny effectiveness. Medical malpractice? “Strip away patients rights or doctors will leave the State.” Automobile crashworthiness? “Ford Motor Company didn’t accept a government bail out so they need and deserve protection from victims who are maimed and killed by defective vehicles.” Insurance bad faith? “Immunize insurance carriers from liability for acting in bad faith against their own policy holders or insurance premiums will continue to rise.” And so on, and so on…

    Elected legislators want to help their corporate and lobbyist friends who got them elected. It’s simple human nature. When the corps/lobbyists whine to their elected friends that, unless the tort reform bill of-the-moment is passed, the corporations be hurt or will go out of business? Bad bills are passed. Especially when the greedy ‘trial lawyers’ are the only voices lobbying the other side of the issue.

    Unfortunately this PR and lobby strategy works. We’ve seen consumer rights and the civil justice system eroded, piece by piece, every year in our state legislatures across the country. The proverbial death by a thousand cuts. Susan Saladoff’s documentary Hot Coffee is a must see on this topic; check it out if you haven’t watched it yet. Sadly, because the corporations and carriers have the cash and staying power, the “denial, phony regret, or else” strategy is here to stay.