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Schools

Schools missed lessons on broker commissions

Neither Hillsborough nor Pinellas school officials knew Aon Corp. had been accused of inflating its commissions.

By KRIS HUNDLEY
Published March 16, 2006

Aon Corp., which holds lucrative, no-bid contracts as benefits broker for both the Pinellas and Hillsborough county school systems, is back in the spotlight over its role in a pay dispute with another area educational institution.

At issue are overpayments made to Aon when it was a commissioned broker for the health plan at St. Petersburg Junior College.

In a lawsuit filed in 2000, what is now St. Petersburg College accused its insurer, Principal Health Care, and Chicago-based Aon of fraud and breach of contract for inflating Aon's commissions by hundreds of thousands of dollars. After two years, the case was settled out of court, with Aon and Principal paying the college a total of $175,000.

No one admitted wrongdoing, and all parties agreed to confidentiality. But documents in the Pinellas County Circuit Court file speak volumes about the need for clients to be aggressive in verifying how much total compensation is being paid to a broker.

On St. Petersburg Junior College's health plan, for example, Aon was supposed to receive a commission of about 0.75 percent of premiums. Instead, it was paid closer to 3.6 percent, generating an overpayment of some $270,000.

For budget-strapped Pinellas and Hillsborough school systems - whose officials said they were unaware of the lawsuit - the case raises fresh questions. Who polices what public school systems pay in commissions on no-bid contracts? And who's making sure the agreed-upon commissions are the amounts being paid?

The answers are key because both Hillsborough and Pinellas school systems rely largely on Aon to self-report commissions. School officials seldom ask insurers to provide written confirmation of brokers' commissions. Nor do they routinely press insurers for details about bonuses, which have been common in the brokerage industry and were the target of an investigation by New York State Attorney General Eliot Spitzer. The lawsuit by St. Petersburg Junior College against Aon became fodder for gossip among many of the area's largest insurance brokers and consultants. But Aon's key liaison with Pinellas schools, risk manager Ted Pafundi, said he was not aware of the complaint. Aon had a no-bid contract with Pinellas schools for 18 years until last month, when the school system opted, after a St. Petersburg Times story on the arrangement, to seek competitive bids for its benefits.

Nor was Deborah Henry, manager of employee benefits with Hillsborough schools. Henry selected Aon to be her district's broker in a no-bid process that took place a year after the lawsuit was filed.

Both Hillsborough and Pinellas school systems represent far bigger clients for Aon than St. Petersburg College. Even with the overpayments, Aon, and its Tampa agents Richard Klima and Steven C. Olson, never received more than $95,000 a year from the college's benefit plans, which cover just 900 employees, court documents show.

By contrast, Hillsborough schools said its benefits for 22,500 employees resulted in more than $1.2-million in commissions for Aon last year. The district also paid Aon an additional $1.5-million in fees.

In the five years it has used Aon as its broker, Hillsborough has received just one report from its insurer, Humana, confirming that it paid a 1 percent commission rate in 2003. There is no record of school officials asking the insurer if Aon received any bonuses on top of commissions.

In Pinellas, with 14,000 employees, district risk manager Pafundi said Aon's commissions totaled $2.2-million last year. He said earlier this year he is confident he gets a full accounting of Aon's earnings in the broker's annual report to the School Board.

"We have discussed Aon's commissions with carriers and validated the dollars reported," Pafundi wrote in an e-mail. "For the most part this has been through conversation rather than written reports."

St. Petersburg College officials neglected to confirm Aon's commission rate with Principal until the relationship was in its fourth year. They were stunned to learn the compensation far exceeded the initial contract. And they were equally puzzled when Principal rationalized the higher rate by saying it "simply paid the commission rate requested by the college's broker, Aon."

Aon, meanwhile, was reportedly surprised by the college's reaction and defended the overpayments as "a combination of standard commissions and bonuses."

Documents filed with the lawsuit show how a seemingly straightforward commission rate of 0.75 percent quickly became inflated through bonuses and behind-the-scenes renegotiations.

When it won the college's account, Principal notified Aon that it would get a $25,000 bonus for the business. A year later, Aon's agent got a letter saying the college's account had generated an additional $52,000 in bonuses. College officials were never notified of these extra payments, nor did they receive a copy of a 1997 letter from Principal to Aon guaranteeing a 3.6 percent commission rate on the account.

When the college finally learned of the disparity, it ended its consulting contract with Aon and notified insurers that the broker was no longer eligible to receive commissions on the college's premiums.

Then it sued Principal and Aon, alleging that the overpayments "unlawfully inflated premiums . . . wrongly inflated (the college's) premiums, approximately dollar for dollar."

With Aon paying $140,000 and Principal $35,000 to settle the case, the college nearly recouped its losses. (Principal also had waived a rate increase after the overpayment was disclosed, resulting in an estimated $100,000 savings to the college.)

Since letting its Aon contract expire in 1998, St. Petersburg College has followed the practice of many public entities, as well as for-profit corporations and several other county school systems in Florida: It provides comprehensive employee benefits without paying a penny to brokers.

"We pay no brokerage fees and no consultant fees," said David Henniger, college attorney. "We pay fees for services only."

Kris Hundley can be reached at hundley@sptimes.com or 727 892-2996.

[Last modified March 16, 2006, 02:15:15]