Losses Continue For Bail Bond Insurer

Most insurance companies, insuring bail bond agreements, take no liability on the bond. Any losses are presumed to be absorbed by fully collateralized bonds, co-signor agreements, and/or the company writing the bond. Here’s what happens when indemnitors fail to cover the losses. Bancinsurance wrote reinsurance policies for a bail bond agency, which means a bail bond company purchased insurance against loss, and that insurance policy was reinsured by Bancinsurance. According to Bancisurance, the reinsurers were not required to pay losses unless there was a failure of the bail bond agency. As the bonds were to be 100% collateralized, any losses paid by the reinsurers were to be recoverable through liquidation of the collateral and collections from third party indemnitors. In 2004, auditors for the company withdrew their audits for the years 2001 through 2003 and was unable to complete the 2004 audit citing that the auditors could not rely on the representations of management regarding the bail bond program. NASDAQ responded by temporarily de-listing the company. Bancinsurance hired new auditors, amended its filings, and hired a team of lawyers to investigate how it could recoup on its losses.

Last week, Bancinsurance reported 4th quarter losses, reporting that it continues to pay losses on its discontinued bail bond judgment policies. Bancinsurance reported the following information to the Securities and Exchange Commission (SEC) on its 2006 annual report: Beginning in 2001 and continuing into the second quarter of 2004, Bancinsurance participated as a reinsurer in a program covering bail and immigration bonds issued by four insurance carriers and produced by a bail bond agency. The liability of the insurance carriers was reinsured to a group of reinsurers, including Bancinsurance. They assumed 15% of the business from 2001 through 2003 and 5% of the business during the first half of 2004. This program was discontinued in the second quarter of 2004. Based on the design of the program, the bail bond agency was to obtain and maintain collateral and other security and to provide funding for bond losses. The bail bond agency and its principals were responsible for all losses as part of their program administration. The insurance carriers and, in turn, the reinsurers were not required to pay losses unless there was a failure of the bail bond agency. As the bonds were to be 100% collateralized, any losses paid by the reinsurers were to be recoverable through liquidation of the collateral and collections from third party indemnitors. In the second quarter of 2004, the Company came to believe that the discontinued bond program was not being operated as it had been represented to the Company by agents of the insurance carriers who had solicited the Company’s participation in the program, and the Company began disputing certain issues with respect to the program, including but not limited to: 1) inaccurate/incomplete disclosures relating to the program; 2) improper supervision by the insurance carriers of the bail bond agency in administering the program; 3) improper disclosures by the insurance carriers through the bail bond agency and the reinsurance intermediaries during life of the program; and 4) improper premium and claims administration.

The reports furnished by Bancinsurance do not identify the bail bond company, if it is still in business, or why the company was unable to cover its losses. My guess is that the bail bond company was writing irresponsible bail, suffered losses, and the cosignors and collateral were either insufficient or nonexistent.