School District Sues Insurance Consultant

The Santa Ana Unified School District has sued a former insurance consultant, accusing him of defrauding the district of $3 million.

The Superior Court lawsuit accuses Kirk Montgomery of negotiating insurance policies for the district for which he received $3 million in commissions. Montgomery should have declined the commissions in order to save the district the money, the suit alleges.

Such commissions are legal and common, according to officials at the California Department of Insurance. At issue, however, is whether the contract between the district and Montgomery allowed him to receive the money.

Before hiring Montgomery’s company, K.M. Employee Benefits Services, in 2000, the school district was self-insured and paid claims out of its reserves. In May 2001, Montgomery persuaded the district to buy insurance from various carriers, including Blue Cross of California. Montgomery said the shift would save the district money in the long term, said his lawyer, Dale Gronemeier.

Montgomery’s three-year contract, which paid him $5,000 a month, acknowledged that some insurance companies build commissions into their rates. In those cases, the contract required Montgomery to reimburse the district its monthly fee if he surpassed that amount in commissions.

But the lawsuit alleges Montgomery “failed to seek the removal of the commission payments from the insurance carriers,” causing the district to pay higher insurance premiums.

“It’s an outrageous thing,” said trustee Rob Richardson, “to know that until this relationship was severed we were unnecessarily paying [more money] so he could take a commission.”

Richardson said the alleged loss of funds is particularly disturbing at a time when the district is struggling to close a multimillion-dollar budget hole.

Montgomery declined to comment, but Gronemeier dismissed the charges as “frivolous.” Gronemeier questioned the accuracy of the $3-million figure and said the lawsuit is “based on the overactive imagination of the [district],” because the contract allows for commissions.

Blue Cross of California -- the district’s health insurance provider -- pays commissions only when given explicit permission to do so, according to company spokesman Michael Chee. He declined to comment on the details of the case, but said Blue Cross would not pay a consultant like Montgomery commissions unless the client -- in this case Santa Ana -- approved.

Richardson and trustee Audrey Yamagata-Noji -- who voted against hiring Montgomery in 2000 -- questioned why the board majority at the time chose Montgomery, because district administrators recommended hiring a larger and more experienced firm.

Gronemeier said his client first learned of the job in 1999 through the board majority’s leader, trustee Nativo Lopez.

Lopez was recalled in 2003. At the time, Lopez and fellow trustee John Palacio -- who was not recalled -- were criticized by district officials for hiring certain contractors and micromanaging the staff.

The same board majority hired the Del Terra Construction Group in 1999 to manage an expansive building project. Soon after Lopez’s recall, the district fired Del Terra for gross mismanagement of the project and recently settled a lawsuit against the company.

Lopez declined to comment on the Montgomery lawsuit, and Palacio did not return calls.

Richardson and Yamagata-Noji said Montgomery’s contract raises more concerns about past decisions.

“We could just bury the past and move on,” Yamagata-Noji said. “But there is a sense of responsibility ... to [pursue this].”