Insurance

Forged Signatures, Fake Policies? Lawsuits Raise Questions About Captive Insurance Plan


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The owners of one of the oldest insurance agencies in Texas must have felt pretty surprised when they were named in a federal lawsuit brought by an AIG company, alleging the agency was part of an elaborate fraud that forged signatures and created fake policies for thousands of residents in apartment communities in the state.

Last month, the Sanford & Tatum Insurance Agency, founded in Lubbock, Texas, in 1935, pushed back. In a crossclaim filed in the suit in Kentucky, the agency principals said that they, like thousands of policyholders around the country, were, in fact, victims of the intricate and far-flung scheme.

The plan was reportedly led by Brandon White, of Kentucky, and his Ambassador Captive Solutions. It allegedly used offshore captive insurance cells to give legitimacy to bogus liability, homeowners, workers’ compensation, accident and health policies, according to lawsuit documents and people involved in the case.

“As a result of being a victim of such conduct, Sanford has now been further victimized by being sued for conduct it had no knowledge of, did not condone, and would not have condoned had it known of such conduct,” reads the crossclaim complaint by Sanford & Tatum, filed in July.

White (Linkedin)

The agency’s principals and attorney declined to comment on the case. But others in the industry said the lawsuit and a similar, nationwide class action filed in California against White and Ambassador, have renewed concerns about how some captive insurance companies are regulated in the U.S. and offshore; how the arrangements are pitched to people seeking alternative risk solutions; and how much this type of “agency captive” structure may lend itself to abuse.

“Never in my life have I seen anything quite like this,” said one captive expert who declined to use his name because of involvement with the cases.

The cases and the types of problems they allege have received little attention in the insurance industry.

“Not many people are aware these issues exist,” said Chris Burand, an insurance industry consultant with Burand & Associates, based in Colorado. “More experienced people have caution and concern, and a few have direct experience with these scenarios going sour, but most other people have no idea.”

The initial suit was brought in 2020 by Lexington Insurance Co., a subsidiary of American International Group, AIG. It was joined later that year by State National Insurance Co. and National Specialty Insurance, based in Texas and owned by Markel Corp.

The carriers argue that White, Ambassador and associates were involved in at least seven schemes that sold millions of dollars worth of fake policies to youth baseball teams and leagues, to surrogate mothers, to a waste-removal company, and to construction companies.

“The plaintiffs allege that Ambassador and/or White procured and caused the fraudulent issuance of counterfeit insurance policies, certificates, and invoices,” reads an amended complaint in the Lexington suit, filed in 2020 in the Western District of Kentucky. The suit asks the court to bar White and his firms from using the carriers’ names and to turn over profits from the schemes, along with treble damages.

White, based in the Louisville area, has been a consultant in the insurance business for a number of years, according to his social media postings and to people who have met him. A 2017 Twitter posting shows him teaching insurance agents at a seminar on captives.

He has denied the fraud allegations and has asked the federal court to dismiss the complaints. In court records, White and Ambassador have said the issues stem from contract disputes with the insurance carriers over the use of their names. White and his attorneys did not return phone calls from Insurance Journal.

The plaintiffs have called White’s schemes “brazen,” aided by the fact that captive reinsurance programs are “complex, multi-party arrangements that require specialized expertise and significant underwriting capacity.” At least $11 million in claims have surfaced since the suits were filed, records show.

It all began, according to the lawsuits, in 2018, when White approached a Lexington and AIG Insurance executive with an idea. The plan was for an insurance broker to sell accident, liability and health policies to youth sports leagues. The claims would ultimately be covered by one of the Cayman-based captive cells, acting as reinsurers, similar to an agency captive structure.

The cells weren’t captives in the traditional sense and weren’t part of a non-insurance business: They were part of an umbrella insurance company called Performance Insurance Co. SPC, a segregated portfolio corporation of which White was president.

Ambassador Captive Solutions would serve as an intermediary, assisting brokers and dealing with carriers.

Lexington’s involvement was needed because captives are not licensed commercial insurers, which often have higher surplus requirements. A licensed commercial insurer would have to issue the policies, the lawsuits explain. The captives would then pay a fee to Lexington and would reimburse it for any losses from claims.

The proposition was somewhat unusual but not that far-fetched. Captives of a variety of types are, with proper safeguards, considered legitimate solutions for hard-to-insure organizations looking to save money on risk management. The agency captive model appears to be more commonly used in offshore domiciles.

For all types of captives, the number has grown steadily in recent years. The Insurance Information Institute recorded 3,069 captive companies in the U.S. in 2021, a 14% increase over the year before. States across the country in recent years have begun to compete in efforts to have captives set up shop inside their borders.

“It’s been a record year and it’s been driven by the hard insurance market,” said David Provost, deputy commissioner of Vermont’s Captive Insurance Division. “Insurers are pulling out of some markets; everything’s tough. So, companies are thinking: ‘If we can’t get the coverage we need, we’ll do it ourselves.’”

Vermont was one of the first U.S. jurisdictions to capitalize on the captive need, in the 1980s, passing laws that made it attractive for captive insurance companies to be domiciled there – providing jobs and premium-tax revenue to the state. The push for captives gained steam after the federal Liability Risk Retention Act of 1986 made it easier for at-risk companies to establish their own liability insurance groups.

Vermont is now number one in the country, with some 620 captives domiciled there in 2021, followed by Utah, Delaware and North Carolina, the Institute reports.

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And it’s not just in the United States where captives have blossomed. Captives domiciled in Bermuda, Barbados and the Cayman Islands have also grown in recent years, topping 1,500 last year, according to industry reports. It’s not clear how many of those are agency captives, similar in structure to White’s model.

The Ambassador lawsuits have led to some finger pointing in the industry. Some have suggested that regulators in the Caymans and in the states, along with the direct insurance companies, insurance agencies, and the insureds themselves, provided little scrutiny into White’s companies, the wording of the policies or the reinsurance treaties, despite the unconventional captive structure.

In many cases, understaffed regulatory agencies rely heavily on captive managers’ word, industry experts said.

“It’s a faulty model,” one industry insider said. Unlike a conventional captive model, none of business owners were on the boards of the captive companies and weren’t signatories on any of the bank accounts. “They trusted their broker and trusted Brandon White implicitly.”

The current captives regulatory head at the Cayman Islands Monetary Authority could not be reached about the authority’s review process for captives, and the former director declined to comment.

Provost, who retires next week, acknowledged that regulators do, in fact, depend on a captive’s own business plan, but they also undertake background checks and conduct reviews into companies’ principals and their affiliations.

Provost

“I don’t see gross misregulation here,” he said. “Something like this would eventually, or with due diligence, be caught.”

Some U.S. states, including Vermont, have moved cautiously on agency captives and have only recently begun allowing the practices. Vermont has fewer than five and restricts them to commercial lines only — so White’s practice of insuring sports teams would not have been allowed there, Provost explained.

The alleged Ambassador fraud was eventually discovered, but not for many months, and not by regulators.

“Ambassador and White went to great lengths to hide their fraud and were successful in their deceit—until they got caught,” reads the lawsuit complaint by Lexington.

After AIG’s captive division vice president, Joe Davina, declined to participate in White’s program in 2018, White and company proceeded anyway, copying and pasting or forging Davina’s signature on documents showing Lexington as the direct insurer, the suit charges. Lexington’s name was used on many fake insurance policies, the 2020 complaint reads.

The plan offered the forged policies through Gagliardi Insurance Agency, based in Pennsylvania, and were purported to be reinsured through a captive cell known as Goldenstar Holdings, affiliated with Ambassador and White, the suit charges. This was dubbed the “Gagliardi scheme” in the court filings. An Ohio company, known as ePremium Insurance Agency, also was named in the suit.

Davina was alerted to potential trouble in December 2018, when a third-party administrator for Gagliardi emailed him, asking about a formal TPA agreement on the policies. Davina questioned White about it, but White said it was a “mixup” by the client.

On that occasion and at least four others, AIG officials took White’s word for the apparent miscommunication and did not pursue their concerns until later. Davina could not be reached for comment by the Insurance Journal.

Meanwhile, White or someone working on his behalf somehow fabricated an email that looked like it came from Davina, tentatively endorsing the TPA plan, the suit contends. The TPA forwarded the fake email to Davina, who again questioned White, but took no further action. Months later, in 2019, AIG received an email from a captive cell’s insurance management firm, with a reinsurance agreement attached, showing Davina’s signature.

Davina emailed back that the document was a forgery. White later apologized for the “misrepresentation,” and said the forgery did not come from Ambassador. By then, AIG had seen enough. The company filed suit six months later.

“White admitted that Davina’s signature on the forged reinsurance agreement was indeed a forgery, but White claimed to be ignorant as to who forged Davina’s signature, or why,” the May 2020 complaint reads.

White then seemed to backtrack, Lexington argues. “Ambassador and White now claimed, for the first time, that White—contrary to all of his earlier statements—witnessed Davina sign the agreement in May 2019 and back-date it to August 2018,” the suit alleges.

Meanwhile, State National and National Specialty entered the fray. In September 2020, the two carriers joined Lexington’s lawsuit, stating that they were also victims of a similar fraud in Texas, known as the “Madera Scheme.”

In that arrangement, homeowners’ and liability policies were sold and insurance certificates were issued to thousands of people living in big apartment communities in Texas, communities developed by Madera Residential, the suit charges. The policies and quota-share reinsurance agreements bore the name of State National, but all were counterfeit, the carrier said. Sanford & Tatum agency in Lubbock was named in that lawsuit, but later filed the crossclaim.

State National’s imprimatur also appeared on workers’ comp, auto and liability policies sold to Royal Waste Services, Triangle Grading & Paving, and Iron Woman Construction, along with medical coverage for Omega Family Services for surrogacy mom services in California.

“In furtherance of the seven schemes, defendants Ambassador and White forged or caused to be forged the signatures of purported State National executives—at times using signatures for individuals who were never employed at State National—on phony agency and reinsurance contracts to which State National never agreed,” the lawsuit reads.

Four months after that suit was joined, the youth baseball league in California launched its class-action suit against White, Ambassador, Performance Insurance Co., Goldenstar and others. The complaint by Del Obispo Youth Baseball Inc. charges violations of the federal Racketeer Influenced and Corrupt Organizations, or RICO, Act. Gagliardi Insurance Services was the broker.

The scheme offered accident and health insurance policies, some with million-dollar limits for brain injuries, the suit said. Del Opispo paid more than $64,000 in premiums to Gagliardi for the forged policies, but hundreds, maybe thousands, of other sports teams and leagues throughout the United States were also duped with the counterfeit policies, the league alleges. The parent organization for the cells, Performance Insurance Co., had at least 12 segregated cells, records show.

In the answer to the complaint, White’s attorneys wrote: “If plaintiffs sustained any damages (which is expressly denied), all or part of the damages alleged in the complaint were caused by the acts and/or omissions of other persons or entities, including plaintiff, for whose conduct defendants are not legally responsible.”

State National and the insureds didn’t find out about the apparent deception until the Gagliardi agency informed them in October 2020 that the policies were the subject of the Lexington lawsuit in Kentucky.

The lawsuits and some in the industry suggest that the alleged fraud was largely done on the front end, and the perpetrators could have easily produced counterfeit insurance certificates without the aide of Cayman-based captives. But the existence of actual captive cells may have allowed the alleged schemers to show legitimate financial statements and registrations – if anyone had asked.

One lesson from the episode seems to be that brokers, agents and insureds should make extra efforts to verify policies and other documentation when approached by people offering captive and other alternative risk solutions. They should consider seeking an independent review of the programs, said those familiar with this type of captive arrangement.

“Agents should not get involved in captives unless they understand the captive’s design at a fairly detailed level, they have an E&O policy that covers them, and they’ve done due diligence on the program that goes far beyond just liking the person selling the captive solution,” said Burand, the insurance consultant. “Few agents have this knowledge and I am learning through my E&O work that quite a few people don’t even know captives and reciprocals are not normal insurance companies.”

If agents don’t provide adequate disclosure to clients, they could be creating significant executives’ and officers’ exposure for themselves, Burand said.

Gagliardi Insurance Services was shut down in late 2020. It is named as a defendant in the Lexington lawsuit, and the California class action’s amended complaint added Marco and Dominic Gagliardi in 2021. After the Lexington lawsuit was filed, regulators in five states revoked Marco Gagliardi’s producer license. He voluntarily surrendered his California agent license in May of this year.

In June, Marco filed for bankruptcy in Pennsylvania. Dominic’s non-resident producer license was revoked in Idaho, the state’s insurance department website shows.

White lives in Kentucky and Ambassador Group’s offices are in the state. When asked what steps the Kentucky Department of Insurance has taken in response to the allegations about White, a spokeswoman for the DOI said only that the department does not comment about continuing investigations. Records show that White’s agent license became inactive in July 2021.

In March of this year, the Texas insurance commissioner ordered White and Ambassador to cease and desist from engaging in any type of insurance business, including acting as captive intermediaries. In August 2020, Nevada’s Division of Industrial Relations was one of the first regulatory agencies to perform a check, when it asked State National to verify a workers’ compensation policy for Iron Woman Construction.

State National said it did not issue the policy, that it was counterfeit. It’s not clear if Nevada’s inquiry triggered any action from the carrier. A month later, though, State National joined the lawsuit against White.

This summer, the assets and liabilities of the Cayman captive cells in the Ambassador program are in the process of being novated, or moved to other captive insurance companies, court records show. Some of the businesses and groups who bought into the allegedly counterfeit policies have been set up with policies backed by legitimate captive reinsurers.

The umbrella captive company, Performance Insurance Co., is in the process of being liquidated. The case is in U.S. Bankruptcy Court in Miami.

And CIMA, the Cayman Islands Monetary Authority, has taken some action against Performance. In December 2020, CIMA issued a cease and desist order, barring Performance from writing any more business, and said it planned to suspend the company’s Class B insurance license.

AIG attorneys declined to comment on the litigation.

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