$5 million civil penalty imposed on Katie Cauthen

The N.C. Department of Insurance (NCDOI) has proposed that the state’s Commissioner of Insurance impose a civil penalty of $4,975,000 on Kathleen Cauthen, a former Blythewood Town Councilwoman, for what the Department said was Cauthen’s part in “orchestrat[ing] a fraudulent insurance scheme that allegedly defrauded thousands of individuals nationwide, including at least 498 North Carolina residents.”

The order was signed by Anne Goco Kirby, Assistant Attorney General for the N.C. Department of Justice Feb. 2 and issued to Cauthen March 2.

Similar penalties were imposed on at least 14 other individuals and companies that the Department says were associated with the alleged scheme.

In 2010, a number of states, including South Carolina and North Carolina, filed cease and desist orders against Cauthen and others, claiming they sold limited benefit medical plans backed by non-existent insurance to unsuspecting consumers through associations.

The NCDOI said it does not know the actual total amount of premiums collected from N.C. residents for what it called bogus and non-existent coverage.

“However, the affidavit of Jeff Jacobs, chief legal counsel of the SC Department of Insurance, indicates that between February 2008 and April 2010, Cauthen and William Worthy collected in excess of $10,000,000 in insurance premiums.”

These figures include premiums that the NCDOI claims were collected from the 498 N.C. residents who purchased the alleged bogus limited medical insurance.

According to the NCDOI’s Memorandum on Penalties for Violations of NCGS 58-28-13, these premiums were wired to various accounts controlled by Worthy, Cauthen and/or an individual named David L. Clark, and were never remitted to an insurer.

Instead, according to the Memorandum, these respondents used a portion of the premiums to pay claims, and Cauthen also used a portion of the premium money to pay employees she allegedly hired to act as customer service representatives.

The order states that “Worthy and Cauthen used the remaining premiums of at least $5,498,500 for personal and unrelated business expenditures.”

The NCDOI asked that the maximum penalty be imposed against Cauthen, Worthy and Clark of $5,000 for the first violation and $10,000 for each subsequent violation.

The NCDOI also asked that each of the 498 N.C. residents known to have purchased the phony insurance . . . be regarded as a separate violation by these respondents.

“Under this formula, the total proposed penalties for Worthy, Cauthen and Clark is $4,975,000 each.”

Cauthen was elected to the Blythewood Town Council in January 2008 and announced in August 2010 that she would not seek re-election in January 2012.