Lessons Learned from MSU’s $500 Million Settlement with Larry Nassar Victims

In the #MeToo era, the suit against Larry Nassar spoke loudly.

More than 330 young women had their lives forever impacted by the University physician, Larry Nassar, and the $500 million proposed settlement by Michigan State University (MSU) is one the largest ever for victims of sexual abuse. Important questions have been presented about whom in leadership roles knew or should have known about Mr. Nassar’s conduct. While the issues around this case go well beyond financial restitution for the victims, the magnitude of this settlement should serve as a wake up call, as virtually every kind of institution or industry could be exposed to serial abuse allegations.

From a risk and liability perspective, it should not be overlooked that the vast majority of plaintiffs in this settlement never set foot on the MSU campus. Also, it is important to note that as of the writing of this paper, claims against USA Gymnastics, Twistars USA, the United States Olympic Committee, and others have yet to settle. MSU decided to enter into this broad settlement due to allegations around negligent hiring, negligent supervision, and failure to comply with Title IX of the Education Amendments of 1972.

The $500 million question is obvious: could this have been prevented or at least mitigated?

5 Key Takeaways from the Larry Nassar Case

This paper explores five important considerations, with both prevention and risk financing considerations in focus.

#1 – Culture Assessment

The potential for significant multi-plaintiff abuse/ molestation events should be analyzed by every organization. While industries such as Higher Education and Healthcare have obvious precedent, the exposure is meaningful whenever there are trusted employees that provide a professional service to many individuals.

Written protocols such as a clear Code of Conduct are standard procedure. However, developing a culture to ensure that any stakeholder (e.g., employee, client, family member, colleague, etc.) would feel safe, if not compelled, to report allegations of improper behavior is an area where much progress can be made.

Following are some characteristics that are more likely to be present in cultures at an elevated risk to experience widespread allegations of sexual misconduct:

• Highly Competitive and Macho: this type of environment rewards those who are “tough” and “persevere” in the face of any obstacle.¹
• Hierarchical: organizations that put their top leaders on “pedestals” and are used to operating with many layers of management.
• (Owner) Dominated: companies created and/ or dominated by a few “successful” individuals can discourage reporting and investigating of misconduct for fear that the entire company will suffer.
• Lack of Diversity: diversity fosters a feeling of equality and can yield a more transparent culture.
• Static (or Institutional): cultures that thrive on “what made them successful” tend to be less tolerant of listening to voices that rebuke something or some person embedded in their culture.

While these are characteristics of potentially problematic cultures, all organizations should have a clear framework for reporting and investigating allegations of misconduct. Clear and versatile reporting protocols, as well as systematic communications to all stakeholders helps to create a safe and effective reporting environment.

#2 – Perils of Relying on Damage Caps

Even when applicable state law might provide limitations on tort damages (e.g., sovereign immunity, caps on noneconomic damages, etc.), there may be circumstances when those limitations become irrelevant. For many institutions, whether learning, healthcare, or public entity, there always exists the possibility that settlement beyond supposed damage caps is appropriate because of specific factual circumstances (e.g., presence of extreme conduct or gross negligence), or simply because of public policy and reputational considerations.

Institutions could be placing too much reliance on Sovereign Immunity as a limitation on their potential risk exposure. The doctrine of Sovereign Immunity traces back to 13th century English Common Law, with the main premise being that “the king can do no wrong.” Today, most U.S. states have statutory provisions that limit sovereign immunity, but provide public (e.g., state, county, etc.) entities with certain protections, including limitations on tort damages. In some states, these statutes are called Tort Claims Acts.²

For example, in Michigan, the Governmental Tort Liability Act (GTLA)³ provides immunity from tort liability arising from activities when the governmental agency is engaged in the exercise or discharge of a governmental function. However, immunity may be limited when a government agency is providing medical care or treatment to a patient— except when the care is provided by a hospital owned or operated by the department of community health or by the department of corrections.

It remains uncertain how the courts would have interpreted the statute given the facts of the MSU/Nassar case. Further, like many states, the Michigan Statute excludes governmental immunity for intentional torts and acts of gross negligence.⁴

#3 – Insurance Coverage and Adequacy of Limits

Coverage issues always should be thoroughly analyzed. In cases like the one at hand, there are some specific considerations:

• How does the insurance contract respond to “batch” or “related events?”
• If a “related event” impacts many potential plaintiffs, would it be treated as a single event or single occurrence for the purposes of self-insured retentions?
• If the insurance contract language stated that all “related events” would be treated as a single event or occurrence, would that (single) policy limit be adequate for an unexpected and extreme event impacting multiple plaintiffs?
• Are allegations of sexual abuse treated separately/ differently from other types of general liability or professional liability allegations?
• Do defense costs erode policy limits?
• What constitutes knowledge by one of the Insured’s senior officials?
• What are the specific claims reporting conditions of the policy contract?

In an attempt to clarify available coverage limits and insured retentions, many insurance carriers have evolved their policy forms to carve out Sexual Abuse/Molestation Liability from the Commercial General Liability coverage.

In addition to providing explicit coverage triggers and conditions for this coverage, such an approach could also lead to lower available coverage limits. This can happen when the policy specifies that all related acts of abuse date back to the initial covered act (or claim), yielding a single policy limit versus separate limits across multiple policy periods.

For example, in the MSU case, the abuse took place over 25+ years, including nearly 20 years while Mr. Nassar was employed at MSU. Does that mean that 20 separate policy limits are available to MSU? Was the policy form consistent over that period of time or were there material changes? Was there related acts wording that would “batch” the claims into a single policy period? What we do know is that MSU has filed suit against 13 insurance companies that had provided one or more insurance policies during a twenty-year period. In such situations, it is not uncommon for coverage litigation to be complex and protracted.

#4 – Consider and Protect Reputational Value

Benjamin Franklin is credited with saying, “It takes many good deeds to build a reputation, and only one bad one to lose it.” While a sobering perspective in the 1700s, there is even greater risk in our age of social media and the Internet. Though intangible, there can be significant long-term value (e.g., “premium”) in an entity’s reputation. That reputational value is based upon the expectations of many stakeholders, and not only the customer.

Reputed to be one of top public universities in the nation, this was clearly an important consideration for MSU. The issues around reputation can trump other considerations and in many cases, makes defensibility of claims a lower priority.

Initially, MSU put up a vigorous defense, asserting absolute sovereign immunity protections. However, they ultimately decided that offering a substantial settlement, and making enhancements to their leadership, protocols, and culture was a better long-term strategy.

Beyond the financial settlement, MSU has done or agreed to do the following:

• Offered public apologies from a variety of MSU leaders, and on a systematic basis.
• Recognition that the financial component to the settlement is only one step in becoming a better institution for all of its stakeholders.
• Creation of specific workgroups to help foster a better culture.⁵
• Naming a new Head to the Office of Civil Rights and Title IX Education and Compliance.
• Established a new Office of Enterprise Risk Management, Ethics and Compliance. Created at the request of the MSU Board of Trustees, the office is intended to ensure the University’s adherence to policies as well as legal and regulatory requirements.
• Negotiated an early retirement with the Dean of College of Osteopathic Medicine, William Strampel, along with a public statement noting that “his conduct and attitude were unacceptable and went against the values of this university.”⁶

#5 – Recognize the Potential for Downstream Liability

The $500 million proposed settlement by MSU is precedent setting. In light of the statements from University officials, questions around where the settlement funds will come from remain. While perhaps not at issue in the MSU case, previous high value settlements often involved looking to third parties for contribution, even if the other parties’ culpability was minimal or indirect.

Vendors, suppliers and business partners can all become involved in protracted litigation when the stakes are high. It goes both ways, as the various parties can either create additional exposure, or inherit downstream risk. For all organizations, assessing how business partners and vendors impact the service and/or product delivered is necessary to appreciate the effect on operational risks.

To conceptualize this further, think about whether the MSU settlement would have been different if Mr. Nassar had been dismissed from another major university prior to working at MSU. What if it was later learned that allegations of abuse were what led to that dismissal, but that the former employee did not investigate and/or report appropriately?

Issues of downstream liability can be complex. Organizations that effectively work to mitigate this exposure go well beyond verifying business partners’ insurance coverage and limits. They essentially underwrite the risk and assess the potential severity impact on operational risk.

Conclusion

While the dust has not completely settled on this historic case, there is much that can be learned in the meantime. Organizations are less likely to be faced with a serial abuser event if they take action to:

• Build a healthy, robust “reporting culture”
• Keenly focus upon risk mitigation efforts
• Ensure that insurance limits are adequate and that coverage would respond as expected
• Take responsibility when things go wrong

Reliance on protections afforded by governmental immunity or other statutes may not be the best strategy to benefit both community and reputation. When it comes to allegations of serial abuse, bad claims do not get better with time—they get worse.

¹ Spector, B. “Why Macho Culture is Bad for Business.” PBS.org. Accessed on 11/21/18, source
² Note that there is also a Federal Tort Claims Act (28 U.S.C section 2674)
³ MCL Section 691.1407
⁴ The lawsuit filed against MSU and the other defendants alleged that the conduct of the defendants was “so reckless as to demonstrate a substantial lack of concern for whether an injury would result to plaintiffs,” and also that MSU’s conduct displayed a “willful disregard” for the safety of the plaintiffs.
⁵ MSU has announced enhancements and outcomes of their “Relationship Violence and Sexual Misconduct Expert Advisory Workgroup.” This group has stated that it is committed to prompt action, diversity, and inclusion.
⁶ William Strampel was the superior of Mr. Nassar for some period of time. There are pending criminal charges against him as of the date of this article.