15 Vermont Captives Eyed In Kickback Probe

Ms. Toll said the way the alleged scheme worked, home builders would offer to send title insurers "all the business in a geographic area," and in return the title companies would be asked to take out reinsurance from captives operated by those firms.

An investigation revealed that the captive coverage was apparently a sham operation. "Essentially no reinsurance claims have been paid in five years? to me that is a red flag," said Ms. Toll.

She added that half the title company premiums were passed on to the reinsurers, and she wondered "how come there's so much fat in the [title company] premium that they can share 50 percent of the premium with this reinsurer?"

In addition, primary insurance premiums were said to be reduced for the builders who sent business to title insurers.

Colorado's Division of Insurance, she said, is analyzing a set of interrogatories that were sent to 24 title companies licensed in Colorado when her investigation commenced last October.

Within two weeks, she said, the division "will be taking some sort of enforcement action" against suspect firms, which could range from a cease and desist order to a notice of charges.

Ms. Toll, who heads a unit of the National Association of Insurance Commissioners that deals with title insurers, said she alerted other states to her findings in October–noting that Washington and California are now investigating title insurers. Additionally, three other states have asked for information and may investigate as well, she said.

Leonard Crouse, Vermont's deputy commissioner of captive insurance in Montpelier, said he believed the issue has come up because regulators "feel that maybe these arrangements are a little too sweet. Maybe a title company should pull back a little and not give so much money back to these captive insurance companies."

He said the banks that set up the captives are getting 50 percent of the premium, and wondered whether the risk transfer is "commiserate to what the exposure would be?"

"The big thing." he noted, "is does it make sense to get back 50 percent for such a small amount of risk? It's a reinsurance arrangement. Being a regulator, when you have a 50 percent quota share, that is the truest form of risk transfer of any kind of reinsurance arrangement?it's plain transfer. But what they're saying is, is there more money being passed back and forth than there should be?"

He said a similar issue had arisen when mortgage insurance captives were created and the U.S. Department of Housing and Urban Development had sent a letter "basically saying they thought the arrangements with mortgage insurance companies were fine. They did not have a problem with it. Whether or not HUD comes out with a letter regarding the title insurance arrangements remains to be seen."

Ms. Toll said she was sending the home contractors' names to HUD.

Mr. Crouse said his agency is watching closely, "and if for any reason, HUD says the arrangements won't work, that is the end of it." It's up to HUD, he said, "to see if they feel this is a violation of the Real Estate Settlement Procedures Act?RESPA. RESPA asks, basically, if it's legal to pay any sort of referral fee to obtain title insurance business.

"We don't feel these captives are violating anything. I think it's just a matter if they feel some of these arrangements are too sweet for some of the parties involved. The compensation shouldn't exceed the services being provided," he said.