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Lessee, Owner or Lendr have requested an ALTA Closing Protection Letter for a real estate transacton involving a true sub-secrow & Title Insurer Issues Closing Letter in Modified Form, Title Insuer must isue cover letter stating ALTA Closign Protection Letter modified to comply with Insurance Commissiner's Guidelines. ALLREGS(sm) A title insurer's marketing representatives have often solicited business from large companies involved in multi-state real estate transactions; Closing Protection Letters protects against loss due to its own actions conduct of the insurer's title agents 'CPL' INDEMNITY AGREEMENT Title Insurers protect Lende and/or Buyer and most don't charge extra?

Lessee, Owner or Lendr have requested an ALTA Closing Protection Letter for a real estate transacton involving a true sub-secrow & Title Insurer Issues Closing Letter in Modified Form, Title Insuer must isue cover letter stating ALTA Closign Protection Letter modified to comply with Insurance Commissiner's Guidelines. ALLREGS(sm) A title insurer's marketing representatives have often solicited business from large companies involved in multi-state real estate transactions; Closing Protection Letters protects against loss due to its own actions conduct of the insurer's title agents 'CPL' INDEMNITY AGREEMENT Title Insurers protect Lende and/or Buyer and most don't charge extra?

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Published by Mary Cochrane
The title company or its title agent may issue closing protection letters when conducting a true sub-escrow, where the title company or its agent

1) receives lender's funds with instructions to pay off underlying encumbrances and clear title to insure a first lien; and
2) pays the balance of funds to an independent escrow company, which follows the lender's further instructions concerning execution of loan documents and further disbursements.
Where the title company or its title agent are conducting such a sub-escrow, the title company or its agent may not provide a closing protection letter to protect against loss due to the actions of the independent escrow company. However, the title company or its agent may provide a closing protection letter which protects against loss due to its own actions. When true sub-escrows are conducted, the closing protection letter must except from coverage the actions or omissions of the independent escrow company by adding to the closing protection letter the following paragraph:
The protection herein offered does not protect against loss or damage which arises due to the actions of independent escrow officers or attorneys who close real estate transactions in which you are the lender secured by a mortgage (including any other security instrument) of an interest in land which is insured by Transnation Title Insurance Company or Commonwealth Land Title Insurance Company.

the title insurer has been held liable for the agent's theft of the lender's funds. In Lawyers Title Ins. Corp. v. Frontier Title Co., (1989) W.L. 44186 (N.D. Ill. 1989) (not recorded in F. Supp.), Frontier Title, a Lawyer's Title agent, used funds from its escrow account to cover overdrafts in its payroll and operating accounts, and the shortfall amounted to $500,000.16 Lawyers Title was required to pay that amount under the closing protection letter issued to the lender
In addition, attorney fees have been held to be recoverable in claims founded on closing protection letters, because closing protection letters are considered an "integrated part of the title policy."17

a title underwriter will accept liability for its agents' acts or omissions

The letters may indemnify lenders and owners against loss of settlement funds due to the acts or omissions of division closers, including theft of settlement funds and failure to comply with written closing instructions. Only Title Guaranty Participating Attorneys and Abstractors are eligible for designation as division closers

To apply for the program, please complete the Application and Letter of Direction (if applicable) and submit to Title Guaranty for approval.
• Procedures and Requirements (updated 12/8/09)
• Gap Coverage Endorsement (updated 12/8/09)
• Application/ Indemnity Agreement - Independent Closers
• Application/Indemnity Agreement - Participating Attorneys and Abstractors
• Letter of Direction to Financial Institution
o Acrobat
o Word
• Sample Closing Protection Letter (updated 12/8/09)

© Copyright 1997-2012 Iowa Finance Authority | All Rights Reserved


© Copyright 1997-2012 Iowa Finance Authority | All Rights Reserved
The title company or its title agent may issue closing protection letters when conducting a true sub-escrow, where the title company or its agent

1) receives lender's funds with instructions to pay off underlying encumbrances and clear title to insure a first lien; and
2) pays the balance of funds to an independent escrow company, which follows the lender's further instructions concerning execution of loan documents and further disbursements.
Where the title company or its title agent are conducting such a sub-escrow, the title company or its agent may not provide a closing protection letter to protect against loss due to the actions of the independent escrow company. However, the title company or its agent may provide a closing protection letter which protects against loss due to its own actions. When true sub-escrows are conducted, the closing protection letter must except from coverage the actions or omissions of the independent escrow company by adding to the closing protection letter the following paragraph:
The protection herein offered does not protect against loss or damage which arises due to the actions of independent escrow officers or attorneys who close real estate transactions in which you are the lender secured by a mortgage (including any other security instrument) of an interest in land which is insured by Transnation Title Insurance Company or Commonwealth Land Title Insurance Company.

the title insurer has been held liable for the agent's theft of the lender's funds. In Lawyers Title Ins. Corp. v. Frontier Title Co., (1989) W.L. 44186 (N.D. Ill. 1989) (not recorded in F. Supp.), Frontier Title, a Lawyer's Title agent, used funds from its escrow account to cover overdrafts in its payroll and operating accounts, and the shortfall amounted to $500,000.16 Lawyers Title was required to pay that amount under the closing protection letter issued to the lender
In addition, attorney fees have been held to be recoverable in claims founded on closing protection letters, because closing protection letters are considered an "integrated part of the title policy."17

a title underwriter will accept liability for its agents' acts or omissions

The letters may indemnify lenders and owners against loss of settlement funds due to the acts or omissions of division closers, including theft of settlement funds and failure to comply with written closing instructions. Only Title Guaranty Participating Attorneys and Abstractors are eligible for designation as division closers

To apply for the program, please complete the Application and Letter of Direction (if applicable) and submit to Title Guaranty for approval.
• Procedures and Requirements (updated 12/8/09)
• Gap Coverage Endorsement (updated 12/8/09)
• Application/ Indemnity Agreement - Independent Closers
• Application/Indemnity Agreement - Participating Attorneys and Abstractors
• Letter of Direction to Financial Institution
o Acrobat
o Word
• Sample Closing Protection Letter (updated 12/8/09)

© Copyright 1997-2012 Iowa Finance Authority | All Rights Reserved


© Copyright 1997-2012 Iowa Finance Authority | All Rights Reserved

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Published by: Mary Cochrane on Aug 10, 2012
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Closing Protection Letters
 
 AUTHOR: Gretchen L. Valentine
I. WHAT ARE CLOSING PROTECTION LETTERS AND WHO DO THEYPROTECT? 
Closing protection letters, also called "insured closings letters", identify thecircumstances under which a title underwriter will accept liability for its agents' acts or omissions.
1
 Closing protection letters are issued to proposed insured lenders andowners who request them. The closing protection letter: 1) assures the proposedinsured that the escrow officer who handles the closing will properly apply the fundsplaced in escrow to clear the encumbrances on title; and 2) indemnifies the proposedinsureds against loss due to the issuing agent's handling of the lender's or owner'sfunds or documents in connection with the closing. The protection offered by the closingprotection letter includes protection against the fraud or dishonesty of the agent issuingthe title underwriter's policy.
2
II. HOW DID CLOSING PROTECTION LETTERS ARISE? 
 A title insurer's marketing representatives have often solicited business from largecompanies involved in multi-state real estate transactions. Where the title company hasnot had direct operations in a desired location, the insurer's marketing representativeshave encouraged these large companies to place their title and escrow orders with thetitle insurer's agents. However, the written agreements between title insurers and their agents specifically exclude closing and escrow activities, and the fraudulent or negligentacts of an agent in conducting a closing cannot be charged to the underwriter simplybecause the agent has been authorized to issue the underwriter's policy in thetransaction. As a result, when the title insurer's marketing representatives referredbusiness to the title insurer's agents, these large companies questioned whether the titleinsurer would be liable for loss if its title agent failed to follow the lender's instructionsand absconded with the funds.
3
  At the customer's request, title companies began issuing closing protection letters,which differed from state to state and insurer to insurer. Closing protection lettersbecame so common that, in 1987, the American Land Title Association's (ALTA's)Executive Committee decided to create an ALTA form which would be acceptable toboth title insurers and insureds.
4
  A copy of the ALTA closing protection letter is attachedas Exhibit A.In
Spring Garden 79U, Inc. v. Stewart Title Guar. Co.
, 1994 Tex App. LEXIS 955, aTexas court confirmed that title insurers are not responsible for an agent's fraud or negligence during closing activities. At closing, the buyer was shown a title commitmentdated six weeks earlier, issued to an unrelated third party, and showing the seller in title.Later, the buyer discovered that the seller had purchased the property the day before
 
closing for $215,000 and had sold the property to the buyer for $435,000. The buyer sued the title insurer, alleging that the insurer was responsible for the fraudulent acts of its agent, but the court found that: 1) the agent acted on behalf of the insurer only inconnection with issuing title insurance policies; and 2) the title insurer was not liable for the agents' acts at closing.
5
III. WHAT COVERAGE DO THEY PROVIDE? 
 A. ALTA closing protection letter The ALTA closing protection letter consists of two parts, much like a title insurancepolicy. First, the closing protection letter contains general protection provisions, whichidentify the insurer's obligations to its proposed insureds. Second, the closing protectionletter contains conditions and exclusions, which limit the protection provided under thegeneral provisions.When title insurance is specified for the protection of a lessee, purchaser or lender, thegeneral protection provisions of the closing protection letter obligate the title insurancecompany to reimburse the lessee, purchaser, or lender for loss arising out of: 1) theissuing agent's failure to comply with closing instructions concerning the status of title,the obtaining of documents, or the collection and payment of funds due; and 2) theissuing agent's fraud or dishonesty in handling funds or documents in connection withthe closing.
6
 If the closing protection letter is issued to the lender alone, the borrower isalso protected if the borrower is mortgaging a residence for one to four families.
7
 The general protection provisions of the closing protection letter are modified by theconditions and exclusions which follow. First, the conditions and exclusions except fromcoverage losses due to: 1) the agent's failure to comply with closing instructions whichrequire title insurance protection inconsistent with that set forth in the title commitment;
8
 2) bank failure, unless the agent failed to deposit the funds in the bank designated bythe lessee, owner, or lender; and 3) mechanic's and materialmen's liens, unless a titleinsurance binder, commitment or policy affords such protection.
9
 Second, if a loss ispaid on the protected party's behalf, the insurer claims a right of subrogation to recover that loss against any person or property that would have been liable had the protectedparty not been reimbursed. Third, the insurer's liability is limited to the protectionprovided under the closing protection letter. Fourth, claims must be made promptly tothe insurer at its principal office. Fifth, protection under the letter is not effective inFlorida, Iowa, and Texas. And finally, protection under the letter is effective upon theinsurer's receipt of the protected party's acceptance in writing and continues untilcancelled in writing by the insurer .
 B. American Title Insurance Company v. Variable Annuity Life Insurance Company
 
 An insurer's closing protection letter may provide greater coverage than thesubsequently issued title insurance policy. In
American Title Ins. Co. v. Variable Annuity Life Ins. Co.
, 1996 WL 544431 (Tex. App.), an owner executed a new mortgage in theamount of $362,000 to refinance its existing mortgage with a balance of $323,000. Thenew lender deposited the proceeds of the new loan with the title agent, but when thetitle agent's check was later issued to the prior mortgagee for the amount due, the titleagent's check was returned
nsf 
. The title agent was placed in receivership andliquidated."
 "Although the lien of the prior mortgage was never released, the title insurer issued itspolicy" insuring the new loan in first lien position.
 In ensuing litigation, the underlyingmortgage was adjudged to be in first position, and the new lender demanded that thetitle insurer pay off the prior lien to protect the new lender's first lien position. Instead,the title insurer paid the lender $353,193, "the balance due on the [new] insuredmortgage, and stated that such payment discharged its liability under the outstandingmortgagee policy."
 The new lender, over the title insurer's objection, paid the prior lender $697,798, which represented the principal, interest, and attorney's fees accruingsince the default.When the new lender sued the title insurer to recover, the Texas court held that the$353,193 payment only satisfied the insurer's obligation under the policy. It did notsatisfy the insurer's obligation under the closing protection letter, which guaranteed thereplacement of lost settlement funds. The title insurer was required to pay $697,000,"subject to a credit for the $353,193 already paid."
IV. WHEN ARE THEY ISSUED? 
 A. Closing protection letters are issued for losses arising from the conduct of theinsurer's title agentsClosing protection letters are issued to protect a proposed insured's deposit of funds or documents with a title insurance company's agent, because the agent's authority onlyextends to issuing the title insurance policy. The closing protection letter underwrites theagent's actions during the closing, even if the agent is only taking delivery of thedocuments to be recorded and recording at the instruction of others.
  A sample copy of the closing protection letter issued to protect against losses due to the actions of agentsis attached at Exhibit A.When closing protection letters have been issued to lenders who placed title orders withan insurer's agents, the title insurer has been held liable for the agent's theft of thelender's funds. In
Lawyers Title Ins. Corp. v. Frontier Title Co.
, (1989) W.L. 44186 (N.D.Ill. 1989) (not recorded in F. Supp.), Frontier Title, a Lawyer's Title agent, used fundsfrom its escrow account to cover overdrafts in its payroll and operating accounts, andthe shortfall amounted to $500,000.
 Lawyers Title was required to pay that amountunder the closing protection letter issued to the lender. In addition, attorney fees have

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