Following a threat of fines from the state Department of Insurance, officials of the Kentucky Association of Counties insurance group have agreed to stop paying for most meals, trips or gifts for county officials.
Those who serve on KACo's insurance boards would still be able to travel to meetings regarding insurance using the programs' money.
The move follows similar changes made by the Kentucky League of Cities in early September, which allows them to avoid violating the state's law prohibiting "illegal inducements" to prospective insurance customers.
Under that provision, insurance providers can't give prospective customers items or benefits worth more than $25. For KACo, which provides a range of services including lobbying and insurance coverage to county governments, officials such as judge-executives and sheriffs pay for the insurance coverage with taxpayer funds.
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Unlike the League, which swiftly agreed to the change, KACo initially balked, according to correspondence obtained through an Open Records request.
"KACo, Inc. does not believe, or in any way admit, that it has ever offered or granted any illegal inducements to its members to purchase insurance through KACo Inc.'s various insurance programs," wrote Lexington lawyer Brent L. Caldwell on KACo's behalf in an Aug. 10 letter to state insurance officials.
KACo officials "do not even agree or believe that there is any statute on the books" that bars self-insured funds, such as KACo's liability and workers' compensation insurance pools, from deciding to provide such perks, Caldwell added. And he said no policy changes could be made before Nov. 30.
Sharon Burton, the insurance department's general counsel, fired back with a pointed response nine days later in which she spelled out the consequences for KACo if the group didn't cooperate.
"The commissioner is prepared to exercise the powers granted to her to identify violations," Burton wrote. She added that penalties for breaking the inducement law include a $10,000 fine per violation and suspension or revocation of licenses.
After that, the tone of responses from KACo officials softened considerably.
Joe Greathouse, KACo's director of insurance, provided via e-mail on Aug. 26 a draft of a nine-point corrective plan that overhauled how KACo's insurance division is organized, does business and spends its money.
Caldwell said Monday that his initial letter was meant to convey KACo's skepticism about the department's authority while requesting an extension. But after the department's response, KACo's insurance board decided "it's better not to engage in any serious legal discussions if we can resolve the issues," he said.
The department, after several rounds of letters, last week approved KACo's plan to establish a stronger firewall between its insurance operations and the rest of KACo's services.
The insurance department acknowledged that KACo's insurance funds are sound financially, but urged the changes as part of ongoing financial reforms at the organization following public scrutiny of its spending patterns.
Among the changes:
■ Insurance fees will be used only for paying employees and operations of the insurance subsidiaries.
The four insurance programs that operate under the KACo umbrella generate more than $4.5 million of the non-profit organization's total $5.7 million budget. But that money will no longer help pay for general KACo operations as well as out-of-state trips by staff and board members and meals at training seminars and conventions unrelated to insurance. That will take effect by July, 1, 2010.
■ The four insurance programs will stop paying for any gifts, promotional items or hospitality suites at events.
■ Greathouse and other KACo employees will stop handling accounts or marketing insurance services to counties. Private agencies who contract with KACo will cover those duties.
The correspondence also shed light on an issue raised last week by a state audit of KACo's expenses and spending.
The audit criticized KACo's Commonwealth Insurance Co. — established as a for-profit entity — for providing bonuses to Greathouse and KACo's director of financial serivces, Grant Satterly, without informing KACo's board of directors or disclosing the criteria for such bonuses.
Greathouse said the bonuses were paid by the CIC because the agency has become increasingly profitable, making $115,019 in 2008 and $340,071 in 2009. The company also pays its six board members $3,000 each a year for attending three board meetings.
Greathouse said future bonus payments will be disclosed to to the KACo board's executive committee.