Colorado Takes Lead As Title Insurance Probes Spread

By Erin Johansen
Denver Business Journal
Feb. 28, 2005


The state of Colorado's investigation into title insurance practices is intensifying scrutiny of the title insurance industry nationwide and could lead to reductions in the cost of this type of protection.

On Feb. 21, the state Division of Insurance formally announced a $24 million settlement with First American Title Insurance Co. in connection with an alleged kickback scheme involving major home builders.

First American (NYSE: FAF) is one of three national title insurers under investigation by the division for allegedly accepting illegal kickbacks from home builders, lenders and real estate agents in exchange for guaranteed business.

The Denver Business Journal was the first to report the investigation, in the Jan. 14-20 edition.

While admitting no wrongdoing, First American voluntarily stopped the questionable practice of buying reinsurance from companies affiliated with some of the home builders and agreed to return $24 million to consumers.

The company had filed an 8-K with the Securities and Exchange Commission Feb. 18 outlining the settlement.

Meanwhile, the probe will be examined by Colorado Attorney General John Suthers, whose office will look at all the companies involved -- including home builders, lenders and real estate companies -- for evidence of possible civil or criminal wrongdoing.

California's commissioner of insurance, John Garamendi, announced Feb. 22 his office is issuing subpoenas and has heightened an ongoing investigation of the same practices.

First American, a subsidiary of First American Corp. of Santa Ana, Calif., had the largest market share in Colorado in 2003, writing $119.4 million in premiums -- almost one-third of the state's title business.

First American lost $3.1 million in Colorado in 2003, and its loss ratio -- the percentage of premiums paid out -- was 2.69 percent, measured against the direct earned premium figure of $116.1 million.

Erin Toll, deputy commissioner of compliance with the Division of Insurance, estimated Colorado consumers will get about $150,000 in the $24 million settlement.

The division also is investigating Fidelity National Financial Inc. and LandAmerica Financial Group Inc.

The state's investigation started last fall after a tip by a competing title company not involved in the questionable practice. The investigation revealed evidence the three companies were getting business from home builders in exchange for monetary kickbacks. The alleged kickbacks came in the form of insurance premiums paid by the title companies to "captive" reinsurers affiliated with the home builders, lenders and real estate agents.

Reinsurance -- when a second company buys a portion of risk from an insurance company -- is a legitimate practice. In these cases, however, it appeared the reinsurance companies served as a way to funnel money back in exchange for guaranteed business, Toll said.

It's illegal under state law and the federal Real Estate Settlement Procedures Act (RESPA) to give or receive something of value in exchange for title business.

Investigators believe the ability to return this much premium means the price of title insurance is artificially inflated.

On Feb. 9, Fidelity National Financial, which is licensed to do business in Colorado as Chicago Title Insurance Co., plus Fidelity National Title Insurance Co., Ticor Title Insurance Co., Security Union Title Insurance Co., Alamo Title Insurance Co. and National Title Insurance of New York announced they would voluntarily discontinue all their suspect reinsurance arrangements nationwide.

Fidelity National, based in Jacksonville, Fla., is in settlement discussions with the Colorado Division of Insurance.

Chicago Title was the third-largest provider of title insurance in Colorado in 2003 with $44.2 million in premiums. The company had $80,000 in losses in 2003, and a 1.81 loss percent ratio, based on $44 million in direct earned premiums.

LandAmerica Financial Group said Feb. 23 it's stopping the captive reinsurance agreements nationwide.

LandAmerica's subsidiaries include Lawyers Title Insurance Corp., Transnation Title Insurance Co. and Commonwealth Land Title Insurance Co.

Lloyd Osgood, a spokeswoman for LandAmerica, said it started putting reinsurance agreements in place in 1997. She said the agreements don't violate RESPA.

Garamendi said both Fidelity and LandAmerica are under investigation by his department for reinsurance violations. The investigation that started last year was intensified this week with the announcement that subpoenas will be issued for companies believed to be involved in the schemes.

In Colorado, a team of attorneys and investigators in the Colorado Attorney General's office will look for additional violations of state or federal law.

The Division of Insurance regulates only the insurance industry. It has no jurisdiction over home builders or others that might involved.

Until they get the files, it's impossible to know if they'll find any additional violations, said Jan Zavislan, deputy attorney general for consumer protection with the Attorney General's office. Zavislan will oversee the investigation.

Copyright 2005 American City Business Journals Inc.



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