The alleged title insurance kickback scheme under investigation by California and Colorado insurance officials isn’t simple. In fact, it’s extremely complicated – some might say devious, which isn’t too surprising given that the so-called scheme is said to violate the Real Estate Settlement Procedures Act.
But Erin Toll, deputy insurance director of the Colorado Department of Insurance and leader of that state’s investigation, has a simple explanation:
Picture a triangle with the broadest part at the top, like a pyramid.
Now picture the homebuilder at the top left corner of the triangle. The title insurance company is across from the homebuilder, at the top right corner of the triangle.
The homebuilder approaches the title insurance company. The homebuilder knows the title insurance company is eager for the volume business the homebuilder has to offer.
So, the homebuilder makes an offer, Toll alleges. According to Toll, if the title insurance company will agree to sign up for reinsurance with a certain reinsurance company, it’ll get the homebuilder’s business. That reinsurance company is a “captive” – a subsidiary of the homebuilder.
The title insurance company agrees. The homebuilder uses the title insurance company’s services, and that’s the line that connects the two.
At the bottom of the triangle is the reinsurer. The title insurer makes payments to the reinsurer, and that’s the line that connects them. There’s one more step, but let’s stop for a minute.
This all sounds simple, yes?
What’s wrong with this picture?
Several things, according to Toll. First of all, the reinsurance is most likely unnecessary. “Over 99 percent of the transactions involving title insurance don’t require reinsurance,” Toll said. “We typically see reinsurance for hugely expensive commercial properties or tiny title insurance companies.” But these arrangements involved residential properties and huge insurance companies.
Second, Toll says that the title companies paid the reinsurers a premium so high, it was grossly disproportionate to the risk the reinsurers were taking. Toll says the title companies were paying the reinsurers half the title insurance premiums they got from the builders.
And now for the last step – what’s really wrong with this picture.
According to Toll, the reinsurers then funnel the payments from the title insurance companies back to their parent companies – the builders. And that’s the line connecting the reinsurers with the builders. The title companies are returning, or “kicking back,” half their fees to the builders via the reinsurers, Toll said.
