Lack of Federal Sanction Puts Housing Commission Insurance in Doubt

‘We would be unlikely to use them unequivocally if they’re not HUD rated. We’d have to look into it and see what the situation is.’

Elizabeth Morris, Housing Commission acting executive director

A fledgling offshore insurance company that sold the San Diego Housing Commission its $2-million liability insurance policy in December--and is preparing to bid to renew the policy--still has not won federal approval to offer such insurance, according to local and federal officials.

Yet the Caribbean-based firm, Centurion Insurance Ltd., continued to sell insurance policies to public housing authorities across the West until July of this year, despite repeated notices from the U.S. Department of Housing and Urban Development that it was not qualified to do so, HUD officials said.

In addition, Centurion apparently failed to conduct its business in California through an insurance broker certified to handle offshore companies, which is a requirement of the California Insurance Code. In papers filed with the San Diego Housing Commission, the firm claimed it had the services of such a broker, but the broker told The Times his firm was not providing that service.

Thomas Eaton, Centurion’s founder and chairman of Centurion’s onshore representative, Wyndham Consulting Services of Burlingame, Calif., maintains that the snafu is largely a bureaucratic one, caused by months of negotiations over HUD’s demand that Centurion keep its $10 million in assets in a U.S. bank. Currently, the company’s assets are kept offshore, out of the reach of U.S. courts should a housing authority attempt to seize them.

Eaton and Bill Booth, the Fresno-based broker who represented the San Diego Housing Commission when it purchased the liability policy, said that they have repeatedly assured the Housing Commission that HUD approval was imminent because federal officials told them it was.

“The assurances given to (the Housing Commission) were the same assurances given to us (by HUD),” Eaton said. “This is what we kept hearing: ‘Any time now.’ So we were not trying to deceive anybody.”

Documents show that might have been wishful thinking on Eaton’s part. And nearly 11 months of delays in federal approval have left San Diego housing officials leery about their decision to buy discount rate insurance from a firm that did not exist until last year and wrote its first policy for the San Diego Housing Commission. The decision was made at a time when U.S. public housing agencies were finding it costly to buy insurance from American companies.

After months of accepting the company’s assurances that federal approval would soon be forthcoming--promises they apparently didn’t check with HUD--Housing Commission officials appear ready to dump Centurion if the company is not HUD approved when the liability policy comes up for renewal in December.

“We would be unlikely to use them unequivocally if they’re not HUD rated,” said Elizabeth Morris, the Housing Commission’s acting executive director. “We’d have to look into it and see what the situation is. If we find that a company that we do business with has misrepresented (themselves) to us, then it would certainly color our willingness to do business with them in the future.”

Look at Alternatives

A risk-management consultant hired by the commission to review its six separate insurance policies also will recommend that the commission not transact new business with Centurion because of the lack of approval by HUD and reluctance on the part of Centurion and Wyndham to reveal information requested by the consultant.

“We’re going to recommend that they look at other alternatives . . . because of the lack of information (about the company) and the fact that they haven’t been approved,” said Craig Collings, a consultant with Advanced Risk Management Techniques.

Public housing agencies purchase liability insurance primarily to protect themselves against lawsuits from people who are injured on their property. HUD, which puts up the money for the housing, reviews the policies to ensure that the agencies are dealing with reputable companies.

HUD has no enforcement power over the actions of private insurance companies short of formally barring them from selling insurance to public housing agencies, a drastic measure that was not adopted in Centurion’s case. Instead, HUD negotiated with Centurion over the standards it wanted the firm to meet before selling insurance.

But J. Michael Dorsey, HUD’s general counsel, said that HUD made it very clear that Centurion needed its approval to sell insurance to any public housing agency. “They have to be approved by HUD to be able to sell insurance to housing authorities,” Dorsey said. “And they don’t have that approval.”

Centurion’s policy offered the commission $2 million in total coverage and up to $1 million for any particular incident for $177,113 per year--at least $22,000 less than a policy offered by broker Robert F. Driver through a regulated U.S. insurance company.

Commission officials knew that Centurion was unregulated by the state Department of Insurance and unrated for financial stability by the A.M. Best & Co. insurance guide. But they never were specifically told that Centurion was an offshore firm until after the deal was concluded, said Cathy Lexin, the commission’s deputy executive director and the official in charge of its insurance matters. The firm is based in the town of Grand Turk in the British dependency known as Turks and Caicos Islands.

Neither was it made fully clear that HUD approval of Centurion was not final, she said.

Eaton denied those charges, responding that “nothing has ever been hidden. We’ve stressed what the company was, where it was.” However, he declined to reveal the names of investors backing Centurion.

With prohibitive prices forcing some public housing agencies to go without any insurance at all, Centurion’s offer was a risk that the commission, then headed by Executive Director Ben Montijo, was willing to take.

HUD officials say that Eaton and Booth have in the past proven to be qualified insurance providers with years of experience selling insurance to public housing authorities. There is no evidence that Centurion is not a legitimate company able to cover the 28 policies it has written for 14 public housing authorities, said Ralph Lecky, an insurance examiner with HUD.

Centurion currently is processing two liability claims for the San Diego Housing Authority. Neither has yet been paid, Lexin said.

With or without HUD approval, Eaton believes that he has little chance to renew the liability policy because he claims that Mayor Maureen O’Connor, who is chairwoman of the housing commission, took a dislike to him last year, a charge mayoral spokesman Paul Downey denied.

“I cannot win as far as San Diego is concerned,” he said. “I could have $100 million hard cash deposited in a bank, I could have the government’s approval, and the mayor will find something wrong.

“That’s my feeling. I think we have conflict of personalities,” he said.

In his defense, Eaton raised this question: If the San Diego Housing Commission is so concerned about Centurion’s credibility and its lack of approval by HUD, why did it invite Booth and Centurion to bid again for the expiring liability policy?

Lexin replied, “There’s really one reason: they’re the current (insurance) carrier. That’s the only reason. It’s a courtesy.” Lexin has warned Booth that Centurion will need HUD approval to be considered, she said.

Getting HUD Approval

Because it is still difficult and expensive for housing authorities to obtain liability and property insurance, HUD would be willing to approve an offshore firm that could provide insurance at a lower cost than American insurance companies--provided that the firm meets accountability standards set up especially for such firms, said Dorsey, HUD’s general counsel. Centurion, the first offshore company to try, has not yet done that, despite 11 months of negotiation, he said.

As early as February, HUD was warning Eaton that Centurion was unqualified to sell insurance in the United States until the firm had met three conditions:

- Transfer all assets to a Federal Reserve system bank.

- Agree to limit insurance coverage to public housing agencies.

- Undergo an audit.

“If Centurion Insurance Ltd. will agree to the following conditions, the Department will consider Centurion Insurance Ltd. an acceptable insurance company,” Dorsey wrote Eaton on Feb. 10.

Though the letter did not explicitly say so, it was clearly intended as a request that Eaton stop selling insurance policies until he met the conditions, Dorsey said in an interview. “It was our intention that they would comply with these conditions before they solicited insurance,” Dorsey said.

Eaton maintains that he spoke with Dorsey “and he retracted that.” Dorsey denies that claim. Eaton and Booth note that they were not hiding from HUD, but continued to exchange letters about how to meet HUD’s financial conditions as they continued to sell insurance policies during the following months.

“I want to be in compliance and I want to do it right,” said Booth, who has been brokering housing authority insurance policies since 1965. “I could tell them to go climb a pole, but I want to be smart and I want to work with them.”

Asked about the continued sale of insurance by Centurion and Booth, Dorsey said that “it concerns me. We’re looking into it.”

One of the policies that Booth sold during those months was to the San Diego Housing Commission--this time to insure the commission’s $43-million worth of property. But after purchasing the insurance in April, the new panel of commissioners, which included five City Council members, demanded written proof that HUD had approved Centurion. When it did not come by June, jittery commissioners canceled the policy and bought one that cost about $50,000 more.

Though they were later advised that the commission also had a liability policy with Centurion, the commissioners decided not to cancel that policy, voting instead to wait until the risk management consultant could review all six types of insurance they hold. That report is scheduled for the housing commission’s Dec. 7 meeting.

In July, HUD explicitly told Eaton to stop soliciting housing authority insurance, a request with which Eaton has complied.

Eaton also may have violated a California Insurance Code requirement governing offshore insurance companies by failing to conduct business through an insurance broker certified to handle offshore companies.

The code mandates that insurance companies not regulated by the state--and thus selling what is known in the trade as “surplus line insurance”--must sell their insurance through a specially licensed “surplus line broker.” That broker’s responsibility is to check into the offshore insurance firm and ensure that it is reputable.

In papers filed with the commission, Eaton listed Crouse & Associates of San Francisco as Centurion’s surplus line broker.

But Jay Eaton, a broker at Crouse & Associates who is not related to Thomas Eaton, said that because HUD has not approved Centurion, Crouse & Associates’ requirements have not yet been met.

“We are prepared to be the filing surplus line broker,” Jay Eaton said. “Our requirements have not yet been met. One of the requirements is that we have a letter from HUD accepting Centurion as an approved carrier.”

Without a surplus line broker, Centurion has violated the Insurance Code, said John Faber, the state Insurance Department’s chief counsel.

Thomas Eaton maintains that Crouse is Centurion’s surplus line broker. “To Centurion’s knowledge and belief, and Wyndham Consulting Services’, Crouse is the surplus line broker,” he said.

More importantly, Eaton said recently that he again has real hope of receiving approval from HUD to sell insurance. On Oct. 30, he agreed in a telephone conversation with Dorsey to move Centurion’s assets into a U.S.-based trust.

Dorsey would not confirm that version of events. Local housing officials say they will wait and see whether the latest promise of HUD approval holds up better than previous ones.

But Eaton is realistic about his chances of renewing the housing commission’s liability policy.

“I would like to retain it, yes,” he said, “but I do not believe it’s in the cards.”