A frequent question I often hear from lenders who have a claim related to a title or closing agent is “What is the insured closing letter all about?” When I turn the tables and ask them what they think it is, the answers I usually receive are (a) a part of the title insurance, (b) an insurance policy covering the settlement agent, and more typically (c) “I have no idea.”
Considering that in many states title insurers may charge a borrower between $25 and $100 for the privilege of the issuance of this letter in connection with a transaction, it seems that lenders should make it a point to become educated regarding the matter.
Title insurers are licensed by states to issue insurance policies, just like any insurance provider. However the nature of title insurance is a form of property and casualty product. It covers for losses incurred where real property is impaired by claims against title. In an era of electronic records and recording this rarely happens; title claims are not very common today. When they do occur most instances involve minor defects, such as mis-recorded documents or missed liens which can be remedied without a total loss or major claim.
Title insurers are not licensed to issue fidelity coverage or errors and omissions insurance, the type of coverage one would look to when a person or firm engages in intentional or negligent acts causing harm. This includes losses from stolen funds, coordinated fraud, looking the other way, or selling consumer private data. Thus the insured closing letter was born. In some states it is known as the closing protection letter. It is merely a letter from the title insurer warranting that in certain circumstances they may cover a lender and (and if they are named) the borrower from losses actual caused by the settlement agent who may or may not an employee of the title company.
Simple right? Not really. A warranty letter is not an insurance policy. It is not governed by insurance laws and contract laws in the same way. It is not subject to the same insurance claim procedures and statutory rights governing bad faith claims practices. In the case of a serious claim coverage will likely be excluded (theft of funds is an exception) and may require costly litigation to resolve issues of liability and damages.
The takeaway from all of this is the following: the insured closing letter is not insurance and it is not a substitute for good risk management. Settlement agents are in a lender’s highest risk bucket. Manage that risk carefully, because if you are hoping that a CPL will protect you chances are it will not do so.