City officials fire back at employee, criticize methods

Say his use of broker to buy insurance was 'inappropriate'

lblackford@herald-leader.comJune 15, 2010 

Officials of Lexington Mayor Jim Newberry's administration are firing back at Patrick Johnston, the city employee who raised questions about the way the city buys insurance.

In 2007, Johnston raised red flags about the ethics of the Kentucky League of Cities and the way the Lexington-Fayette Urban County Government's law department was buying insurance. Those questions have led to a city investigation and a state audit into how Johnston's allegations were handled and an analysis of how the city procures insurance.

Now city officials say they were uncomfortable with the way Johnston, the city's director of risk management, procured insurance himself.

At issue is Johnston's use of an insurance broker, Marsh, which compared prices of different insurance companies to provide the city's excess liability coverage. That procurement apparently included the use of last looks, or last-chance quotes. This can mean the broker compares prices and asks one or more insurance companies to quote a lower price.

According to an Aug. 30, 2007, e-mail message from Johnston to Law Commissioner Logan Askew, which was provided to the Herald-Leader by administration spokeswoman Susan Straub, Marsh was paid a flat fee of $79,000 and brought competing proposals back to the city.

Johnston said in the e-mail that using Marsh saved the city money because it got last-chance quotes.

"This is how the LFUCG has saved thousands in premiums each year — by allowing the broker to go for a last-chance quote," Johnston wrote. "If allowed, Marsh could probably save the LFUCG another $10,000-$20,000 today on the AIG quote." AIG was one of the insurers giving the city bids.

Straub said that Askew, who was Johnston's boss, was uncomfortable with the practice because it was outside of the city's normal purchasing process.

"He considered it inappropriate," Straub said of Askew, who has declined to comment. "A last look does not fall within the rules of our organization."

Askew also was concerned about the practice because it came after a 2005 settlement between New York's then-Attorney General Eliot Spitzer and Marsh over alleged bid rigging and other illegal practices.

In that agreement, Marsh did not admit to wrongdoing but agreed to pay $850 million into a fund for clients; as a Marsh client, Lexington received $35,000 based on the fact that the city had purchased insurance through Marsh.

The agreement also addressed "contingent compensation" from an insurer, prohibiting Marsh representatives from taking any extra compensation for "providing preferential treatment," including last looks.

Straub, who gave the e-mails and the New York lawsuit to the Herald-Leader, said her actions were not a vendetta against Johnston.

"It explains why we felt it was really important to change the process," she said.

Hidden fees

Industry experts say that last looks are standard practice when the client knows about them. The problems found in the Spitzer lawsuit were related to hidden fees paid to Marsh by insurance companies to give them a contractual right to get a "last look."

"In terms of the last look, if the client knows you're doing it, that's what supposed to happen," said Scott Sinder, general counsel to the Council of Insurance Agents and Brokers and a partner at Steptoe and Johnson in Washington, D.C. "Last look is really a misnomer: it really is about going back and forth until you get the best price."

Traditionally, last looks allow the broker to compare insurance quotes in order to work for a lower price, much as an individual would bargain with different car dealers for the best deal. A broker does not put out a call for sealed bids, it merely requests quotes, which it can then compare to one another.

"That's a common business practice," said Kentucky Insurance Commissioner Sharon Clark. "Brokers represent several companies; they say, 'What is the best price you can get on this?'"

Johnston's lawyer, Patrick Nash, said his client had done nothing wrong. He declined to make Johnston available for comment on the specifics of Marsh's process.

In other e-mails from 2007, Askew made it clear that he wanted the Kentucky League of Cities, a non-profit organization that sells insurance and other services to its members, to be part of the procurement process, although the League did not go through Marsh.

Officials from Marsh and the League also have declined to comment.

Denny Nunnelley, director of the Kentucky Association of Counties, said county governments are allowed to use a broker to get the lowest price.

"There's no rule or rhyme or reason that prohibits them from going back to get something cheaper," he said. "It wouldn't have to be sealed bids; the parameters are flexible so counties can get the lowest and best deal."

League conflicts

In the end, the council members went with Askew's recommendation to hire the League, which got its insurance from ACE Insurance, with claims administration by Collins and Co., a Tennessee-based third-party administrator. Johnston has said he did not endorse that decision.

City officials say they saved money and improved service with the League.

In 2009, a state audit found that the League's insurance director, William Hamilton, had numerous conflicts of interest with Collins and Co., including that he and his wife rented them office space in Georgetown and that the Hamiltons accepted several Caribbean trips from Collins' chief executive.

In addition, Hamilton's daughter, Carrie Hamilton, works for ACE, the company that KLC brought in to handle Lexington's business. According to a biography from a speaking engagement, Carrie Hamilton works for ACE's Los Angeles office. That conflict of interest was also found in the state auditor's report on KLC. The audit also found that Collins and Co. had employed Hamilton's son and his grandchild's mother.

The League declined to bid on Lexington's insurance business for 2011. LFUCG officials chose not to use a broker or an agent; instead they used the request for proposal process for its different insurance needs.

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