State files complaint against Guaranty Title

The Missouri Department of Insurance has filed a formal complaint against a Nixa-based title company shut down by its underwriter in June when evidence of an alleged check-kiting scheme surfaced.

In the complaint – filed Dec. 6 – Douglas Ommen, director of the Department of Insurance, Financial Institutions and Professional Registration, asked an administrative hearing commission to find that cause exists for disciplinary action against Guaranty Title Co. owners Rick Burton, Kathy Allen and Stephanie Gray.

The complaint contains five counts, including the owners’ alleged failure to uphold their fiduciary responsibility to Virginia-based underwriter LandAmerica Financial Group (NYSE: LFG) and their alleged disbursal of money from escrow accounts without corresponding deposits. Guaranty Title, which had at least nine offices in southwest Missouri, also improperly withheld premiums paid by Missouri consumers, according to the complaint.

Additionally, the state alleged that Guaranty Title’s owners used dishonest practices and demonstrated incompetence by failing to conduct “reasonable reconciliations of escrow and construction disbursement accounts to ensure solvency of those accounts.”

As of July 9, LandAmerica’s auditors had estimated that shortages in the agency’s accounts totaled about $5.1 million, according to the complaint.

Disciplinary options

Within the next six months, an administrative commission will hear Department of Insurance’s complaint to determine if the state can proceed with disciplinary action against Guaranty Title’s owners, who stand to lose their insurance producer licenses. That punishment, though, strikes some in the industry as odd.

“I doubt they’re going to need a license unless they’re going be active in the title business,” said Peggy Barton, president and owner of Great American Title Co., which employs more than 100 at seven local offices.

The damage done by the Guaranty Title fiasco and similar scams uncovered in Missouri and throughout the country have consumers wondering whom they can trust, Barton said.

“It has definitely hurt our industry, and that’s regrettable for the people who do try to do business in an upright manner,” she said.

One of the counts in the state’s complaint singled out Allen, also known as Kathy Stanton, for operating without an insurance producer license. Allen’s license was revoked in 2004 for failing to file state income tax returns, according to DOI records.

Allen has admitted to a “scheme of commingling and transferring funds between and among different banks and multiple accounts to replenish shortages and to also mask shortages,” according to an affidavit filed by LandAmerica’s senior auditor.

The affidavit is part of a growing case file in Christian County Circuit Court, where LandAmerica filed suit against Guaranty Title’s owners in late June. The litigation has been a magnet for banks, construction contractors and property owners hoping to recoup money they lost when the title company went under.

Who’s protecting consumers?

Among those affected by Guaranty Title’s collapse is developer David Hover, a California resident financing Briarwood condominium development on Lake Taneycomo in Branson. Hover, who used Guaranty Title’s escrow and construction loan disbursement services, lost about $300,000 but has been able to recover some of his money.

“The best-case scenario is probably going to cost me $100,000,” he said. “That’s a lot of money.”

Hover is disappointed with Guaranty Title for leaving its customers in the lurch, and underwriter LandAmerica for lax oversight of its agent. He also thinks the state Department of Insurance shares the blame for failing to shut down the title agency last year after learning the results of an audit conducted by the underwriter in February 2006. The audit found Guaranty Title’s escrow accounts were short $500,000, and that the company had failed to report 5,323 policies totaling some $400,000 in premiums.

“There were a lot of signs, and the Department of Insurance is there to protect the consumer,” Hover said. “It doesn’t seem like they’ve done their job. … Certainly – after this whole thing – they better come up with some way to police this industry. If nothing else comes out of this whole nightmare, they better come up with some oversight.”

Ommen said legislation enacted in the past three years has broadened DOI’s oversight of the title insurance business with anti-fraud provisions and stronger regulation. A bill signed into law earlier this year requires new title insurance agents to pass an entry exam and licensed ones to attend eight hours of continuing education every two years. The law also requires underwriters to audit their agents at least once a year and furnish DOI with the findings, Ommen said.

“Prior to this, those audits were not provided to the department unless we stumbled upon them or they were requested,” he said. “Now, there’s a statutory duty to report.”

State deflects blame

Ommen defended the department’s actions after learning about problems at Guaranty Title, suggesting much of the blame rests with the underwriter.

“I don’t think there was any failing on our behalf at all,” he said. “We were reviewing and investigating the matters under the authority we had at the time, which was pretty limited.”

He added, “Effective Jan. 1, we would be in the position to examine the examiners and … to take action against the likes of LandAmerica if they don’t adequately perform that review and detect the problems could have been detected here. … What really raises a great deal of concern in terms of the adequacy of supervision in this case is not what was reported, but what was undetected.”

A LandAmerica spokesman told Springfield Business Journal in July that discrepancies in an agent’s escrow funds occur for a “variety of reasons and can be extremely complex,” and that the company conducts regular reviews of its agents.

Ommen said the DOI investigation continues and that evidence from the probe will eventually be made available to prosecutors at local, state and federal levels.

“We will share this information with any prosecutor who wishes to pursue it, and I think I have to leave it to them to decide who they are,” he said.

Still, Hover is perturbed that six months have passed since Guaranty Title collapsed and no one has been arrested or charged with a crime in connection with the alleged fraud. He counts himself among those questioning the benefits of title insurance.

“I’m feeling stupid because I thought that I was protected,” he said. “Obviously, this is insured. The title company is behind it. The underwriter’s behind it. (There’s) Department of Insurance oversight. Everybody’s going to be taken care of. Well, no, that’s not the case.”[[In-content Ad]]