Alleged kickback schemes center on captive insurance

March 1, 2005

Controversy surrounds companies set up to serve home builders

By Janis Mara
Inman News

Captive insurance companies played a critical part in the alleged title insurance kickback schemes under investigation in Colorado and other states. But few really understand what a captive insurer is and what it does.

A captive insurance company insures only the company or group that created it. The members of that group pay premiums, which are used to pay off claims. In many cases, the group that created the captive insurer also owns it.

In the title insurance schemes under investigation in Colorado, builders allegedly promised title companies that if they would sign up for reinsurance with the builder-owned captive insurers, they would get the home builder's business, according to Erin Toll, Colorado's deputy insurance commissioner.

Those reinsurance companies were captives of the home builders. The title insurers then paid the reinsurers fees, which, Toll claims, were funneled back to the home builders.

According to Toll, more than 99 percent of the transactions involving title insurance don't require reinsurance.

Though the captives involved in the Colorado investigation are being questioned, "in general captives have a good reputation," said Molly Lambert, president of the Vermont Captive Insurance Association. Vermont is the Number One domicile of captives in the United States and third in the world, she said.

Lambert said in the two and a half years she has worked with the association, she has never encountered a problem with Vermont's approximately 540 active captive insurance companies.

There are about 4,400 captives worldwide, Lambert said.

All the reinsurance companies in Colorado's investigation except one are incorporated in Vermont, according to Erin Toll, Colorado's deputy insurance commissioner.

But this doesn't mean Vermont is at fault; it's the state with the best laws and private sector expertise in working with captives, so it's picked most often as a domicile.

"National regulations (such as the Real Estate Settlement Procedures Act) are being challenged here, not Vermont statutes," noted Lambert.

"Nonprofits often use captives. Ecology Action, the San Diego, Calif., Performing Arts League and Youth Mentoring Action, are all part of one nonprofit group in California with its own captive. Colleges and universities are another example," said Lambert.

"For such groups to get insurance could be prohibitively expensive. Universities, for example. You mix kids between 18 and 23, alcohol and football and what have you got? High liability risk," Lambert said. "So the universities band together and create their own insurance company," she said.

Taking everything into consideration, captive insurance approach is a positive thing, said Peter Rousmaniere, a professional in the risk and insurance field for 20 years who has written about home title insurance.

"It's a way to set up a very lean and highly focused insurance entity for fire, environmental damage and the like," said Rousmaniere, "with zero overhead and all the capital put into the entity under the control of the corporate parent."

If Home Depot, for example, formed a captive, "the individual Home Depot stores would buy their insurance from the captive, and avoid the tons of fat of the big insurers. Also, the captive would set the rules on what the pricing would be, and what would happen to the profits from the insurance ventures," Rousmaniere said.

As with other insurance companies, the money from the premiums is used to pay off claims when necessary, Lambert said.

According to Lambert and Rousmaniere, this is how most captives operate. In the case of the Colorado investigation, captives, which Toll agrees are legitimate companies, were used to funnel kickbacks from title insurance companies back to home builders, according to Toll.

On balance, "captives are good to allow," Rousmaniere said.

Copyright 2005 Inman News

Contact ALTA at 202-296-3671 or