Forged signatures and forged policies? Lawsuits Raise Concerns About Captive Plan
The owners of one of Texas’ oldest insurance agencies must have been taken aback when they were named in a federal lawsuit brought by an AIG company, alleging the agency was involved in an elaborate fraud that forged signatures and created fake policies for thousands of residents in the state’s apartment communities.
Sanford & Tatum Insurance Agency, founded in 1935 in Lubbock, Texas, resisted last month. The agency’s principals claimed in a crossclaim filed in Kentucky that they, like thousands of policyholders across the country, were victims of the complicated and far-flung conspiracy.
Brandon White of Kentucky and his Ambassador Captive Solutions are said to have spearheaded the scheme. According to litigation records and others connected in the case, it reportedly used offshore captive insurance cells to legitimize fraudulent liability, homeowners, workers compensation, accident and health policies.
“As a result of being a victim of such conduct, Sanford has now been victimized further by being sued for conduct it had no knowledge of, did not condone, and would not have condoned had it known of such conduct,” states the crossclaim case filed in July by Sanford & Tatum.
The principals of the agency and its counsel declined to comment on the matter. Others in the industry, however, said the lawsuit and a similar nationwide class action filed against White and Ambassador in California have renewed concerns about how some captive insurance companies are regulated in the United States 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.
“I’ve never seen anything quite like this in my life,” said one hostage specialist who declined to be identified due to his role in the cases.
The insurance industry has paid little attention to the complaints and the sorts of problems they allege.
“Not many people are aware these risks exist,” said Chris Burand, a Colorado-based insurance industry expert with Burand & Associates. “More experienced individuals are cautious and concerned, and a few have firsthand experience with these scenarios going wrong, but the vast majority of people have no notion.”
Lexington Insurance Co., a unit of American International Group, filed the original complaint in 2020. (AIG). Later that year, it was joined by State National Insurance Co. and National Specialty Insurance, both situated in Texas and controlled by Markel Corp.
According to the complaint, White, Ambassador, and their friends were involved in at least seven scams in which they marketed millions of dollars in bogus insurance to youth baseball teams and leagues, surrogate mothers, a waste-removal firm, and construction organizations.
“The plaintiffs allege that Ambassador and/or White acquired and caused the illegal issue of counterfeit insurance policies, certificates, and invoices,” according to an amended complaint filed in 2020 in the Western District of Kentucky in the Lexington case. The petition requests that the court prohibit White and his enterprises from using the carriers’ names and order them to give up earnings from the schemes, as well as triple damages.
White, who lives in the Louisville area, has worked as an insurance consultant for several years, according to social media posts and others who have met him. A 2017 Twitter post shows him instructing insurance salespeople at a captives event.
He has rejected the charges of fraud and has requested that the cases be dismissed by the federal court. According to court documents, White and Ambassador claim the problems originate from contract conflicts with insurance companies over the use of their names. Insurance Journal’s phone calls were not returned by White or his attorneys.
The plaintiffs have referred to White’s schemes as “brazen,” which is facilitated by the fact that captive reinsurance programs are “complex, multi-party arrangements that need specialized expertise and extensive underwriting capacity.” Records reveal that at least $11 million in claims have appeared since the lawsuit were filed.
According to the claims, it all started in 2018 when White approached a Lexington and AIG Insurance official with a proposal. An insurance broker was supposed to offer accident, liability, and health insurance plans to child sports groups. Similar to an agency captive structure, the claims would eventually be covered by one of the Cayman-based captive cells serving as reinsurers.
The cells were not captives in the classic sense, nor were they part of a non-insurance business: they were part of a segregated portfolio corporation named Performance Insurance Co. SPC, of which White was president.
Ambassador Captive Solutions would act as a mediator between brokers and carriers.
Because captives are not licensed commercial insurers, which sometimes have greater surplus requirements, Lexington’s assistance was required. The complaints state that the insurance must be issued by a licensed commercial insurer. The captives would then pay a charge to Lexington and repay it for any claims losses.
The proposal was odd, but not out of the realm of possibility. With sufficient precautions, captives of various sorts are regarded valid alternatives for hard-to-insure firms wishing to save money on risk management. The agency captive model appears to be increasingly popular in offshore jurisdictions.
The total number of prisoners has continuously increased in recent years. The Insurance Information Institute reported 3,069 captive firms in the United States in 2021, a 14% rise from the previous year. In recent years, states throughout the country have begun to compete for prisoners to set up shop within their borders.
“It’s been a record year, and the harsh insurance market has pushed it,” said David Provost, deputy commissioner of Vermont’s Captive Insurance Division. “Insurers are withdrawing from various markets; everything is difficult.” As a result, businesses are thinking, “If we can’t acquire the coverage we need, we’ll do it ourselves.”
In the 1980s, Vermont was one of the first jurisdictions in the United States to capitalize on the captive demand, creating rules that made it desirable for captive insurance businesses to be domiciled there, giving employment and premium-tax money to the state. The captive movement gained traction when the federal Liability Risk Retention Act of 1986 made it simpler for high-risk businesses to form their own liability insurance groupings.
According to the Institute, Vermont is currently number one in the country, with around 620 captives residing there in 2021, followed by Utah, Delaware, and North Carolina. Captives have grown in popularity all across the world, not only in the United States. According to industry sources, the number of captives based in Bermuda, Barbados, and the Cayman Islands surpassed 1,500 last year. It’s unclear how many of those are agency captives, which are structured similarly to White’s paradigm.
The Ambassador cases have caused some industry finger pointing. Some have indicated that, despite the unorthodox captive structure, regulators in the Cayman Islands and the states, as well as direct insurance firms, insurance agencies, and the insureds themselves, gave little investigation into White’s businesses, policy language, or reinsurance treaties.
According to industry analysts, underfunded regulatory authorities frequently depend significantly on captive managers’ word.
“It’s a flawed model,” one industry source explained. Unlike a traditional captive model, none of the firm owners served on the boards of the captive businesses or signed any of the bank accounts. “They had complete faith in their broker and Brandon White.”
The Cayman Islands Monetary Authority’s current captives regulatory head could not be reached for comment on the authority’s captives assessment procedure, and the prior director declined to comment.
Provost, who is retiring next week, agreed that regulators do rely on a captive’s own business strategy, but they also perform background checks and evaluations of firms’ founders and ties.
“I don’t see any significant misregulation here,” he added. “Something like this would ultimately be detected, perhaps with proper diligence.”
Some states in the United States, particularly Vermont, have taken a cautious approach to agency captives and have just lately begun to authorize the activities. Vermont has fewer than five and limits them to business lines solely, thus White’s practice of insuring sports teams would not have been permitted, according to Provost.
The suspected Ambassador scam was finally detected, although it took months and was not caught by regulators.
“Ambassador and White went to great measures to conceal their fraud and were successful in their deception—until they were found,” Lexington claims in its lawsuit.
The action claims that although AIG’s captive division vice president, Joe Davina, rejected to join in White’s initiative in 2018, White and company went forward with the operation nevertheless, copying and pasting or forging Davina’s signature on documents representing Lexington as the direct insurer. According to the 2020 lawsuit, Lexington’s identity was used on several bogus insurance policies.
According to the claim, the plan provided the falsified policies through Gagliardi Insurance Agency in Pennsylvania, and they were purportedly reinsured through a captive cell known as Goldenstar Holdings, which was associated with Ambassador and White. In court documents, this was nicknamed the “Gagliardi scam.” The action also named an Ohio firm called ePremium Insurance Agency.
In December 2018, Davina was notified of a possible problem when a third-party administrator for Gagliardi wrote him, inquiring about a formal TPA agreement on the rules. Davina questioned White about it, but White said there was a “miscommunication” on the part of the customer.
AIG executives took White’s word for the apparent misunderstanding on that occasion, as well as at least four others, and did not explore their concerns until later. The Insurance Journal was unable to reach Davina for comment.
Meanwhile, the suit claims that White or someone acting on his behalf forged an email that seemed to be from Davina, provisionally approving the TPA proposal.
The TPA passed the bogus email to Davina, who questioned White once again but took no further action. Months later, in 2019, AIG got an email from the insurance management business of a captive cell, with a reinsurance agreement attached and Davina’s signature.
Davina responded by email, stating that the document was a forgery. White then apologized for the “misrepresentation” and stated that the fake did not originate with Ambassador. AIG had had enough by that point. Six months later, the business filed a lawsuit.
“White confirmed that Davina’s signature on the forged reinsurance agreement was a forgery, but White claimed to be unaware of who forged Davina’s signature or why,” according to the May 2020 lawsuit.
Lexington claims that White then appeared to backtrack. The suit claims that “Ambassador and White now stated, for the first time, that White—contrary to all of his previous statements—witnessed Davina sign the agreement in May 2019 and back-date it to August 2018.” Meanwhile, State National and National Specialty began competing. The two carriers joined Lexington’s complaint in September 2020, claiming that they were also victims of a similar fraud in Texas called as the “Madera Scheme.”
According to the claim, homeowners’ and liability policies were sold and insurance certificates were granted to hundreds of people living in large apartment communities in Texas created by Madera Residential. The policies and quota-share reinsurance agreements bore the State National name, but they were all forgeries, according to the carrier. The Lubbock-based Sanford & Tatum firm was mentioned in the case but later filed the crossclaim.
State National’s logo also featured on plans sold to Royal Waste Services, Triangle Grading & Paving, and Iron Woman Construction, as well as medical coverage for Omega Family Services’ surrogate mom services in California.
“In furtherance of the seven frauds, defendants Ambassador and White fabricated or caused to be forged the signatures of bogus State National officials on fraudulent agency and reinsurance contracts to which State National never consented,” the lawsuit states.
Four months after that complaint was filed, a California minor baseball league filed a class-action lawsuit against White, Ambassador, Performance Insurance Co., Goldenstar, and others. Del Obispo Youth Baseball Inc.’s complaint alleges breaches of the federal Racketeer Influenced and Corrupt Organizations Act, or RICO. The broker was Gagliardi Insurance Services.
According to the lawsuit, the scam offered accident and health insurance plans, some with million-dollar limits for brain injury. Del Opispo paid more than $64,000 in premiums to Gagliardi for the falsified policies, but the league claims that hundreds, if not thousands, of other sports teams and organizations around the country were also tricked by the fake insurance. According to data, the parent company for the cells, Performance Insurance Co., had at least 12 segregated cells.
“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,” White’s attorneys wrote in their response to the complaint.
The suspected deceit was not revealed to State National or the insureds until the Gagliardi agency alerted them in October 2020 that the policies were the subject of the Lexington litigation in Kentucky.
According to the lawsuits and several industry sources, the alleged fraud occurred mostly on the front end, and the culprits could have easily manufactured counterfeit insurance certificates without the assistance of Cayman-based captives. However, the existence of genuine captive cells may have permitted the putative schemers to exhibit legitimate financial accounts and registrations if they had been questioned.
One takeaway from the story appears to be that when approached by persons promising captive and other alternative risk solutions, brokers, agents, and insureds should make extra measures to examine policies and other paperwork. Those acquainted with this sort of captive relationship advised them to seek an independent examination of the programs.
“Agents should not get involved in captives unless they understand the captive’s design at a fairly detailed level, have an E&O policy that covers them, and they’ve done due diligence on the program that goes far beyond simply liking the person selling the captive solution,” Burand, the insurance consultant, said.
“Few agents have this information, and I’m discovering via my E&O work that many individuals don’t even realize captives and reciprocals aren’t regular insurance firms.”
If agents fail to offer proper information to customers, they may expose executives and officers to considerable liability, according to Burand.
Gagliardi Insurance Services was decommissioned in late 2020. It is identified as a defendant in the Lexington litigation, and in 2021, Marco and Dominic Gagliardi were added to the California class action’s revised complaint. Marco Gagliardi’s producer license was canceled by authorities in five states after the Lexington case was filed. In May of this year, he voluntarily resigned his California agent license.
Marco declared bankruptcy in Pennsylvania in June. Dominic’s non-resident producer license in Idaho was cancelled, according to the state’s insurance department website.
White lives in Kentucky, and Ambassador Group has offices there as well. When asked what actions the Kentucky Department of Insurance has taken in response to the claims against White, a DOI representative stated simply that the department does not comment on ongoing investigations. According to public records, White’s agent license expired in July 2021.
The Texas insurance commissioner ordered White and Ambassador to stop doing any form of insurance business, including operating as captive middlemen, in March of this year. When the Nevada Division of Industrial Relations contacted State National to validate a workers’ compensation policy for Iron Woman Construction in August 2020, it was one of the first regulatory authorities to execute a check.
State National claimed that the policy was forged and that it had never been issued. It’s unclear whether Nevada’s probe prompted the airline to take any action. However, State National joined the case against White a month later.
According to court documents, the assets and liabilities of the Cayman captive cells in the Ambassador program are being novated or transferred to other captive insurance businesses this summer. Some of the firms and organizations who purchased the allegedly fraudulent policies were set up with policies guaranteed by real captive reinsurers.
Performance Insurance Co., the umbrella captive firm, is being liquidated. The lawsuit is being heard in the United States Bankruptcy Court in Miami.
The Cayman Islands Monetary Authority, CIMA, has also initiated action against Performance. CIMA issued a halt and desist order in December 2020, prohibiting Performance from writing any additional business and stating that the company’s Class B insurance license will be suspended.
Attorneys for AIG declined to comment on the lawsuit.