Md. Blues must pay ex-chief $3.5 million, panel rules Sardegna wins case against insurer over retirement package

February 04, 1997|By M. William Salganik | M. William Salganik,SUN STAFF

An arbitration panel ruled yesterday that Blue Cross Blue Shield of Maryland must pay $3.5 million in retirement benefits, interest and legal fees to Carl J. Sardegna, the chief executive officer who quit under pressure in 1992 with the company on the brink of insolvency.

In 1990, the Blue Cross board had approved a $2 million "supplemental executive retirement plan" to be paid to Sardegna whenever he left. The retirement payment quickly became controversial when Sardegna quit after a U.S. Senate Committee investigation which concluded that there had been poor management and extravagant spending at the Maryland company.

John A. Donoho, then state insurance commissioner, temporarily blocked the payment. And Attorney General J. Joseph Curran Jr. asked the board to cancel the payout, which he called "a platinum parachute."

Curran said the payment was "irreconcilably inconsistent with the nonprofit mission of the company" and with the state charter that required Blue Cross Blue Shield to provide health insurance for Marylanders at the lowest possible cost.

The board agreed in February 1993, to revoke the retirement packages. Sardegna sued, and the two sides agreed to have the case heard by a three-member arbitration panel. The case was heard in several sessions from July through December.

In a unanimous opinion, the arbitrators ruled yesterday that Sardegna "performed his duties in a manner that did not constitute cause for termination" under the terms of the Blue Cross retirement plan, so the board had "acted improperly and in abuse of its discretion" in refusing to pay him.

Sardegna's lawyer, J. Alan Galbraith, said the departed executive would have no comment yesterday, but "he's very pleased. It's a complete vindication from his perspective. He was viewed as a complete villain in 1992 and 1993, and it was the result of misperception."

Jeffery W. Valentine, a Blue Cross spokesman, said the company was "obviously disappointed." He said Blue Cross had "made accruals for much of the claim that was awarded and it will not have any direct impact on future premiums." Valentine said Blue Cross officials would not comment on the merits of the case.

Galbraith said a main question in the arbitration had been whether Sardegna had kept the board fully informed of the company's financial position -- which had become so precarious that the national Blue Cross and Blue Shield Association had placed the Maryland Blues on "conditional membership status."

Testimony showed, Galbraith said, that not only had Sardegna informed the board, he had written to Blue Cross employees and discussed the conditional status with the press.

The three arbitrators, Patricia H. Latham, M. David Vaughn and Jeffrey L. Squires, said Blue Cross must pay Sardegna within 30 days. The payments include:

$2,088,186, the supplemental retirement payment.

$$509,747 in interest.

$865,978 in legal fees and $67,484 in expenses to Williams & Connolly, the Washington law firm that represented Sardegna.

$35,212 to another law firm, Kaplan, Greenberg, Engelman and Belgrade, which represented and attempted to negotiate a settlement for Sardegna earlier.

$48,054 in arbitration expenses and fees.

Fred M. Gloth Jr., Blue Cross' former general counsel who left at about the same time as Sardegna, also had been given a retirement payment that was blocked by the board. An arbitrator awarded him $2.8 million in benefits, interest and legal fees in 1995.

Donoho, the former insurance commissioner, said last night that he had blocked the payments because "at that moment, the Blues had only $9 million in cash. If they had paid out $5 million to those two fellows, they would not have been able to pay claims."

Dwight K. Bartlett, the current commissioner, said, "I know Mr. Donoho expressed concerns about the payments, given the shaky financial condition of the Blues. Given the fact that the Blues have come back strongly, I don't have that concern now."

Beyond that, Bartlett said, he had no position on the payments.

According to Blue Cross, the company had a statutory surplus of $24.9 million at the end of 1992, with enough cash to cover about three weeks' worth of claims. By the end of 1995, the surplus stood at $197.8 million, with enough cash to pay 4 1/2 months' worth of claims.

Galbraith said Sardegna, who was chief executive at Blue Cross for seven years, "is now pursuing other business ventures" and lives in Baltimore County.

Pub Date: 2/04/97

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