Insurer settles executive pay case with state

The state's largest medical malpractice insurer has agreed to pay a $75,000 penalty to settle allegations that part of its executive compensation plan violated state law.

Medical Mutual Insurance Co. of North Carolina and four senior executives, including CEO A. Dale Jenkins, agreed to the settlement with the state Insurance Department. They deny any wrongdoing, however, contending that the compensation plan was within the law.

The dispute centers on the insurer's investment of $9.8 million in real estate partnerships that top executives also participated in, according to the Insurance Department. Those investments, state officials contend, violate a state law that forbids insurance companies from making investments in which its directors or officers are substantially involved.

The Insurance Department didn't take issue with the investments themselves or with the amount of compensation contemplated in the investment plan but objected to the executives' involvement.

"Our contention is, the money invested by the company should go back to the company owners," said department spokeswoman Chrissy Pearson. "In this case, that is the policyholders, since this is a mutual insurance company."

Medical Mutual, based in Raleigh, provides malpractice insurance to about 6,300 physicians statewide. Each policyholder has an ownership stake in the business.

The Insurance Department said it uncovered the disputed compensation plan in an audit conducted in the spring.

The settlement agreement was released Wednesday.

The company and its lawyers think the real estate transactions were allowed as part of its executive pay program, Dr. Henry J. Carr, Medical Mutual's chairman, said in a prepared statement. "Because the transactions are not material to our overall operations," Carr said, "we have elected to move forward" and settle the dispute.

The four executives who invested in the real estate partnerships, and agreed to the settlement, are Jenkins; Brian Kent Tucker, senior vice president; David Paul Sousa, senior vice president and general counsel; and Paul Mark Davidson, treasurer.

Jenkins referred questions to Bill Patterson, a Raleigh lawyer who represented Medical Mutual in the regulatory dispute.

"It is not appropriate for me to comment on executive compensation," Jenkins said. "I don't set my compensation." The board of directors sets the CEO's salary and bonuses.

Medical Mutual made the investments after consulting with its attorneys, who declared it appropriate. "I believe to this day it is a permissible investment," Patterson said.

Although Patterson agreed that state law generally bars an insurer from investing alongside its executives, he pointed to a provision that carves out an exception for compensation approved by the board of directors.

Patterson said the company had a dual purpose in making the investments: diversifying its investments by taking advantage of what was at the time a strong local real estate market, and leveraging its investments in a way that provided additional compensation for executives.

By allowing the executives to invest alongside the company, he said, "you get more bang for your compensation buck."

The investment partnerships also included investors with no affiliation to the company, Patterson said.

Although there were nine partnerships, only five investments were involved -- in buildings and raw land, Patterson said, including the company's headquarters building on Spring Forest Road.

The deals were structured so the executives wouldn't receive any money from the investments unless they were profitable, "and the company had to get all of its money back before the executives got any," Patterson said.

In addition to paying the $75,000 penalty, Medical Mutual and the officers agreed the executives' ownership stakes in the real estate partnerships will be terminated and transferred to the company. Any profits they received to date also are to be turned over to the company.