The proposed $1.3 billion sale of the region's largest health insurer could be illegal under state law because of bonus and severance packages totaling $119 million offered to a handful of key executives, Maryland's insurance commissioner said yesterday.

Steven B. Larsen's comments came on the second day of hearings on the sale of CareFirst BlueCross BlueShield, a not-for-profit company that provides health care coverage to nearly 3 million customers in Maryland and the District.

"The enforcement of the law could result in this deal being disapproved," Larsen said, adding that the packages promised to eight executives have sparked "public outcry or at least public concern."

Daniel J. Altobello, CareFirst's board chairman, defended the planned payouts, saying the company's management team "deserved recognition" for jobs well done and needed incentives to stay on board until the firm is sold to WellPoint Health Networks Inc., a California-based for-profit insurer.

Altobello also questioned "the depths" of public outcry, saying he believed most of the company's policyholders had yet to form an opinion. And he angrily defended the 21-member board of the nonprofit organization that signed off on the compensation packages.

"There has been much made about what the board of directors might gain out of this," he said. "Zero. Unemployment."

For a hearing on insurance regulations, this one was full of drama. Larsen played the role of the daring prosecutor, brandishing subpoenaed documents while questioning the veracity of CareFirst's hired experts and cutting witnesses short with curt directives.

CareFirst's defense team watched the back-and-forth, for the most part unsmiling.

Conspicuously absent was William L. Jews, the company's chief executive, whose compensation package was the most expensive of all: Should the deal be approved and executed, Jews has a severance parachute worth $30 million. The board also gave Jews and other company executives merger bonuses worth $41 million, though state lawmakers were so infuriated by the bonuses that they passed a law last year to ban them.

Many question whether the incentives clouded the executives' judgment in striking the deal with WellPoint. Larsen's expert testified Monday that the company may be worth far more than the $1.3 billion selling price.

By law, the company is considered a public asset and has received huge tax subsidies. Consequently, proceeds of the sale would be divided among Maryland, the District and Delaware, the three jurisdictions where CareFirst operates.

At issue yesterday was whether the board violated its fiduciary responsibility in promising the pay packages and whether the packages themselves are enough to kill the deal under Maryland law.

The law requires Larsen to approve proposals like this one only if they are determined to be in the public interest. It specifies that a deal is not in the public interest "unless the appropriate steps have been taken" to ensure that the value of the public asset has been safeguarded and does not "inure directly or indirectly to an officer, a director or trustee of a nonprofit health entity."

Experts on both sides entered into a lengthy discussion about the law's meaning. Both agreed only that payments ought not to be "unreasonable."

Jay Angoff, a former insurance commissioner hired by Larsen, pointed to Internal Revenue System code, which defines an "excess parachute payment" as one that exceeds three times the annual salary of the recipient.

He said experts hired by the board could not find another instance in which executives of a not-for-profit insurer had received compensation packages of the type and size proposed for CareFirst executives. Instead, he said, they relied on comparisons to large for-profit companies such as CVS Corp.

CareFirst witnesses attacked Angoff's credentials and questioned whether the IRS standard should be a determining factor.

Under questioning by Larsen, Gene E. Bauer, a compensation expert hired by the CareFirst board, said the firm was competing for executives with for-profit companies and needed incentives to ensure that the managers got top dollar for the company and stayed with it through the merger.

Larsen pounced: "Don't they get a big salary to stay focused?" he asked.

"I'm not suggesting they would shirk their duties," Bauer responded.

"Then why give them incentives?" Larsen asked.

Next, Larsen produced a series of documents he said showed that the incentive packages were approved after WellPoint and another company made their final and best offers. He produced a memo to Jews from an lawyer that said an incentive plan would be supportable "only if it is implemented before the price negotiations begin." And he pointed out that the selling price of the company didn't increase after the compensation rewards were approved.

CareFirst officials responded that the deal is not final and that incentives are working because most of the top executives are still with the company.

Daniel Altobello, CareFirst's board chairman, defended compensation plans, saying executives deserve recognition for good work and incentives to stay.