The California Department of Insurance is seeking $46.7 million in damages and penalties against Stewart Title Guaranty Co. for an alleged captive reinsurance scheme affecting 3,650 homeowners.

California Insurance Commissioner John Garamendi on Monday accused Stewart Title of channeling illegal kickbacks to shell companies created by home builders and lenders in exchange for business.

Garamendi alleges the shell companies had no offices or employees and were created with the sole purpose of receiving kickbacks related to unnecessary “reinsurance” agreements.

According to the Department of Insurance’s accusation, Stewart Title paid up to 50 percent of the premiums on the policies — a total of $443,000 — to the shell companies between 1999 and 2005.

“Consumers and their wallets are being taken to the cleaners by title insurers who inflate their bottom lines through these schemes,” Garamendi said in a prepared statement.

Stewart Title maintains that California has not issued clear guidance on the payment referral fees, and that the allegations by California Insurance Commissioner John Garamendi are “the result of a misunderstanding of Stewart’s business.”

“It is Stewart’s belief that all of its reinsurance purchases were in accordance with guidelines issued by the Department of Housing and Urban Development for reinsuring residential transactions at market rates,” the company said in a press release.

Stewart Title has met with members of Garamendi’s staff to answer the department’s questions about its reinsurance purchases, and is providing additional information to overcome these allegations, the company said.

Last year, Garamendi reached settlements totaling $37.8 million with nine title insurance companies accused of engaging in similar captive reinsurance practices.

In April 2005, the department imposed $750,000 in fines and costs on Stewart Title of California as part of a separate investigation into alleged inducements to lenders and builders. The inducements included vacations and purchases of office supplies, said Norman Williams, a spokesman for the department.

In the latest investigation, opened Nov. 3, 2004, the department is seeking $46.7 million in damages and fines from Stewart Title. Those include $36.5 million in civil penalties, or $10,000 for each title insurance policy allegedly subjected to reinsurance. The department’s accusation also demands that Stewart pay a $2.2 million penalty equal to five times the amount of the alleged illegal rebates, and an $8 million fine based on a tripling of the $2.7 million charged for all settlement services provided.

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Send tips or a Letter to the Editor to matt@inman.com or call (510) 658-9252, ext. 150.

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