In a typical real estate transaction the parties will open an escrow either with a title insurance company or an attorney for the deposit of documents and money and directions for their use. When the transaction closes, the escrow agent will order the issuance of a title insurance policy or policies insuring the purchaser and the lender, if a loan is involved. The title insurance policies protect the purchaser and the lender against defects in the title that has been purchased or encumbered and also provide insurance that the title has been properly transferred and encumbered. If this insurance is brought into question, the insureds under the policies can bring claims on their policies either to recoup monetary losses or to require the title insurance company to place the title in the status that it was insured.
But what if the funds or the documents placed into escrow are misused or misappropriated during the closing process? How are the parties to the transaction to be protected from possible fraud, defalcation, or theft by the closing agent, something that is not addressed by the title insurance policies? This short article explores the document developed for that purpose, the Closing Protection Letter (CPL).
A local title company or an attorney will act as a closing agent. The national title insurers have worked through the American Land Title Association (ALTA) to develop standard letters to indemnify the parties for losses attributable to certain acts of these agents. These standard letters are normally effective only as to a single transaction and promise indemnity for losses related either to the status of the insured title or payment of funds and delivery of documents in connection with the closing. The express obligation created by the CPL for these losses relieves the parties (addressees of the letter or letters) of the need to rely on the apparent authority of the closing agent to collect from the title insurance underwriter, the financially responsible entity. The right to recover is limited to the losses caused by the acts of the closing agent that the letters expressly describes.
Since the CPLs indemnify as a matter of contract law, negligence and tort principles do not apply. However, courts apply the same standard of interpretation to CPLs that they do to title insurance policies by liberally construing the CPLs in favor of the addressees and strictly construing them against the title insurer. One has to check state regulations to determine who may receive such letters and on what terms.
The ALTA has frequently revised the standard CPLs. The ALTA adopted the most current versions, the Single Transaction and the Multiple Transaction, on December 1, 2015. The Single Transaction version applies only to the referenced order or transaction number. The Multiple Transaction version is good for all transactions closed by the title agent or approved attorney until cancelled.
The 2014 amendment of the letters deleted "negligence" from the acts of the agent or closing attorney that are covered in a response to court cases. The 2014 amendment also excluded losses from predatory lending, truth-in-lending, securitization of mortgages, those resulting from the borrower's inability to repay the loan and those in which the closing agent or attorney is acting as a facilitator for a §1031 exchange or disbursing construction loan funds. The amendments also try to prohibit the addressees from litigating claims on the letter as part of a class action.
The 2015 versions of the letters, the current versions, provide two basic assurances to the addressees (1) indemnification for loss caused by the failure of the issuing agent or the approved attorney to comply with the closing instructions related to title;(2) indemnification for losses suffered due to the fraud or dishonesty of the issuing agent or approved attorney in the handling of the addressee's funds or documents in connection with the closing. The various state courts have adopted varying views of what constitutes fraud or dishonesty and that create coverage under the letters.
The 2015 letters eliminate the requirement that the claimants own the loan when the claim is made and paid allowing successor owners such as assignees and warehouse lenders to make claims. The letters apply only when the title insurer has issued a policy in connection with the transaction and the addressee of the letter must be a buyer, lender, or lessee. The 2015 letters extends protection to the purchaser via a letter addressed to the purchaser's lender.
Most state insurance departments do not consider CPLs to be title insurance either because they do not fit within their statutory definition of title insurance or they do not spread risk within the normal meaning of insurance. As a consequence title insurers in most states do not charge for issuance of the letters and consider them to be issued "incidentally" to the issuance of title insurance and consider the cost of the letters to be built into the title insurance premium.
Since the letters are issued incidentally to the issuance of title insurance consideration has been given for the letters. The breach of the promises given in the letters supports an action for breach of contract that is independent of any action on the title policies. In those jurisdictions that do not consider the letters to be title insurance the addressee cannot bring a bad faith action. A bad faith denial of benefits can only occur under an insurance policy.
In conclusion although it may seem to be only a minor part of a real estate closing, a CPL can provide important protections to lenders and buyers and is something of which that parties to the transaction should be aware. This is only a brief survey of the CPL, and in a case in which the coverage of a CPL is at issue the parties involved may wish to seek the advice of a consultant or expert for a more detailed review of their particular situation.
Douglas Borchert, JD, is an accomplished California Real Property & Title Attorney with over 40 years of experience in Title Insurance. Mr. Borchert worked in all aspects of the business from Poster to Title Officer to Title Insurance Underwriting Attorney. He has experience with commercial and residential transactions of every type involving liabilities running into the tens of millions of dollars. Mr. Borchert has worked on all facets of title insurance and escrow for Western Title Insurance, SAFECO Title Insurance, and TICOR Title in Sacramento, Tulare, and Ventura Counties.
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