The state Department of Insurance knew from the outset that the Castleton Group's finances were shaky, but it took regulators 2 1/2 years to reject the company's application for an operating license.

Throughout this period, the Raleigh human resources management firm -- which left clients in the lurch when it shut down and filed for bankruptcy in December -- continued operating and recruiting clients.

Some of Castleton's former clients are outraged that the Department of Insurance took so long to deny Castleton a license and that the agency didn't go public with Castleton's problems until the end of that process. Many had to quickly find companies to handle payroll and health insurance for their employees when Castleton shut down. Worse, it caused a gap in health insurance for some clients' workers.

"The Department of Insurance has done a huge disservice to our employees and our companies by not making us aware of this when they found out," said Turner Revels, president of Revels Turf and Tractor in Fuquay-Varina. "By the time we figured it out, it was too late."

But the Insurance Department maintains that, under state law, it couldn't go public with Castleton's problems until the administrative process was complete and the dispute shifted to the courts. That happened in early December, when the Insurance Department announced that Castleton's application was denied because the company was insolvent.

"Had we taken any action against the company before we went through the process, we could have risked having [legal] action taken against us by the company," said Insurance Department spokeswoman Chrissy Pearson.

Castleton initially appealed that denial to Wake County Superior Court but quickly reversed course and shut down its operations Dec. 18. Four days later, Castleton filed for bankruptcy.

Tony Riddick, deputy insurance commissioner, defends the length of the licensing process. He and other insurance officials say it was a function of limited agency manpower, a legal process that involves plenty of back-and-forth with built-in delays of 30 days at certain points. They say Castleton fought regulators every step of the way. Castleton consistently said it was financially stable.

According to correspondence obtained from the state, Castleton kept regulators waiting for information, repeatedly sought deadline extensions and served up details for several plans aimed at improving its financial situation to the regulators' satisfaction.

Castleton, whose executives declined to comment for this story, already was operating as a professional employer organization when the General Assembly passed a law in 2005 requiring that such companies be licensed. That enabled it to operate while its application was being considered.

When it shut down, Castleton's client roster included about 100 small and midsize companies employing 3,500 people.

Though the law requiring professional employer organizations to be licensed led to a flood of applications, the General Assembly only included funding for one administrator to process them. "We were juggling them all at once," Pearson said. The department is requesting funding for a second licensing administrator.

Former Castleton clients such as Thad Armbruster, chief financial officer at XS, a Morrisville software company that caters to the agricultural industry, are dismayed that the process took so long.

"It seems that the state dropped their ball," Armbruster said. "My frustration doesn't just lie solely with the Insurance Department. The legislators bear some responsibility too. When laws are passed ... they should have teeth in them."

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