Ambassador Captive And Brandon White Fiasco Highlights Need For Better Captive Manager Oversight
The business of insurance is one of the most highly regulated industries worldwide. The reason for this is obvious: Those who purchase insurance want to know that if a loss happens, their insurance policy will cover the loss. Thus, insurance companies are licensed and then heavily regulated by insurance commissioners, who themselves conduct periodic examinations in addition to requiring that the companies have outside auditors. Insurance brokers and agents must pass examinations and satisfy individual qualifications to be licensed to sell insurance. The vast majority of those employed in the insurance sector are either licensed themselves in some form or another, or else they work for somebody or some company who is licensed and bears responsibility for them.
Yet, there is one group within the insurance industry that is neither licensed nor supervised, and pretty much are utterly left alone by regulators even though they control, directly or indirectly, the flow of many billions of dollars’ worth of policies and premiums. These are firms and folks who provide back-office services to captive insurance companies and are known as “captive managers”.
The primary reason why captive managers are not regulated is largely historical, or rather a lack of history, since the office of the captive manager is relatively new. While traditional insurance dates back many hundreds of years, with formal regulation of insurance companies and brokers increasingly rapidly in the 1800s, the first captive insurance company (being an insurance company subsidiary formed for the insurance needs of its parent organization) is believed to be a company formed in Bermuda in 1962. Even then, captives did not take off like wildfire, but instead captives were no more than a misunderstood oddity that were largely restricted to very large and usually transnational companies until the 1990s when they began to get traction.
Doubtless, the early tepid interest in captive insurance companies was due to uncertainty as to how such companies and their policies were taxed, and so for the first few decades only the largest companies with large tax and legal staffs were willing to take the risk of adverse tax treatment and also have the financial war chests for what would be extended squabbles with the IRS. Eventually, in 2001, the United Parcel Service won a landmark victory for captives and the following year, 2002, the IRS finally raised the white flag and published three notices that delineated how a captive arrangement could appropriately fall within the boundaries of U.S. tax law. This finally opened the floodgates, and captives thereafter took over the corporate insurance world.
The point here being that one could say that the captive industry really didn’t exist until 2002 ― only a little more than a couple of decades before the writing of this article, and barely a discernable blip on the centuries-long timeline of insurance regulation. The office of the captive manager has thus not existed for very long, either. When I joined with two business partners in 1998 to form a captive insurance management firm, there were probably less than a dozen such firms involved with U.S. captives; today, there are many dozens (if not hundreds) of captive management firms, including some very large ones that themselves handle hundreds of captive insurance companies.
Because of their relatively newness, and because so far they have caused few problems in the bigger scheme of things, captive managers have not been regulated by the various state departments of insurance, unlike the insurance companies they manage and the insurance brokers and agents who arrange outside commercial policies for their clients. This is a curiosity of sorts, because a captive manager typically does much more than just keep the company’s books, but also will determine necessary coverages, underwrite risks, price policies, make determinations about reserves (with the help of actuaries), and do many of the things that traditional insurance companies and insurance brokers do. As captive managers expand their services beyond traditional captives and into wider alternative risk markets, however, the lines between an unregulated captive manager and a heavily-regulated insurance broker start to blur. At some point, a good case can be made that captive managers should be licensed and regulated much as insurance brokers.
Consider the mess of litigation currently going on with captive manager The Ambassador Group LLC and its owner Brandon White, doing business as Ambassador Captive Solutions. A Complaint filed by Lexington Insurance Company in the U.S. District Court for the Western District of Kentucky, which you can read here. According to that Complaint, and a subsequent Amended Complaint which you can read here, White and Ambassador approached Lexington (a large licensed insurance company and an AIG subsidiary) about acting as a fronting company to provide insurance to various youth sports leagues. The idea was that Lexington would use its insurance license to issue the policies to the sports leagues, and then Lexington would pass the risk and premiums on to Goldenstar Holdings, which was a captive insurance company affiliated with Ambassador.
In essence, Lexington was being asked to enter into what is known as ― and is common ― in the captive insurance sector as a “fronting relationship”. A captive insurance company, like Goldenstar, has a limited insurance license, which restricts the captive from doing business with anybody but other companies that are closely affiliated with its owners (hence the name “captive”). A captive like Goldenstar cannot issue policies to unrelated parties, such as the sports leagues. However, Goldenstar’s captive license does allow it to reinsurance other licensed insurance companies, such as Lexington. So the idea was that Lexington would, for a fee known as a “fronting fee” use its general license to issue policies directly to the sports leagues, and then lay off the risk and premiums to Goldenstar by way of a reinsurance agreement. Thus, Goldenstar effectively becomes the real insurer of the sports leagues, although if Goldenstar did not pay claims against Lexington’s policies for whatever reason, then Lexington would be on the hook for those policies. These types of fronting arrangements are made every business day in the captive industry, and they basically give the generally licensed insurance companies like Lexington a nice revenue stream for, effectively, leasing out their license to captives like Goldenstar.
That was the idea, anyhow, for Lexington to serve as the fronting company for Goldenstar. However, Lexington (according to the allegations of its Complaint) refused to act as Goldenstar’s front for this deal. Ambassador and White asked again, and Lexington refused again.
So, according to Lexington’s complaint, Ambassador and White simply refused to take “no” as an answer, and proceeded to make copies of Lexington’s policies and forged the signature of Joseph Davina (an AIG executive) onto 11 different policies which were then issued to hundreds of sports leagues and their athletes nationwide. According to Lexington’s complaint:
“Some policies — for combat sports and football — have million-dollar limits for certain brain injuries. Every insured is under the impression that, if a loss occurs, a company affiliated with AIG will be there to pay the claim. In fact, however, every policy at issue is a counterfeit, and claims will be paid only if the fraudsters decide to pay them.” [Emphasis in original].
Basically, the same thing is alleged to have happened to State National Insurance Company. Ambassador and White similarly approached State National to develop a captive reinsurance program, but State National declined. Ambassador and White allegedly forged the signature of State National’s Vice-President David Cleff onto State National’s policies, and then had those policies “issued” through a company called ePremium Insurance Agency, LLC. State National also alleges similar forgeries involving a quote share reinsurance agreement between State National and ePremium.
Further according to State National, the forgeries did not stop at the policies and reinsurance agreements, but was also found in e-mails to insurance agents:
“Upon information and belief, on or about June 2020, White forwarded to Sanford & Tatum Insurance Agency, an agent working with Madera, the attached email chain purporting to verify payments to State National. (See Ex. 10.) The email chain includes purported emails from ‘Sarah Cloud’ at State National stating: ‘We can confirm receipt of the payment schedule attached’ and ‘We are in receipt of the $559,239 that was payable for the 4th quarter of 2019.’ Ms. Cloud did not send these emails, and State National never received the funds. The emails are counterfeit forgeries.”
Invoices were also forged, according to State National, including one for $686,732 which was sent to ePremium.
State National’s allegations continue that forged policies were issued for what became known as the “Madera Scheme” that involved more than 50 real estate developments in Texas and 1,000 apartment units, whereby homeowners and personal liability policies purportedly issued by State National were arranged by Ambassador and White ― all without State National’s knowledge or consent. State National further alleges that Ambassador and White forged and caused to be issued false policies from State National to sports teams and athletes in connection with their similar alleged activities regarding Lexington.
Yet another scheme of Ambassador and White which is alleged by State National involved the issuance of automobile, workers compensation and general liability insurance coverage that was issued to operators of waste removal systems in New York. Policies were similarly forged and fraudulently issued, according to State National. When State National finally confronted White about this scheme, White tried to explain it away as mistake since the insured should have been Lexington and AIG, according to State National, although of course they were not issuing legitimate policies either. Further forgeries are alleged to have occurred in the handling of claims, purportedly on behalf of State National, but without that company’s knowledge.
For their part, Ambassador and White basically are claiming that all of this was just part of a big misunderstanding, and that there is no fraud involved but instead a question of whether they had a contract with Lexington and State National, and you can read their Answer here. This litigation is ongoing, and there has been no resolution or findings by the Court, and as mentioned so far all we have are the allegations of the parties. Of additional interest is the Motion to Intervene filed by the Cayman Island representatives of Performance Insurance Company and its segregated portfolios, which has apparently been taken under regulatory supervision, and which you can read here.
But this is just one of the cases now pending against Ambassador and White, another one being a complaint filed in Pennsylvania state court and removed to the U.S. District Court for the Western District of Pennsylvania, as Seubert & Assoc. v. The Ambassador Group LLC, Case No. 20-CV-1880 (W.D.Pa., Dec. 4, 2020), which you can read here. This lawsuit involves an insurance brokerage firm called Seubert & Associates, Inc., and one of its insurance clients, Team Ten LLC d/b/a American Eagle Papermills (“AE Paper”), alleging that AE Paper paid Ambassador and White to create a captive insurance company in the Cayman Islands. Thereafter, according to the Complaint, Ambassador and White bound $13 million of coverage for AE Paper for a premium of $948,690 from a company called Faraday Insurance, though a brokerage known as EC3 Insurance Brokers in London, UK.
The Seubert Complaint goes on to state that after Seubert found out about the Lexington litigation, Suebert began to investigate Ambassador and White’s insurance arrangement for AE Eagle, and discovered that in reality there was only $6.5 million in coverage and the premiums had been misrepresented, thus leading to a shortfall in the loss fund that would pay a percentage of any losses. Additionally, Seubert alleges that it learned that Ambassador and White never actually formed the Cayman captive.
Ambassador and White deny these allegations as well, but this litigation has progressed to the point where both sides filed motions for summary judgment, which were resolved by the Court on December 30, 2022, by a memorandum order which you can read here. Essentially, the Court dismissed some of the claims as lacking evidence, and has allowed other claims to proceed to trial sometime in the probably not-too-distant future. Nonetheless, the Opinion makes for interesting reading to say the least.
Another Complaint is found in the case of Del Obispo Youth Baseball v. The Ambassador Group LLC, Case No. 21-CV-199 (C.D. Cal., 2021), which you can read here. This Complaint, filed by the California-based Dana Point Youth Baseball (“DPYB”) against Ambassador, White, and others, basically alleges the same forgeries and fraudulent policies of the Lexington and State National complaint, but goes on to request the certification of a class action and the imposition of Civil RICO trebled damages. Of interest is the pending motion of DPYB to certify the class of plaintiffs, which you can read here. Ambassador, White, and the other parties have denied these allegations as well, and the matter continues to be litigated.
Meanwhile, the Texas Commissioner of Insurance obtained a consent order on March 22, 2022, requiring Ambassador and White to cease and desist from engaging in the business of insurance in the State of Texas. You can read this document here. Somewhat similarly, on April 4, 2022, the Oregon Department of Consumer and Business Services issued a Final Order to Cease and Desist and Final Order Assessing Civil Penalties, Entered By Default, to Robert Y. Part and Omega Family Services, LLC d/b/a Prime Insurance Solutions and Lygfro Insurance Solutions, regarding an insurance product called “Pregnancy Care” that was issued by a one of Performance Insurance Company’s segregated cells (Performance is the company taken under supervision in the Caymans and is seeking to intervene in the Lexington and State National litigation), and which was falsely represented to involve a State National policy. You can read that Order here.
Again, and I can’t emphasize this enough, at this point the allegations against Ambassador, White and related parties (mostly involved insurance agencies) are nothing more than that, being allegations. There have been no trials yet, and no evidentiary findings by any tribunal. However, it is sometimes said that “where there is smoke, there is fire”, and there is more smoke here than a 100-car coal train that has just been hit by a napalm attack. Having multiple policies issued without authorization by multiple insurance companies would seem to the hypothetical reasonable person to be something more than merely coincidental. Just as obviously, if it turns out that policies have been forged as the insurance companies allege, then the matter becomes eclipsed by very serious criminal issues.
Now back to the question raised at the start of this article: Should captive managers be licensed and regulated by the state insurance commissioners? My own answer to that is both yes and no. No, because the vast majority of captive managers are simply acting as the agents of their captive insurance company clients and nothing more. These captives insurance companies are themselves tightly regulated (at least in the better captive jurisdictions), and there is no need for an additional level of regulation. However, just as they are now, captive managers should still be screened for admission as a captive manager within a given jurisdiction, and perhaps that screening process should be tightened up.
Where the answer becomes “yes” is where a captive manager starts acting like an insurance broker or agent, in terms of creating programs for the benefit of unrelated parties and the general public, negotiating premiums, and doing the myriad other things that insurance brokers and agents do. In these circumstances, the captive managers should be required to meet the same licensing requirements as insurance brokers and agents. Here, Ambassador and White are alleged to have acted far beyond the typical office of a captive manager, and when such folks cross the line into acting as insurance brokers and agents, they should be regulated as such.
What all this does require is much greater oversight of captive managers than is currently being done by the state insurance commissioners. The commissioners need to know what the captive managers admitted into their jurisdictions are doing: Are they simply managing pure captives, or are they offering alternative risk management programs that are ultimately being extended to the general public.
The state insurance commissioners also need to be on better alert where creative captive arrangements are being use to circumvent the state insurance laws. An example of this is the renters insurance program of which State National complains: Basically, the apartment owner sets up what seems to be an ordinary captive, but then starts offering insurance from that captive to renters. This is selling insurance to the general public, and unless a bona fide fronting arrangement is used, these deals clearly exceed the limited insurance license of a captive which restricts the captive to selling only to persons closely affiliated with the captive. But such arrangements have become ubiquitous and the state insurance commissioners should crack down on them and all like programs.
Anyway, what goes on with Ambassador and White, et al., will likely make for some good future reading, so stay tuned.