In a sign of the long-lasting fallout from the Larry Nassar sex-abuse scandal, Michigan State University no longer has direct liability insurance covering sexual-misconduct claims.

After Michigan State agreed to a $500 million settlement to more than 300 victims of Mr. Nassar’s abuse last year, its insurer of 18 years, United Educators, reduced the coverage it offered the East Lansing, Mich., school when negotiating to renew the general-liability policy.

Michigan State rejected the offer.

Instead, Michigan State established its own captive insurance company, called Lysander Series, part of North Carolina-licensed Aesir Insurance Co. Under that policy, which was reviewed by The Wall Street Journal, the school is covered for employee benefits, medical malpractice and other operational liability.

But losses related specifically to actual or threatened sexual abuse are not covered. It also doesn’t cover harm that stems from shoddy internal investigations or failure to report abuse to proper authorities.

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The university confirmed that the policy “broadly excludes insurer liability for sexual misconduct.”

Without such coverage, the university could have to pay out funds from its own coffers. Though it has reinsurance, which covers additional expenses beyond the main insurance package, those policies generally mirror the original policy in terms of what is or isn’t included in coverage.

The university “continues to assess its insurance coverage and self-insurance programs to best protect the university’s interests going forward,” said Michigan State spokeswoman Heather Young.

A Journal review of sexual-harassment-related settlements made by public university systems in the nation’s five major athletic conferences found that 22 schools paid out more than $10.5 million in 2016 and 2017. It’s not clear what portion of that was paid for by insurers.

Captive insurers are considered cost-effective ways for companies or other organizations to self-insure, especially if they have complex risk exposure. They are regularly created by academic medical centers that need malpractice insurance—but insurance executives and brokers say they aren’t as common for universities at large.

Michigan State has faced a slew of legal and leadership challenges in the wake of the Nassar scandal. The former president, Lou Anna Simon, now faces criminal charges for lying to police; its controversial interim president, John Engler, resigned in January; and the state’s attorney general is still investigating the school’s response to allegations against the former doctor.

The school agreed to the $500 million settlement in May, about six weeks before its policy with United Educators expired.

The insurer offered to renew its coverage, with new conditions. It wouldn’t expose itself to any potential future claims against Nassar, who pleaded guilty in 2017 to state sexual-abuse charges in Michigan and to federal child-pornography charges, for which he is serving an effective life sentence. Nor would it cover former College of Osteopathic Medicine dean William Strampel, who earlier that spring had been charged with criminal sexual conduct and neglect of duty.

Ms. Young said the proposed terms were “onerous.”

United Educators was afraid that if it didn’t carve out Nassar from its new policy offer, it would be saddled with even more potential costs related to how the school handled his criminal misconduct, according to a person familiar with the matter.

The university balked at the limited coverage option, according to that person. United Educators, which insures more than 1,600 colleges and schools, says defections are rare; the company boasts a 98% 10-year average retention rate on its website.

So Michigan State established Lysander Series. The name is a nod to the school’s athletics teams, known as the Spartans; Lysander was a Spartan military leader credited with helping to end the Peloponnesian War.

Under its general-liability policy, which runs through July, Michigan State is on the hook for the first $5 million of liability, per occurrence. Insurance executives and brokers say $1 million to $2 million of upfront exposure is more common for a school of that size.

The policy covers the next $10 million of liability after Michigan State’s first $5 million, per occurrence. Including reinsurance, the school’s coverage is capped at $55 million.

In July, the school sued 13 insurance companies that had covered it during the years Nassar worked there, including United Educators, saying they were responsible for the settlement payout. The school issued bonds to pay the funds in December and is now in mediation with those insurers.

Write to Melissa Korn at melissa.korn@wsj.com