Closing Protection Letters

Closing protection letters are offered by title insurance companies to address concerns of lenders about the liability of their approved attorneys or agents. These letters outline the conditions under which the title insurance company will accept liability for the acts or omissions of its agents. They indemnify lenders against damages arising from certain claims against the agent, and also offer protection to the borrower for loans secured by a mortgage on a one- to four-family dwelling. However, in a case in Alabama, the court ruled that a closing protection letter is not considered insurance because no premium is collected for its issuance. Therefore, no cause of action for bad faith could be maintained against the title insurance company. Escrow Disbursement Insurance Agency sued title underwriters for having a monopoly on selling “gap insurance.” The underwriters argued they weren’t monopolizing because they offered protection for the gap through insured closing service letters. The court decided that closing protection letters might not be considered insurance under the law because they don’t spread risk, which is a key part of insurance. Some Florida circuit courts have ruled that closing protection letters are a form of insurance and have allowed insured people to recover attorneys’ fees in their lawsuits against title underwriters. Florida law also prohibits insurers from selling both title insurance and other kinds of insurance. Title insurers can provide instruments to protect against fraud and other issues related to real property transactions. Closing protection letters are considered part of the title insurance policy, and courts have ruled that they are integrated into the policy and not a separate contract. This means that the insurer does not provide closing protection letters for free, and they are considered part of the overall title insurance coverage. In the case of Herget National Bank v. USLife Title Insurance Company, a group of banks received closing protection letters from USLife as assurance that their funds would be protected during a construction project. When the project faced financial issues, the banks sued the developer and settled the case. They then sought reimbursement from USLife for their losses, but the court ruled that the closing protection letters only covered direct losses of funds, not additional expenses or lost profits. In a court case, First Financial Savings & Loan Association sued Minnesota Title Insurance Company for not honoring a closing protection letter they provided to Heritage National Mortgage Corporation. The court ruled in favor of Minnesota Title. In another case, Lawyers Title Insurance Corporation sued Dearborn Title Corporation for not honoring a closing protection letter, and First Midwest Bank for using escrow funds. The court allowed the case to proceed, as there was confusion about the agency relationship between the title underwriter and the closing agent. Basically, TRW Title Insurance Company had an agreement with a lawyer to handle title insurance, but not escrow services. The lawyer stole money from an escrow account during real estate closings. Coldwell Banker, the real estate company, paid off the prior mortgages and sued TRW. TRW said they weren’t responsible because of the agreement with the lawyer, but the court found TRW liable because they had issued a letter that showed the lawyer was acting as their agent. This means TRW had to pay for the money that was stolen. In a court case, a buyer’s lawyer was also the person in charge of finalizing the purchase. The title company said the buyer’s old mortgage had to be paid off at the closing. The lawyer took the money meant for the mortgage but didn’t use it for that. The title company then wouldn’t give insurance without making an exception for the unpaid mortgage. The buyer didn’t want that. The mortgage company then tried to take the buyer’s house. The court said the buyer’s lawyer wasn’t working for the title company, so the buyer had to take the loss. In the Sears Mortgage Corporation v. Rose case, the New Jersey Supreme Court said that the buyer’s lawyer who ordered the title commitment was working for the title underwriter. The court also said that the underwriter should have done more to stop the problem. The court also said that the underwriter has a duty to tell the buyer if they don’t have the same protection as the lender. The court didn’t agree with the underwriter’s argument that they can’t offer this protection in New Jersey. So, the court said the underwriter has to pay the Sears mortgage and can’t take over the mortgage and foreclose on the buyer. In this case, a lawyer working for the buyer stole money meant to pay off a mortgage. The title company who issued the insurance for the lender had to cover the loss. The court said the title company was responsible because they should have known about the risk of theft. The title company couldn’t go after the buyer for the stolen money because the lawyer represented the lender, not the buyer. The court also said that the insurance company had to pay fees for the claim. In Florida, it’s still unsure if closing protection letters are considered insurance or not. They can still be helpful, especially for protecting funds from lenders at closing. If someone wants to make a claim based on a closing protection letter, they can argue that the lawyer or agent was representing them. The law on closing protection letters differs from state to state and is unlikely to change soon. – Florida law makes it easier for insured plaintiffs to get compensated if a title insurance agent misuses their funds
– New York and Kansas also have laws to prevent title insurance companies from issuing closing protection letters
– There are court cases where title underwriters tried to get their money back from companies
– Shawn G. Rader is a lawyer who specializes in real estate law and title insurance defense
– This article was written for the Real Property, Probate and Trust Law Section of The Florida Bar, which aims to uphold the principles of duty and service to the public, improve justice administration, and advance the science of law.

Source: https://www.floridabar.org/the-florida-bar-journal/closing-protection-letters/