Kentucky Auditor Clears League Over Workers’ Compensation Purchase

October 7, 2010

Kentucky’s state auditor has found no fraud in the insurance buying practices of the Lexington-Fayette County Urban Government.

Auditor Crit Luallen said her agency found no evidence to conclude that the city’s decision to purchase workers’ compensation coverage through the Kentucky League of Cities (KLC) rather than with American International Group (AIG) was improper.

At the same time, the auditor has recommended that the city alter several purchasing policies and adopt better internal procedures to more efficiently handle allegations of fraud in the future.

The auditor stepped in to review the municipality’s insurance purchases after the city’s director of risk management alleged that there might be fraud. The director had previously indicated his concerns about possible fraud in 2008 and 2009 during Lexington’s annual audits.

The state auditors researched 11 observations made by the director of risk management but found no wrongdoing. “[A]uditors found no evidence to suggest fraud occurred or any indication of misrepresentation or concealment of material facts,” Luallen said in her agency’s press release.

Among the publicized allegations Luallen said were unsubstantiated was that the city’s commissioner of law manipulated documents to favor the purchase of insurance from KLC over AIG or that KLC was allowed to inappropriately modify its quote for workers’ compensation coverage.

The auditors said that the commissioner of law properly asked that the city’s former insurance broker, Marsh, for a recommendation on the best workers’ compensation coverage for the city and Marsh recommended AIG as the better fit for the city’s needs. However at the end of the email, the broker added, “Conversely, if you were to tell me that the cost differential is not an issue — then KLC would be the better fit.”

Luallen’s office said it was unable to determine if the decision to purchase insurance through KLC was a better decision than to continue with AIG.

“Evaluating (insurance) proposals based on the best value means that a number of different factors are included in the decision making process with price only being one of them,” the examiners wrote in their report. “It appears that as long as the procurement methods employed are appropriate and within the confines of all laws and policies, it is incumbent on management and the council to determine which proposals are going to be the greatest benefits to LFUCG.”

The controversy has cost the city $100,000 in legal and external auditing bills, which Luallen said might have been avoided had there been better internal procedures in place.

Topics Fraud Workers' Compensation Talent Kentucky AIG

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