Last month, I briefly touched upon the findings of an investigation conducted by Washington's Insurance Commissioner, Mike Kreidler, into illegal marketing practices employed by the title industry. See, Two Different Settlements Sheets?. On November 21, 2006, Kreidler's office released a "Technical Assistance Advisory" that essentially serves as a user's guide for members of the title industry doing business in the state. I highly recommend that every industry insider take the time to visit http://www.insurance.wa.gov/ to look closely at the report itself and the concisely drafted advisory language. Is it not safe to assume that the abuses taking place within Washington are pervasive throughout the nation?
Title companies have traditionally marketed their products through a business model known as "reverse competition." Rather than selling directly to consumers, the title industry markets to realtors, lenders and home builders. A similar situation existed within the context of the medical profession before prescription drug manufacturers started marketing directly to the public. The consumer doesn't benefit at all from a "reverse competition" model and faces the distinct risk of being overcharged for reduced services. The dollar amount and frequency of legal inducements paid by the title industry to potential business sources is determined by federal and state guidelines.
Initially, Kreidler's interest in title industry practices was sparked by an inquiry by Colorado officials into a scheme contrived by title insurers, captive re-insurance arrangements. A technical description of captive re-insurance arrangements is beyond the scope of this post. A long story short, a number of title insurers hid behind the veil of an obscure insurance concept to illegally compensate sources for directed title business.
Kreidler's investigation took 10 months to complete while probing into industry practices during an 18 month period. The results were astounding. Some of the most important and influential players in this nations title industry were guilty "per se" of flagrant violations of federal and state laws that were promulgated to protect the interests of consumers. The laundry list of items and activities paid for illegally by title insurers includes expensive gifts, golf tournaments, extravagant parties, ski trips, shopping trips and tickets to sporting events. The violations were so rampant and wide-spread that regulatory enforcement was a practical impossibility. In one case, the report speculates that a particular underwriter was able to "attain superior market share" by paying illegal inducements. What exactly is wrong with this scenario? In a word: everything!
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