Special Reports

KLC ignores post-audit policy during insurance deal

The Kentucky League of Cities has extended a contract with an insurance claims company it has paid at least $6.6 million in the past three years, a company that has also provided numerous benefits to the League's insurance director, including trips to the Caribbean.

The extension with Collins and Co. was signed by KLC's insurance arm less than a month after state Auditor Crit Luallen strongly recommended the League require competitive bidding on contracts and eliminate conflicts. It contradicts KLC policies adopted after the audit that require purchases over $5,000 to have "three competitive quotes for comparison."

Collins and Co. also continues to rent space on a month-to-month basis from KLC Insurance Services Director William Hamilton in Georgetown. The state audit found that the relationship between Hamilton and James Johnston, Collins' CEO, and between the two companies was fraught with conflicts of interest.

Luallen called the move "disappointing."

"As our audit points out, the contract in question was originally awarded without a competitive selection process and (with) personal conflicts of interest between the vendor and key KLC management staff," Luallen said. "We recommend in the audit competitive proposals be required."

KLC spokeswoman Terri Johnson said that the KLCIS board had told Collins and Co. in September to vacate the Georgetown premises in one year's time, and that they expected to have found new space well before that deadline.

James Johnston did not return calls for comment.

Luallen's audit followed stories in the Herald-Leader about high salaries and expense accounts at the league. KLC Executive Director Sylvia Lovely resigned last summer.

The contract extension, signed Jan. 12, guarantees payments of $156,646 a month to Collins to administer all third-party claims for the KLC's insurance arm, which provides property and liability insurance to cities around Kentucky. The contract was obtained by the Herald-Leader through the state's Open Records Law.

Johnson said the new contract was signed to include the recent addition of the Kentucky School Boards Insurance Trust, which is now being operated by KLC. The original contract was signed in 2006 — at the recommendation of Hamilton — without competitive bidding. It was for three years with an automatic one-year rollover provision.

"Given the quick turnaround of assuming the KSBIT business, both boards felt it was prudent to maintain the continuity of Collins' claims expertise," Johnson said in a statement. "It would not have made sense to bring in a large new line of business and change claims carriers at the same time."

However, Johnson said, the league's insurance board told its staff to develop a request for proposal for an independent auditor to review all insurance claims, including Collins' service. Johnson said the league's executive board still has to approve the new policy that requires competitive bids.

Legislation to require more transparency on expenses and contracts at the league is making its way through the General Assembly.

Luallen's December report found numerous conflicts of interest between Hamilton and Collins and Co., including:

■ Collins and Co. employed Hamilton's son as a claims adjustor and employs Hamilton's grandchild's mother.

■ Hamilton and his wife, Denise, rent office space in Georgetown to Collins and Co. and still do so, according to an office representative.

■ Collins and Co. and its CEO, Johnston, provided housing and other expenses to Hamilton and other KLC members at Johnston's house in Bonaire, an island in the Dutch Caribbean, for scuba diving trips.

■ Hamilton was responsible for selecting Collins and Co. as the third-party claims administrator in 2006 and for an internal quality-control monitoring of Collins. The report said Hamilton did not see this as a conflict.

■ Johnston reimbursed KLC for a cover charge for admission to a Las Vegas strip club, which was originally charged to Hamilton's credit card.

■ Johnston paid for greens fees and numerous meals for KLC employees.

The League has adopted a series of new policies regarding expenses, purchasing and conflicts of interest. Credit cards have been limited, no executive staff member drives a KLC-owned car, and the league's previous policy of paying for spousal travel has been suspended indefinitely.

The KLC recently issued a point-by-point response to the 30 recommendations made by Luallen after her audit of the group.

In response to Luallen's finding that there were no procedures for setting salaries and raises, the group created a Compensation Task Force to study the issue, particularly at the executive level. The league also has eliminated a bonus program that was set up in lieu of raises for executive staff.

In response to Luallen's concerns about excessive expenses, KLC has set up a reimbursement process for expenses. The board has also established a comprehensive ethics and work-conduct policy. To see the complete audit response, go to www.klc.org.

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