The California Department of Insurance said yesterday that it had reached a $1 million settlement agreement with Stewart Title Guaranty Company over a $46 million lawsuit targeting captive reinsurance agreements that the regulator characterized as “illegal and unfair.” The CDI had charged that Stewart — along with other major title insurance operations — paid a portion of the title insurance premium collected to builders, lenders, and title agents in return for the referral of business. From the CDI press statment:

Stewart Title Guaranty Company was accused of executing a sophisticated scheme camouflaged as “reinsurance” that channeled illegal rebates to various homebuilders, lenders, and title agents in exchange for the referral of title business to Stewart. These “reinsurance agreements” gave up to 50% of the title insurance premium to captive reinsurance companies specially created by the homebuilders, lenders, and title agents for purported “reinsurance.” The amount of money “ceded” or paid to the captive reinsurance companies far exceeded the amount of recoveries that Stewart would expect to receive from the reinsurance companies based on its historical loss ratios.

Stewart put out a competing press statement that challenged many of the insurance regulator’s claims, saying that the title insurer believed it has “very strong legal and factual defenses” to the allegations made against it — and especially took issue with the claim that 50 percent of title premiums charged to borrowers consituted a referral kickback:

Contrary to the news release issued by the CDOI, Stewart did not pay 50 percent of the title insurance premium for reinsurance. Stewart was prepared to demonstrate that its reinsurance payments were at market rates. Further Stewart did not camouflage its reinsurance agreements; rather it disclosed its agreements in its annual filings with the CDOI. By entering into the Stipulation and Waiver with the CDOI, Stewart did not admit any wrongdoing, and has entered into the Stipulation and Waiver as a compromise to avoid the cost and time of further litigation.

I don’t think the question here is what was going on — at least in terms of reinsurance — but the question is whether what was going on is/was legal. I know from speaking with folks on both sides of this fence that there are some very strong opinions in both directions.