California Launches Multistate Probe into Title Insurance Industry over Alleged Kickbacks

Strategic Insights -

California Insurance Commissioner John Garamendi has joined with regulators in Colorado and Washington in a multistate probe into alleged kickbacks in the title insurance industry. The investigation, which is focused on Fidelity National Financial Inc. and LandAmerica Financial Group Inc., claims that title insurers have entered into "phony" reinsurance treaties with captive reinsurers owned by builders and real estate firms to circumvent state and federal prohibitions against the payment of referral fees on title insurance business. Garamendi estimates that this practice is costing Californians untold millions of dollars.

Key Takeaways:

  • The multistate probe is investigating alleged kickbacks in the title insurance industry, where title insurers enter into reinsurance treaties with captive reinsurers owned by builders and real estate firms.
  • The practice is allegedly used to circumvent state and federal prohibitions against the payment of referral fees on title insurance business.
  • Fidelity National Financial Inc. and LandAmerica Financial Group Inc. are the initial focus of the investigation, with Garamendi sending subpoenas to both companies seeking information about their reinsurance treaty programs.
  • The practice is estimated to cost Californians untold millions of dollars, with Garamendi stating "In the name of greed, title insurers are paying kickbacks by unnecessarily raising the price of premiums and splitting the overcharge with the other conspirators."
  • The investigation has also led to a scheduled hearing on April 4, where Garamendi plans to summon executives from the state's largest title insurers to determine how common the practice is.
  • Additionally, Garamendi has called on Gov. Arnold Schwarzenegger to extend the investigation into those sectors of the real estate market that lie outside the insurance department's jurisdiction.
  • The practice of paying referral fees on title insurance business is prohibited under Section 12404 of the California Insurance Code and the federal Real Estate Settlement Procedures Act.

Statistics:

  • Fidelity National and LandAmerica earn nearly 75% of the premium in California's title insurance market.
  • Loss ratios for a typical title policy are only 3% to 5% on a single-family home property, suggesting little need for reinsurance coverage.
  • Fidelity National paid about $24 million in premium over several years on ceding arrangements with captive reinsurers.
  • The company earned between $4 billion and $5 billion in title insurance premium in 2004.
  • First American Corporation will provide $24 million in policyholder refunds for premium that had been ceded to captives.

Sources:

  • A. M. Best Company, Inc. news article via COMTEX (http://www.comtexnews.com)
  • California Department of Insurance
  • Colorado Division of Insurance
  • National Association of Insurance Commissioners' Title Insurance Working Group
  • First American Corporation
  • Fidelity National Financial Inc.
  • LandAmerica Financial Group Inc.