Former exec sues HRH alleging defamation

Mr. Lockhart/ Mr. Lockhart

RICHMOND, Va.—Robert B. Lockhart, a former president of Hilb Rogal & Hobbs Co. who recently launched a new insurance brokerage, is suing HRH for allegedly defaming him in the course of settling regulatory charges over its contingent commission practices.

Mr. Lockhart, who was fired by HRH in May 2005 and who last month formed middle-market broker Kinloch Holdings Inc., filed the defamation complaint in a Virginia state court in August.

The suit charges that HRH improperly terminated him over alleged illegal rebate payments to an HRH client, then made him a scapegoat in its separate $30 million settlement of contingent commission charges with Connecticut regulators in August 2005. Mr. Lockhart had no responsibility for HRH's contingent agreements with insurers, which predated his joining the broker, the suit says.

HRH "identified in Lockhart a convenient public relations target for the company and a substantial sacrifice for (Connecticut) investigators," the complaint charges.

The suit comes more than a year after HRH launched arbitration proceedings against Mr. Lockhart to cancel salary and benefit obligations under his employment contract, which expires in February 2007. That arbitration, stayed by HRH since its July 2005 filing, was pending when Mr. Lockhart filed his defamation suit, court records say.

HRH is now asking a judge in Henrico County Circuit Court in Richmond to compel arbitration of the defamation claims as well. A hearing on the motion was scheduled for last Friday.

Mr. Lockhart, his lawyer and HRH all declined to comment on the dispute.

Mr. Lockhart and current HRH Chief Executive Officer Martin L. Vaughan III were both executives of broker American Phoenix Corp. when HRH acquired it in 1999. After the acquisition, Mr. Lockhart took over HRH's Hartford, Conn., office and later became the broker's Northeast regional director. In 2003, he was promoted to president and chief operating officer of HRH, taking over from Mr. Vaughan, who became HRH's chairman and CEO.

In the fall of 2004, Connecticut Attorney General Richard Blumenthal and the state's insurance department began investigating HRH's contingent commission practices, one of numerous investigations of insurance brokers by regulators in several states.

HRH also began a review of its own business practices, and in the course of that review, voluntarily notified Connecticut regulators of undisclosed commissions and potentially improper payments it had made related to Physicians for Women's Health, a Connecticut health care network, according to Mr. Lockhart's suit. PWH had been an American Phoenix client and remained with HRH after the acquisition.

According to the lawsuit Mr. Blumenthal later filed against HRH, the brokerage not only took undisclosed overrides on professional liability placements for PWH, but also agreed to pay allegedly illegal rebates ranging from $30,000 to $78,000 to Women's Health USA Inc., an Avon, Conn., administrator that handled PWH policy renewals.

HRH fired Mr. Lockhart in May 2005, citing his involvement with PWH. Mr. Lockhart signed a resignation letter under protest and denied that the brokerage had the proper cause required under his employment contract to terminate him, the suit says.

In an 8-K report filed the day of the termination with the Securities and Exchange Commission and in an internal memo to employees, HRH reported that the resignation stemmed from potentially improper payments to three organizations. The 8-K and internal memo, which do not name the organizations, also reported the firing of another HRH employee who handled the three accounts at the time Mr. Lockhart headed the Hartford office and the Northeast region.

In August 2005, HRH agreed to pay $30 million to settle Mr. Blumenthal's allegations that it had steered clients starting in 1998 to insurers paying it the highest contingent commissions. The settlement incorporated a separate consent order with the state's insurance department in which HRH agreed to pay a $250,000 fine to head off charges that it had--among other things--paid illegal rebates to WHUSA.

Mr. Lockhart now alleges in his defamation suit that his firing amounted to an effort by HRH to blame him not only for the PWH situation--a "narrow tangential issue" in the overall Connecticut investigation--but for the larger contingent commission settlement.

HRH's 8-K filing and internal memo mischaracterized Mr. Lockhart's termination, falsely painting him as a "culpable individual and a target of the investigation who stepped down voluntarily because of his involvement," the suit says.

HRH's 8-K filing and employee memo, and public comments by Mr. Vaughan and other HRH officials after Mr. Lockhart's termination, also created the impression that Mr. Lockhart was responsible for HRH actions that led to the $30 million settlement, his suit charges.

An internal HRH media question-and-answer document prepared for discussing the settlement included the following question, according to the suit: "Does the agreement resolve all the past questions relating to the state of Connecticut, including those surrounding former president and COO Robert Lockhart?"

The answer, the suit says, was "From our view, there are no further questions relating to past issues of broker and agent compensation. The situation referred to, we voluntarily reported to state regulators."

Several news media accounts incorrectly stated that Mr. Lockhart had resigned in connection with the client-steering investigation, the suit says.

"HRH's silence in the face of these mischaracterizations demonstrates its intent that Lockhart serve as a scapegoat for the investigation and settlement," the complaint charges.

Furthermore, HRH's voluntary disclosure of the PWH payments to Connecticut regulators--while it failed to disclose what the suit contends were similar payments to other HRH clients--allowed the broker to use Mr. Lockhart's firing as a bargaining chip in its settlement talks with Mr. Blumenthal, the suit contends.

"Lockhart's termination was presented to Connecticut law enforcement and regulatory officials as a pre-emptive measure to forestall the investigation and to absolve HRH from any sanction by shifting the blame to a convenient target," the complaint charges.

The defamation action seeks $30 million in damages.

HRH has continued to pay Mr. Lockhart's $365,000 annual base salary since his termination, but has not provided the 401(k), health insurance and other benefits called for in his contract, court papers say.