The embattled Castleton Group surprised clients and regulators Tuesday by saying it will shut down, a move with the potential to disrupt health insurance coverage for thousands of local workers.

The announcement set off a scramble among Castleton's clients, 100 small and midsize employers, to find replacement benefits providers. Castleton managed human resources, such as processing payroll and administering health benefits, for clients with about 3,500 workers.

"I'm working very diligently to fill the gaps they've left behind," said Joey Tart, chief executive of Family Medical Supply in Dunn, a Castleton client with more than 100 workers. Family Medical Supply provides home medical equipment and supplies.

Some clients, such as Coldwell Banker Commercial Trademark Properties, a Raleigh real estate firm, are handling their payroll in-house -- at least for now -- so that their employees are assured of receiving their next paycheck.

"This is not something you want at this time of year," said the real estate firm's CEO and co-owner, Billie Redmond. "This is a busy time of year."

But providing health coverage isn't something that Castleton's clients can do themselves, which raises the possibility that some companies may face a gap in coverage until they line up a new insurer.

A spokeswoman for Castleton said the company would have no comment beyond an e-mail message from President Suzanne Clifton that was sent to clients Tuesday.

"Financial circumstances require that we cease operations and no longer provide any services to our clients," Clifton wrote. "I had sincerely hoped that we would be able to provide transitional services to you into the new year, and I regret that our present circumstances do not make that possible."

Castleton's move marked an abrupt reversal from earlier this month, when it went to court to appeal the Insurance Department's ruling that it was insolvent.

Regulators' hands are tied, to a large degree, said Department of Insurance spokeswoman Chrissy Pearson. "We don't have the authority to go in and take over the business," she said.

Clifton had sent a letter to clients earlier this month assuring them that they could expect service without disruption. It was a message she and other Castleton executives repeated in follow-up phone calls.

"I am heartened by the outpouring of support from the community, as well as our clients," Clifton said in an interview at the time. "I will do everything I can to save these clients and to keep them all together with us."

Wake County Superior Court Judge Donald W. Stephens ruled last week that Castleton had until Jan. 11 to come up with a plan to wind down its business. The judge's order noted that it was impossible for a company such as Castleton "to cease operations immediately without damage to its client customers."

Insurance regulators had anticipated that Castleton's plan would include a blueprint that would enable clients to transfer their business to another company without disrupting service, Pearson said.

"We always warned their clients there could be some interruption of service," she said. "That's why we wanted to get the information out" about Castleton's problems.

Castleton didn't notify the Insurance Department of its decision, Pearson said. The department learned of the decision from clients who received Clifton's e-mail.

"Our lawyer is trying to contact their lawyer," Pearson said. The next step would be to notify the court of Castleton's latest move in hopes that a judge would order the business to fulfill its obligations or find a company that could take over its services, she said.

Thad Armbruster, chief financial officer at XS Inc., a Morrisville company that was a Castleton client, said that he has lined up a benefits provider but that the arrangement wasn't entirely satisfactory. XS, which provides software for the agricultural industry, has about 30 employees.

Armbruster's new provider, ADP TotalSource, can't provide health insurance until Jan. 1. His fear: "We're going to have two weeks of people not having insurance." He said ADP was better than providers he contacted that wouldn't provide health insurance until Feb. 1.

Wallace Dawson, a partner at TriSure, a health insurance consulting firm based in Raleigh, said it's unclear when health insurance coverage provided by Castleton will expire. "That's the million-dollar question that everyone is trying to answer," said Dawson, who has been trying -- and failing -- to get answers from Castleton.

TriSure is arranging health insurance for about a half-dozen former Castleton clients.

Castleton clients seeking an insurance provider can call the Insurance Department at (800) 546-5664 for a list of companies.

Get $150+ in coupons in every Sunday N&O. Click here for convenient home delivery.