A Lexington city employee questioned the ethics and business practices of the Kentucky League of Cities' insurance division as his superior pushed to consider hiring the group, according to a series of e-mails between the two in 2007.
League representatives were trying to get the city's business without contacting its existing insurance agent, Marsh Insurance, according to an August 2007 e-mail that Patrick Johnston, the Lexington-Fayette Urban County Government's director of risk management, sent to Law Commissioner Logan Askew.
"Without Marsh at the table, it is my opinion and that of the insurance community that KLC will be acting in an unethical manner," Johnston wrote to Askew on Aug. 17, 2007. "I teach ethics at the National RIMS (Risk and Insurance Management Society) conference and I am deeply disappointed with what I see KLC doing behind Marsh's back.
"Considering the manner in which KLC is behaving at this juncture, I'm not sure I want them as a business partner of the LFUCG," the e-mail continues. "If you can't trust them to be transparent with this process ... can you trust them to represent the best interest of the LFUCG in the future?"
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About 20 minutes later, Askew replied that he did not see any violation of ethical rules and that "it would suit me to have presentations from other companies as well. It seems to me that KLC being local, should get a serious look over foreign companies."
On Aug. 20, there was another exchange between Askew and Johnston. At 12:31 p.m., Askew wrote: "Patrick, KLC will (word underlined) be included for consideration of this business, and if we need to move the meeting back with Marsh, we will do so."
Half an hour later, Johnston replied that KLC wouldn't return calls to Marsh for analysis of their proposal. "If current behavior is any indication of future behavior, we will be in for a very rocky road with KLC on the account," he wrote.
Three years later, the League is the city's insurance agent, and Johnston and Askew are embroiled in a controversy at City Hall. Johnston's job has been slated for elimination, and some city council members want to know if that decision is related to allegations of fraud that Johnston made on audit questionnaires in 2008 and 2009.
The e-mails, which were left anonymously at the Herald-Leader's front counter, do not contain any details about those fraud allegations. Johnston's lawyer, Patrick Nash, said Johnston did not know where the e-mails came from or why they were given to the Herald-Leader. He declined to comment on their substance.
League officials did not return phone calls seeking comment on Wednesday.
City spokeswoman Susan Straub said city officials never pushed to hire the League. "What the push was was for a better policy for less money," she said.
On Tuesday, city council members voted to form an investigative committee to look further into the matter. Mayor Jim Newberry's administration also has recommended a third-party review of how the city handled the fraud allegations, possibly by the state auditor.
The League underwent a scathing state audit late last year, which found repeated instances of conflicts of interest and other problems, particularly involving its insurance services director, Bill Hamilton.
The audit found that Hamilton rented office space in Georgetown to Collins and Company, the League's claims adjustor, accepted trips to the Caribbean from Collins CEO James Johnston, and received numerous other gifts from other insurance companies, the audit found.
When those issues came to light in 2009, Newberry became one of the League's harshest critics. At that point, he had been on the League's executive board for two years, joining in 2007 — about six months before the council voted to hire the group as its insurance agent.
In addition to questioning the League's ethics, Patrick Johnston did several analyses that questioned whether the League would provide the most cost-effective deal for the city.
On Aug. 30, 2007, Johnston presented the Newberry administration with an analysis that showed a proposal by AIG to provide a package of insurance products would cost $491,481, which was $123,529 cheaper than the League's initial proposal of $615,010.
However, the city council apparently did not receive that analysis when it was asked to approve hiring the League a few days later on Sept. 11.
Several hours before the council meeting, Askew wrote to Johnston saying: "The Mayor has asked me to present the insurance matter to the council today. I want you to be sitting next to me. Please revise your comparison handout to eliminate the issues we resolved yesterday."
At the meeting, council members were handed a matrix that compared the League's proposal to AIG's. That matrix shows "KLC premium adjustments" that reduced the League's price to $476,510.
In addition, four areas of comparison were left out of the document given to the council, including a notation that the League did not have stringent self oversight of its financial and insurance forms, and that the League's finances were not graded by the national rating company A.M. Best. AIG had received an A+ rating from that group, according to the documents.
City officials have said the process was not competitively bid, but that two proposals were considered.
The council voted to accept the League's offer; Marsh's contract was cancelled.
Last week, city officials said overall expenses on insurance have gone from $1.376 million in 2007 to $1.274 million in 2010.
Councilman Julian Beard said he did not remember the details of the meeting when the council voted to hire the League, but he said the proposal was presented as the best deal.
"Otherwise we wouldn't have done it," he said Wednesday. "There was a feeling that maybe Marsh's cut of the pie was too high. In retrospect, there's a lot of things about the League of Cities we did not know then that we know now.
"At that point there was a very harmonious relationship between the administration and the council; it lasted about a year," Beard said. "Now it's a sad situation."
In 2008, a consulting firm did an organization audit of the city and recommended moving risk management into other departments and eliminating Johnston's position.
Last week, a council committee declined to accept that recommendation.
Newberry said on WVLK-AM Wednesday morning that the problem was linked to politics.
Newberry is running for re-election against Vice-Mayor Jim Gray, who will create the investigative committee to scrutinize the fraud allegations. Council member KC Crosbie, who has asked to see Johnston's fraud allegations, is married to lawyer and former council member Scott Crosbie, who has endorsed Gray.