California regulators are seeking $41.6 million in fines and penalties from Stewart Title Guaranty Corp. for alleged captive reinsurance schemes with home builders, lenders and a title agency.
The California Department of Insurance alleges that Stewart Title paid $500,000 in illegal rebates to companies owned or affiliated by its partners in the scheme in exchange for referrals that generated 3,908 title insurance policies.
Stewart Title allegedly made the payments from 1998 to 2006, to reinsurance companies owned by or affiliated with Lennar Homes, Wells Fargo Home Mortgage and other settlement services providers.
The payments, made from premiums paid by policyholders, amounted to illegal kickbacks for the purpose of generating referrals, because no real transfer of risk took place to the reinsurance companies, the Department of Insurance alleges.
Stewart Title, Lennar Homes and Wells Fargo did not respond to requests for comment from Inman News. The allegations are directed only at Stewart Title, which will have an opportunity to respond to them at an Aug. 27 hearing.
According to the allegations, in August 1998, Stewart Title entered into a reinsurance agreement with U.S. Home Corp., in which Stewart agreed to reinsure all the title business it received from U.S. Home and its affiliates through an affiliated business, U.S.H. Indemnity Co. Ltd. of Bermuda. The agreement stipulated that Stewart would pay U.S. Home 42 cents per $1,000 of risk assumed.
After U.S. Home Corp. was acquired by Lennar Corp., in January 2001 Stewart Title allegedly entered into a reinsurance agreement with Lennar Homes, in which it agreed to pay 50 percent of title insurance payments to a Florida company owned or controlled by Lennar. The company, TitleAmerica Insurance Corp. — which changed its name to North American Title Insurance Corp. a few months later — was to assume 50 percent of each policy’s liability.
In September 2001, Stewart Title allegedly entered into a reinsurance agreement with Wells Fargo Home Mortgage, in which it agreed to reinsure all title business it received from the lender through Home Services Title Reinsurance Co., a Vermont corporation affiliated with Wells Fargo. After deducting a processing fee, Stewart allegedly paid 5.4 percent of each policy’s premiums to Home Services in exchange for the company assuming 50 percent of the risk.
Stewart allegedly entered into similar arrangements with Elliott Homes Inc. of Folsom, Calif., and its affiliated reinsurer, Hawaii-based Pacific Unified Insurance Co. Inc.; and Flagler Title Co. of Palm Beach County, Fla., and its affiliated West Indies-based reinsurer, Flagler Title Reinsurance Co. Ltd.
Between 1998 and 2006, Stewart Guarantee landed 3,908 orders for title insurance policies through the captive arrangements, and paid its partners $500,196 in ceded premiums, the Department of Insurance alleges.
In the company’s annual statement to California’s insurance commissioner, the company reported recovering only $3,000 in losses from captive reinsurers. Stewart reported that it anticipated making no other recoveries from captive reinsurers, “thereby indicating no real transfer of risk or expectation of transfer of risk,” the Department of Insurance alleged.
In its most recent annual statement filed in March, Stewart Title reported that it anticipated recovering $202,000 from reinsurers on claims that had been incurred but not yet reported dating back to 1997.
Unpursuaded, on June 27 the Department of Insurance’s legal division filed its accusation against the company, alleging that Stewart Title filed false annual statements and engaged in unfair or deceptive practices.
The accusation seeks a civil penalty of $39.08 million — or $1,000 for each of the 3,908 title insurance policies allegedly obtained through the schemes — and $2.5 million in fines (five times the amount of the alleged illegal rebates).