Insurance division alleges kickbacks

By Erin Johansen
Denver Business Journal
January 14, 2005

The Colorado Division of Insurance is readying sanctions against nine real estate title insurance companies for allegedly giving kickbacks to several large homebuilders in exchange for a guarantee of business.

The sanctions, which could come in the form of cease-and-desist orders or notices of charges, comes after an investigation by the state launched in October.

Officials said they're trying to end the practice of locking in title insurance business by big firms by rebating premium costs back to the homebuilders.

That could cost the title companies millions in lost business and also would hurt the homebuilders' bottom line, because they no longer would get money back from the title companies providing insurance to their home buyers.

Giving or accepting money in exchange for title insurance business is a violation of both Colorado statute and the federal Real Estate Settlement Procedures Act (RESPA).

"We want the business to be based on good service, not on a financial arrangement," said Erin Toll, deputy commissioner of compliance with the division, which is part of the Department of Regulatory Agencies.

Toll is heading up the Colorado investigation and also is vice chair of the title insurance working group for the National Association of Insurance Commissioners (NAIC). The NAIC believes the problem is widespread and is encouraging insurance commissioners nationwide to investigate the practice.

California and Washington state also are pursuing investigations, Toll said. Toll said some sort of sanction by the Colorado Division of Insurance is likely by month's end.

The investigation started after the division was tipped off that some title companies and homebuilders had arrangements for discounted title policies, which is illegal. The division sent inquiry letters to all 24 title companies licensed to do business in Colorado. Based on the responses, the division believes nine are engaged in a kickback arrangement.

Here's how it is alleged to have worked: Some large homebuilders have set up affiliated companies to provide reinsurance to title insurance companies.

Reinsurance is legitimate. That's when a second insurance company is paid by the primary insurer to share the risk of any claims. The holder of an insurance policy is usually unaware of any reinsurance agreements between companies, Toll said.

"Generally it's legitimate and we like it, because it spreads risk," Toll said.

But in this case, the alleged kickback arrangements involve payment of half the title insurance premium to a reinsurance company that's an affiliate of the homebuilder.

All the builder-affiliated reinsurance companies but one are incorporated in Vermont because the insurance laws there are advantageous. The state believes the builders' reinsurance companies aren't legitimate companies because they never pay claims.

The transfer of premium also should mean the transfer of risk. But in three years, none of the homebuilder-affiliated reinsurance companies has paid on a single claim. According to Toll, the agreements are written with caveats that allow the builders' reinsurance companies to never pay on a claim.

In exchange, the participating title company is guaranteed a certain amount of business, like all the homes in a new subdivision, for example, Toll said. According to the investigation, each of the nine insurance companies has done about $2 million annually as a result of the arrangement with homebuilders.

This means a title company has a guaranteed source of business from a major homebuilder and the builder gets a 50 percent reduction in its title insurance premium.

"We see the discount as illegal because we think it's giving favorable rates," Toll said.

Her division's concern is the consumer, who isn't necessarily getting the best title company, but one that's willing to give the builder a financial break.

Some title insurance companies have refused to participate and, as a result, are frozen out of business with some of the big homebuilders.

The arrangement also reveals how much more is charged for title insurance than necessary.

"How is there so much fat [in the premium] that they can give [half of it] back?" she said.

Toll also worries companies not willing -- or financially able -- to enter into such an arrangement could lose market share and potentially go out of business, leaving consumers with fewer choices.

Denver company Attorneys Title Guarantee Fund Inc., like all local title companies, responded to the state's inquiry.

Company President Christoper Condie said his firm avoids any practice that might violate the state statute or RESPA.

"We have always supported the Division of Insurance and RESPA in that giving something in return for business is bad for consumers and bad for our industry," Condie said. "So in the broad perspective, we support RESPA and [the Colorado regulation].

"And in specific connection to this issue, it's our position that doing so could violate [Colorado law] and RESPA. I think it can be done legitimately, but I think it needs to be looked into to make sure that builder is actually reinsuring, taking on risk, has license to sell reinsurance and is paying out claims."

2005 American City Business Journals, Inc. and its licensors. All rights reserved.

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