Two Plead Guilty in Big Virginia Insurance Fraud Case Involving Former Malpractice Reciprocal

February 11, 2005

Two former top officers of collapsed Reciprocal of America are scheduled for sentencing in June for their roles in what a federal prosecutor called one of Virginia’s biggest insurance fraud cases.

Kenneth R. Patterson was the president and CEO and Carolyn B. Hudgins was executive vice president of the company when it was placed in receivership in January 2003 with unpaid liabilities of $450 million.

Both entered guilty pleas in U.S. District Court this week to conspiracy to commit insurance fraud and other charges.

They are scheduled to be sentenced June 28 before U.S. District Judge James R. Spencer. Patterson faces up to 15 years, while Hudgins could be sentenced to up to five years in prison.

Formed in 1976 when Virginia hospitals and physicians were having trouble getting medical-malpractice insurance, Reciprocal created related companies, Doctors Insurance Reciprocal and American National Lawyers Insurance Reciprocal, to protect doctors and lawyers.

The companies, however, ran into financial difficulty when they attempted to expand into such states as Alabama, Mississippi and Arizona, where there is a history of large malpractice awards.

In Alabama, as many as 800 physicians and medical personnel and 46 hospitals lost malpractice coverage in 2003 because of the Virginia company’s problems. Some had to delay surgeries and appointments until alternative insurance could be found.

The two former executives admitted that in an attempt to save Reciprocal, they concealed and misrepresented the company’s status through fraudulent accounting techniques and in reports to the Virginia insurance commissioner. The company’s board and subscribers were also misled, U.S. Attorney Paul J. McNulty said in a statement.

“The defendants took extreme measures to circumvent systems that protect subscribers and insured individuals,” McNulty said. “In doing so, they destroyed one of the largest insurance companies in Virginia.”

While most health facilities, doctors and lawyers were able to obtain malpractice insurance from other companies, they did so at a time of rising rates and the extent of their coverage for incidents when they had policies with the reciprocals remains in doubt.

Court documents allege that Patterson created the impression that the company’s assets were larger than they were by ordering an arbitrary reduction in the amount of reserves allocated to resolve cases that had been filed.

The allegations of fraud are among many other instances of accounting irregularities alleged in a civil lawsuit filed against Patterson, Hudgins and many others in November 2003 by Virginia Insurance Commissioner Alfred W. Gross. The suit has been consolidated with another case and is pending in Memphis, Tenn.

Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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