The Boy Scouts of America recently filed for Chapter 11 bankruptcy. What once seemed unthinkable, one of America’s most iconic and beloved organizations has reached the climax of a dramatic and tumultuous fall from grace. In the face of a myriad of sexual abuse allegations, the BSA has, in essence, written a book on how not to handle a major scandal. Aside from the obvious moral repercussions, the BSA has dug itself into a financial hole as well. In this blog post, we will discuss some key points organizations need to know when handling a major scandal within itself.
Bankruptcy Won’t Save Your Assets
The BSA says it paid more than $150 million in settlements and legal costs from 2017 to 2019. In filing for Chapter 11, the organization said, “The BSA intends to use the Chapter 11 process to create a Victims Compensation Trust that would provide equitable compensation to victims.” While there have already been numerous suits settled, there’s estimated to be hundreds, perhaps even thousands of cases to come. In filing for Chapter 11, the BSA can consolidate all of their lawsuits for a settlement far lower than what they could pay without bankruptcy. The strategy being utilized by the BSA also allows it to avoid more victims coming forward as more states have begun re-opening windows and extending the timeframe to file suit. This strategy, however, has backfired on other organizations before.
In 2007, a federal judge dismissed a bankruptcy case filed by the Catholic Diocese of San Diego. Just before this filing, lawyers had reached a settlement for the Diocese to pay $198 million to 144 survivors. During the bankruptcy trial, Judge Louise DeCarl Adler called the Diocese “disingenuous” and “byzantine”. She also told the San Diego Union-Tribune that the Diocese should never have filed the claim as a way to deal with victims. In essence, an attempt at using bankruptcy to leverage your organization into not paying out victims and protecting assets can easily be thwarted in court.
Insurance Companies Don’t Have To Pay Out for the Loss
Not taking effective measures to prevent a scandal from growing may also affect insurance claims. The BSA isn’t just heavily involved in lawsuits with the victims, they’re also heavily involved in lawsuits with their own insurance companies for refusing to pay out on liability claims.
In most instances, General Liability policies do not provide coverage for the exposure of sexual abuse. When insurance is provided, policy conditions require prompt reporting for actual and alleged exposure to loss. While coverage for sexual abuse or molestation does exist, they usually are underwritten separately. In the aforementioned cases, having knowledge of continued abuse compromises the coverage “trigger” of negligence. In addition, when applying for the coverage (new or renewal), a significant underwriting factor is disclosing allegations and events that may rise to a claim. Any violations of policy conditions could give the provider of insurance grounds for denial of a claim.
Individuals Can Be Held Personally Liable
In addition to the damage done to organizations as a whole, individual, high-ranking officials may be held personally accountable in the wake of a scandal too. In the aftermath of the Larry Nassar sexual abuse scandal, several high ranking officials from USA Gymnastics were ousted from the organization, some charged with crimes themselves. Former President of USA Gymnastics Steve Penny was indicted in Texas and accused of tampering with incriminating evidence against Larry Nassar. If convicted, Penny will face 2 to 10 years in prison and pay a fine up to $10,000.
If we’ve learned anything from the Boy Scouts, USA Gymnastics or the Catholic Church, trying to protect a certain image is almost never worth it. Aside from an organizations reputation being irreparably damaged upon discovery of a scandal, the financial and legal implications intensify as well. The cases discussed here are an example of what not to do. The best defense against permanent damage is for your organization to have processes to avoid improprieties and to have processes for reporting and investigating all allegations. With the proper action taken up front, it may not only save your organization, it could also save an innocent person from becoming a victim.