Closing Protection Letters: What Is (And Is Not) Covered
Title agents are customarily authorized, through agency agreements, to sell policies for one or more title insurance underwriters. These agency agreements normally provide that the agent is an agent solely for the purpose of issuing title insurance commitments and policies, and explicitly state that the agent is not the title company’s agent for the purpose of conducting settlements or performing escrow services. Authorized title agents also often act separately as the agent for the lender, buyer, or seller, pursuant to instructions from such “principals” (that only such principals can enforce), in connection with the escrow closing of the transaction that is the subject of the title insurance.
A lender who also wants the title insurer to be responsible for the agent’s acts in connection with escrow closing activities and services must separately contract with the title insurer for such additional protection by entering into an “insured closing letter” or “closing protection letter” (CPL). CPLs have been available since the 1960s. They originally were not title-industry approved forms but, rather, were forms requested by mortgage lenders that were concerned they had no protection against unauthorized or fraudulent actions, or failure to comply with the lender’s closing instructions, by the title company’s approved closing agent or attorney. Lenders require CPLs because the agency-principal relationship between a title underwriter and a policy-issuing agent or approved attorney is limited to the issuance of a title-insurance policy, and such relationship does not extend to escrow or closing functions.
CPLs: What Is Covered?
CPLs specifically apply to escrow closing activities and services performed for title underwriters by approved attorneys or agents who are not employees of the title companies; as a general rule they are not issued on behalf of independent closers over whom the title company has no control. (An “Approved Attorney” is defined in the standard forms of CPLs as “an attorney upon whose certification of title the title insurance company issues title insurance”; an “Issuing Agent” is defined as “an agent authorized to issue title insurance for the title insurance company”). These letters are standardized indemnity agreements given to individually named lenders and recite the specific conditions under, and the extent to which, title insurers will accept liability for the acts or omissions of such parties.
A CPL generally applies only with respect to the particular transaction for which it is issued, although title insurers generally also will issue a general or “blanket” CPL that protects a particular lender in connection with escrow closing activities and services involving a designated agent for a specified period of time. The CPL specifically provides that the title insurance company will reimburse the customer named in the letter (when the customer is purchasing the title company’s policy) for losses incurred under certain conditions and as the result of certain actions or inactions by the approved agent or attorney. The CPL further provides that the customer’s recourse against the title insurer is limited to and defined by the provisions of the letter with respect to such losses. See Metmor Financial, Inc. v. Commonwealth Land Title Ins. Co., 645 So. 2d 295, 297 (Ala. 1993) (“The purpose of the closing service letter is to provide indemnity against loss due to a closing attorney’s defalcation or failure to follow a lender’s closing instructions”).
CPLs are intended to indemnify lenders solely against losses incurred as the result of (1) dishonesty or fraud by the issuing agent or approved attorney in handling the lender’s funds or documents in connection with the specific transaction for which the letter is issued (the 2008 ALTA CPLs, described below, now provide this specific coverage only to the extent that fraud, dishonesty, or negligence relates to the status of the title to the interest in the land being insured or to the validity, enforceability, and priority of the lien of the mortgage on that interest in land), and (2) failure of the issuing agent or approved attorney to comply with the written closing instructions of the lender to the extent they relate to status of title to the lender’s interest in the land or the validity, priority, or enforceability of the mortgage on the land, including the obtaining of documents and disbursement of funds in connection therewith (although not to the extent such instructions require a determination of the validity, enforceability, or effectiveness of any such document). CPLs do not, however, provide coverage for such matters as failure of the documents to comply with applicable laws or regulations (including environmental, land use, lender regulation, and zoning) or facts and circumstances regarding the closing or the parties to the closing.
In October 2007, the ALTA Forms Committee adopted three new CPL forms (“2008 ALTA CPLs”), which were designed to replace their predecessor 1998 forms. These forms were introduced as official ALTA Forms on January 1, 2008, after the ALTA Forms Committee considered comments from several interested groups and organizations. The number of ALTA CPL forms available is now limited to these three new forms, and the substantive changes are the same in each of the 2008 ALTA CPLs. Adverse claims experience may have prompted the changes made in the 2008 ALTA CPLs, as ALTA has “tightened up” the former CPL forms with respect to affirmative coverage and has included additional conditions and exclusions. All three new 2008 ALTA CPLs adopt the concept of the ALTA Regulatory closing protection letter as set forth in an Administrative Letter issued in 1995 by the Commissioner of Insurance of the Commonwealth of Virginia, to all companies licensed to write title insurance in Virginia (“Virginia CPL Letter”), i.e., limiting the issuer’s liability for fraud, dishonesty or negligence solely to losses relating to the status of title or the insured mortgage. The Virginia CPL Letter advises title insurers licensed in Virginia that by statute they are single-line (or “monoline”) insurance companies and that CPLs (whether on an individual or blanket basis) may not be used to indemnify lenders for losses that are unrelated to the condition of title to the property or the status of any lien on the property.
All three new 2008 ALTA CPLs specify the nature of the relationship between the issuer and the agent or approved attorney and disclaim liability for the acts or knowledge of other third parties and for the economics of the transaction. Also, all three new forms include an arbitration clause that parallels the arbitration clause in the 2006 ALTA Owner’s and Loan Policies. These new forms are available on the ALTA website: http://www.alta.org/.
Even though the 2008 ALTA CPLs became effective on January 1, 2008, the ALTA Forms Committee will be reviewing comments and suggestions submitted by interested individuals and groups since October 2007 at its next meeting in 2008, and will, among other things, decide whether to make any further changes based on those specific comments and suggestions.
Statutory and Regulatory Restrictions
Although the ALTA forms of CPLs generally are used in most states, some states restrict, limit, or prohibit their use. The principal statutory and regulatory rationale for prohibiting or restricting the use of CPLs by title insurance companies has been that their issuance results in the unauthorized writing of fidelity or surety coverage. The issuance of such coverage also may violate the monoline nature and scope of the title insurer’s business activities that are authorized by applicable state statutory or regulatory provisions (or the title company’s charter).
Most states, however, do not have promulgated or filed CPLs and permit the use of the approved ALTA forms. State regulators in these states generally take the position that the issuance of CPLs, which assure as to certain actions of the title insurer’s own policy-issuing agent or approved attorney, do not violate the state’s monoline statute so long as a policy is being issued in connection with the subject transaction.
Understanding the Use of CPLs
The CPL serves to extend the liability of the (generally) large and creditworthy title insurance company—which would otherwise be limited to the title insurance policy—to cover certain “bad acts” of the company’s issuing agent or approved attorney. But this additional protection must be separately and specifically requested from the title insurer, and the scope of the coverage is defined solely by the terms and provisions of the letter. Coverage under the CPL is also strictly limited to the parties designated therein, and generally applies only with respect to the particular transaction for which the letter is furnished. The ALTA has attempted to meet the needs of title insurance customers by expanding the types of CPLs (the latest being the 2008 ALTA CPLs) to cover varying factual situations and comply with state statutory and regulatory restrictions. It is important for both the insured and the insurer to understand the legal (both case law and statutory) and regulatory restrictions and limitations on the use of CPLs in certain jurisdictions, and the nature and scope of the agency relationships that exist between title insurance companies and their issuing agents and approved attorneys. Recently, some title insurers have been pressured to issue CPLs to parties other than issuing agents and approved attorneys, such as independent escrow or settlement-service companies, real estate brokers, and loan originators in securitized and conduit transactions. It is likely that title companies will strongly resist such efforts because of the very real risk of incurring liability without accountability and supervision, and because of the additional risk of providing unauthorized fidelity or surety coverage.
John C. “Jack” Murray is Vice President-Special Counsel for First American Title Insurance Company, Nation Commercial Services. His e-mail address is email@example.com. This article is an abstract of paper that provides a comprehensive analysis of this subject; the full paper is available for download at www.firstam.com/listReference.cfm?id=5574 (under the “title insurance” link).
© Copyright 2008, American Bar Association.