McDonough Employment Agreement



Exhibit 10.1




EMPLOYMENT AGREEMENT 



        This
Agreement, made the 14th day of March, 2005, is effective as of January 1,
2005, by and between Coventry Health Care, Inc., a Delaware corporation (the
“Company”), and Thomas P. McDonough (the “Executive”). 



        WHEREAS,
the Company employed the Executive as its Executive Vice President and Chief Operating
Officer pursuant to an Employment Agreement dated February 6, 2004, and the parties wish
to amend the terms of such employment as set forth herein. 



        NOW,
THEREFORE, in consideration of the mutual covenants contained in this Employment Agreement
(“Agreement”), the parties hereby agree as follows: 



     1.    
          TERM AND DUTIES 



        1.1
The term of this Agreement commenced as of January 1, 2005, shall continue through
December 31, 2007 (the “Initial Term”), and will continue on a year-to-year
basis thereafter (the “Renewal Term”), until the Executive’s employment is
terminated as outlined in Section 4 herein. 



        1.2
Executive shall serve as President, Coventry Health Care, Inc., and President and Chief
Executive Officer, First Health Group Corporation, shall report to the Chief Executive
Officer, Coventry Health Care, Inc., and shall be responsible for broad executive
responsibilities, including, but not limited to, the establishment and implementation of
policies and directives, formulation of company goals and objectives, effective management
of employees, and such other powers and duties normally associated with such position or
as may be delegated or assigned to the Executive by the Company’s Chief Executive
Officer. During the Initial or Renewal Term of the Agreement, the Executive shall also
serve without additional compensation in such other offices of the Company or its
subsidiaries or affiliates to which he may be elected or appointed. 



     2.    
          COMPENSATION AND BENEFITS 



        2.1
The Company shall pay the Executive a base salary (“Base Salary”) of not less
than Eight-Hundred Fifty Thousand Dollars ($850,000) per annum, subject to applicable
withholdings. The Base Salary shall be payable according to the customary payroll
practices of the Company. The Base Salary shall be reviewed annually and shall be subject
to increase from time to time. 



        2.2
The Executive shall be eligible for an annual bonus (“Bonus”). In addition,
Executive shall be eligible for a 2005 and a 2006 Special Performance Bonus. All bonuses
are in accordance with the Company’s 2004 Incentive Plan. 



        2.3
The terms and conditions of all stock options and restricted share awards previously
granted to Executive shall remain in full force and effect. 



        2.4 The Executive will be entitled to
participate in all employee benefit plans or programs and receive all benefits and
perquisites to which any salaried employee is eligible under any existing or future plan
or program for salaried employees, including, without limitation, all plans developed for
executive officers of the Company. These plans or programs may include group
hospitalization, health care, dental care, vision care, life or other insurance, tax
qualified pension, car allowance, savings, thrift and profit sharing plans, sick leave
plans, travel or accident insurance, disability insurance, and contingent compensation
plans, including capital accumulation programs, deferred compensation plans, restricted
stock programs, stock purchase programs and stock option plans. Nothing in this Agreement
will preclude the Company from amending or terminating any of the plans or programs
applicable to salaried employees or executive officers. 


        2.5       The Executive will be entitled to four (4) weeks of annual paid vacation.



        2.6
The Company will reimburse the Executive for all reasonable travel and other expenses
incurred by the Executive in connection with the performance of his duties upon proper
documentation in accordance with Company policies. In addition, Executive shall be
entitled to a discretionary monthly car allowance, payable on a grossed-up basis. 



        2.7
The Executive will be entitled to 20 hours of personal use of the Company plane and full
reimbursement of the associated additional income tax liability. 



         3.       
          DEATH AND DISABILITY COMPENSATION 



        3.1
In the event of the Executive’s death during the Initial or Renewal Term, the
Agreement terminates and all payments under the Agreement shall cease as of the date of
death, except for the following benefits to be paid to the Executive’s beneficiaries: 



                    (a)    
          any earned but unpaid base salary and a lump sum payment equal to the average
          annual bonus compensation for the two (2) calendar years immediately preceding
          the death of Executive; 



                    (b)    
          for twenty-four (24) months following the date of the Executive’s death,
          the Company shall pay the cost of medical, dental, and vision insurance premiums
          as in effect at the date of the Executive’s death, to the Executive’s
          designated beneficiary, subject to a formal election by the beneficiary; 



                    (c)    
          the exercisability of stock options granted to the Executive shall be governed
          by any applicable stock option agreements and the terms of the respective stock
          option plans; and 



                    (d)    
          the Executive’s designated beneficiary will be entitled to receive the
          proceeds of any life or other insurance or other death benefit programs provided
          or referred to in this Employment Agreement. 



        3.2
Notwithstanding the short-term disability of the Executive, the Company will continue to
pay the Executive pursuant to Section 2 hereof during the Initial or Renewal Term, unless
the Executive’s employment is earlier terminated in accordance with this Agreement.
In the event the Executive becomes disabled (as defined by the Company’s long-term
disability plan), the Executive’s employment will be termed and the Company will pay
the Executive amounts equal to the following: 



                    (a)    
          any earned but unpaid Base Salary and a lump sum payment equal to the average
          annual Bonus for the two (2) calendar years immediately preceding the year of
          termination due to disability; 



                    (b)    
          for twenty-four (24) months following the date of the Executive’s
          termination due to disability, the Company shall pay for the cost of the
          Executive’s medical, dental, and vision insurance premiums as in effect at
          the date of the Executive’s termination, subject to a formal election by
          the Executive; and 



                    (c)    
          the Executive will receive a monthly payment equal to 60% of the
          Executive’s pre- disability earnings (as defined by the qualified long-term
          disability plan) less any monthly benefit paid under the qualified long-term
          disability program. Such payments shall continue to cessation of payments under
          the Company’s qualified long-term disability program. 



                    (d)    
          the Executive will receive twelve (12) months additional vesting credit for all
          stock options and restricted stock awards. 



        3.3
During the period the Executive is receiving payments following his disability and as long
as he is physically and mentally able to do so, the Executive will furnish information and
assistance to the Company and from time to time will make himself available to the Company
to undertake assignments consistent with his position or prior position with the Company
and his physical and mental health. 



        3.4
For purposes of this Agreement, the term “disabled” or “disability”
will have the same meaning as is attributed to such term, or any substantially similar
term, in the Company’s long-term disability income plan as in effect from time to
time. The Company’s group long-term disability policy in existence at the time of
disability shall be considered to be a part of this Agreement. 



         4.       
          TERMINATION OF EMPLOYMENT 



        4.1
The Company may terminate this Agreement with or without cause at any time during the term
of this Agreement with ninety (90) days prior notice (the “Notice”). . However,
except in the case of the two year period following a Change in Control (as hereinafter
defined), if the Executive suffers a Termination Without Cause (hereinafter defined) or a
Constructive Termination (as hereinafter defined), the Company will continue to pay the
Executive the following: 



                    (a)    
          for a period of twelve (12) months after Termination Without Cause or
          Constructive Termination, a monthly amount equal to 100% of the sum of the
          Executive’s combined (i) Base Salary as in effect at the time of the
          termination and (ii) the average Bonus for the two (2) calendar years
          immediately preceding the year of termination, divided by twelve (12); and 



                    (b)    
          for twelve (12) months following such Termination Without Cause or Constructive
          Termination, the Company shall pay the cost of the Executive’s medical,
          dental, and vision insurance premiums as in effect at the date of termination,
          subject to a formal election by the Executive. However, if Executive obtains
          employment with another employer during such twelve (12) month period, such
          coverage will cease as of the date Executive, his spouse and family can be
          covered under the plans of the new employer without exclusion for preexisting
          conditions, if earlier than the end of the 12-month period; and 



                    (c)       
          the Executive will receive twelve (12) months additional vesting credit for all
          stock options and restricted stock awards. 



        4.2
If the Executive suffers a Termination Without Cause or Constructive Termination within
two (2) years following a Change in Control, the Company will pay to the Executive the
following: 



                    (a)    
          in a lump sum upon such termination an amount equal to the sum of (i) 200% of
          the Executive’s combined (A) Base Salary as in effect at the time of the
          termination and (B) average Incentive Bonus for the two (2) calendar years
          immediately preceding the year of termination, and (ii) to the extent that such
          foregoing amount or any other payment in the nature of compensation (within the
          meaning of Section 280G of the Internal Revenue Code of 1986, as amended, and
          the regulations promulgated thereunder (“Section 280G”)) to or for the
          benefit to the Executive (or any part of such amount or other payment)
          constitutes an “excess parachute payment” within the meaning of
          Section 280G, the amount, if any, of (A) such “excess parachute
          payment” multiplied by a fraction, the numerator of which is the number one
          (1.00) and the denominator of which is (I) the number (1.00) minus (II) the
          effective tax rate under Section 280G applicable to the Executive expressed as
          decimal, minus (B) the amount of such “excess parachute payment”; 



                    (b)    
          for twenty-four (24) months following such Termination Without Cause or
          Constructive Termination following a Change of Control, the Company shall pay
          for the cost of the Executive’s medical, dental, vision insurance premiums
          as in effect at the date of termination, subject to a formal election by the
          Executive; and 



                    (c)    
          all stock options and all restricted stock granted to the Executive shall vest
          in full upon a Change of Control. 



        4.3
Executive may terminate his employment hereunder at any time during the term of this
Agreement with notice (as defined in Section 4.1 herein). If the Executive suffers a
Termination with Cause or the Executive terminates his employment with the Company not due
to a Constructive Termination, death or disability (as defined in Section 3.4) (a
“Voluntary Termination”), then the Company will not be obligated to pay the
Executive any amounts of compensation or benefits following the date of termination,
except earned but unpaid Base Salary through the date of termination, which will be paid
in accordance with standard company procedures. The exercisability of stock options
granted to the Executive shall be governed by any applicable stock option agreements and
plans. 


        4.4     For purposes of this Employment Agreement, the following terms have the following meanings:



                    (a)    
          A “Change in Control” shall occur if at any time, substantially all of
          the assets of the Company are sold or transferred by sale, merger or otherwise,
          to an entity which is not a direct or indirect subsidiary of the Company, or if
          any “person” (as such term is used in Sections 13(d) or 14 (d) of the
          Securities Exchange Act of 1934, as amended) is or becomes the beneficial owner,
          directly or indirectly, of securities of the Company representing 35% or more of
          the combined voting power of the then existing outstanding securities of the
          Company. 



                    (b)    
          “Constructive Termination” means termination by the Executive which
          follows (i) a reassignment of duties, responsibilities, title, or reporting
          relationships that are not at least the equivalent of his then current position
          as set forth in Section 1.2 or a material reduction in the compensation and
          benefits provided herein, or (ii) the intentional or material breach by the
          Company of this Agreement, or (iii) a reassignment, after a Change of Control,
          to a geographic location more than fifty miles from Bethesda, Maryland. The
          Executive shall have a period of ninety (90) days after termination of his
          employment to assert against the Company that he suffered a Constructive
          Termination, and after the expiration of such ninety (90) day period, the
          Executive shall be deemed to have irrevocably waived the right to such
          assertion. 



                    (c)    
          “Termination With Cause” means termination by the Company, acting in
          good faith, by written notice to the Executive specifying the event relied upon
          for such termination, due to; (i) the Executive’s indictment or conviction
          of a felony, (ii) the Executive’s intentional perpetration of a fraud,
          theft, embezzlement or other acts of dishonesty, (iii) the Executive’s
          intentional breach of a trust or fiduciary duty which materially adversely
          affects the Company or its shareholders. 



                    (d)    
          “Termination Without Cause” means termination by the Company other
          than due to the Executive’s death or disability or Termination With Cause. 



     5.    
          OTHER DUTIES OF THE EXECUTIVE 



        5.1 The Executive shall devote
substantially all of his working time to the business of the Company and during the Term
shall not take, directly or indirectly, an active role in any other business without the
prior written consent of the Company; but except as provided in Section 5.3, this Section
shall not prevent the Executive from serving as a director of other entities not
affiliated with the Company, from making real estate or other investments of a passive
nature or from participating in the activities of a charitable organization where such
participation does not adversely affect the Executive’s ability to perform his duties
under this Agreement. 



        5.2 The Executive will, upon
reasonable notice, during or after the Term of this Employment Agreement, furnish
information as may be in his possession and cooperate with the Company as may reasonably
be requested in connection with any claims or legal actions in which the Company is or may
become a party. The Executive shall receive reasonable compensation for the time expended
by him pursuant to this Section 5.2 after the Term. 



        5.3 The Executive acknowledges that
certain information pertaining to the business and operations of the Company such as
strategic plans, product development, financial costs, pricing terms, sales data or new or
developing business opportunities (“Confidential Information”), is confidential
and is a unique and valuable asset of the Company. Access to and knowledge of this
Confidential Information are essential to the performance of the Executive’s duties
under this Agreement. The Executive will not during the term of this Agreement or
following termination of his employment except to the extent reasonably necessary in the
performance of his duties under this Agreement, give to any person, firm, association,
corporation or governmental agency any Confidential Information except as required by law.
The Executive will not make use of this Confidential Information for his own purposes or
for the benefit of any person or organization other than the Company. The Executive will
also use his best efforts to prevent the disclosure of this Confidential Information by
others. All records, memoranda, etc. relating to the business of the Company whether made
by the Executive or otherwise coming into his possession will remain the property of the
Company. 



        5.4 The Executive will not Compete
with the Company (as hereinafter defined) at any time while he is employed by the Company.
Except after a Change in Control or after non-renewal under Section 1.1, in the event of
Termination Without Cause or Constructive Termination pursuant to Section 4.1, the
Executive will not Compete with the Company for a period of one (1) year from the date of
such termination. In the event of a termination after a Change in Control that gives rise
to payments to Executive under Section 4.2, the Executive will not Compete with the
Company for one (1) year from the date of termination. In the event of a Voluntary
Termination in which the Executive only receives payment as defined under Section 4.3, or
which follows a Company non-extension notice under Section 1.1, there will be no
restriction on the Executive’s right to Compete with the Company after the date his
employment terminates. For the purposes of this Section 5.4, the term “Compete with
the Company” means action by the Executive, direct or indirect, either as an officer,
director, stockholder, owner, partner, employee or in any other capacity, resulting in the
Executive having any legal or equitable ownership or other financial or non-financial
interest in or employment with, any HMO, managed care or health insurance business within
a fifty mile radius of any location where the Company or any subsidiary or affiliate of
the Company conducts such business at the date of a termination of the Executive’s
employment; provided, however, that the term “Compete with the Company” shall
not include ownership (without any more extensive relationship) of a less than a five
percent (5%) interest in any publicly-held corporation or other business entity. The
Executive acknowledges that the covenants contained herein are reasonable as to geographic
and temporal scope. The Executive acknowledges that his breach or threatened or attempted
breach of any provision of Section 5.4 may cause irreparable harm to the Company not
compensable in monetary damages and that the Company may be entitled, in addition to all
other applicable remedies, to a temporary and permanent injunction and a decree for
specific performance of the terms of Section 5.4. 



     6.    
          INDEMNIFICATION OF EXECUTIVE 



        6.1 The Company shall indemnify the
Executive and shall reimburse the Executive’s expenses under the circumstances
described, and to the maximum extent provided under the mandatory and the permissive
indemnification and expense reimbursement provisions of Delaware law. The provisions of
this Section 6.1 shall continue in full force and effect after Executive ceases to serve
as an officer, director, employee or in any other capacity with the Company or any of its
affiliates, and shall inure to the benefit of his heirs, executors or administrators. 



     7.    
          MISCELLANEOUS 



        7.1 This Agreement contains the
entire understanding between the Company and the Executive with respect to the subject
matter and supersedes any prior employment or severance agreements between the Company and
its affiliates, and the Executive. 



        7.2 This Agreement may not be
modified or amended except in writing signed by the parties. No term or condition of this
Employment Agreement will be deemed to have been waived except in writing by the party
charged with waiver. A waiver shall operate only as to a specific term or condition waived
and will not constitute a waiver for the future or act on anything other than that which
is specifically waived. 



        7.3 Should any part of this Agreement
be declared invalid for any reason, such invalidity shall not affect the validity of any
remaining portion hereof and such remaining portion shall continue in full force and
effect as if this Employment Agreement had been originally executed without including the
invalid part. Should any covenant of this Employment Agreement be unenforceable because of
its geographic scope or term, its geographic scope or term shall be modified to such
extent as may be necessary to render such covenant enforceable. 



        7.4 Titles and captions in no way
define, limit, extend or describe the scope of this Agreement nor the intent of any
provision thereof. 



        7.5 This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. 



        7.6 This Employment Agreement has
been executed and delivered in the State of Maryland and its validity, interpretation,
performance and enforcement shall be governed by the laws of that state. Any dispute among
the parties hereto shall be settled by arbitration in Bethesda, Maryland, in accordance
with the rules then obtaining of the American Arbitration Association and judgment upon
the award rendered may be entered in any court having jurisdiction thereof. All provisions
hereof are for the protection and are intended to be for the benefit of the parties hereto
and enforceable directly by the binding upon each party. Each party hereto agrees that the
remedy at law of the other for any actual or threatened breach of this Employment
Agreement would be inadequate and that the other party shall be entitled to specific
performance hereof or injunctive relief or both, by temporary or permanent injunction or
such other appropriate judicial remedy, writ or orders as may be decided by a court of
competent jurisdiction in addition to any damages which the complaining party may be
legally entitled to recover. 



        7.7 All notices, requests, consents
and other communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or confirmed
facsimile transmission to the following: 



          		    (i)       
               If to the Company, at 6705 Rockledge Drive, Suite 900, Bethesda, Maryland,
               20817, Attention: Chairman of the Compensation Committee, or at such other
               address as may have been furnished to the Executive by the Company in writing;
               or 



               



          		    (ii)       
               If to the Executive, at 6705 Rockledge Drive, Suite 900, Bethesda, Maryland,
               20817 or ______________________________________________________ or such other
               address as may have been furnished to the Company by the Executive in writing. 



               


        7.8      This Employment Agreement shall be binding on the parties' successors, heirs and assigns.



        IN
WITNESS WHEREOF, the undersigned have executed this Employment Agreement as of the date
first above written. 



	COVENTRY HEALTH CARE, INC.	EXECUTIVE:




 

	By:         /s/ Dale B. Wolf
	              /s/ Thomas P. McDonough

	             Dale B. Wolf	             Thomas P. McDonough
	             Chief Executive Officer