A closing protection letter is a contract between a title insurance underwriter and a lender. In this agreement, the underwriter agrees to indemnify the lender for actual losses caused by certain kinds of misconduct by the closing agent. Basically, the insurance company is agreeing to hold the ultimate risk and stand behind the policy. If the title company used for the closing is guilty of fraud or dishonestly handles the money or documents, the insurance underwriter will stand by this agreement to reimburse as necessary.
Title underwriters do not work with just any title and closing agent. There is a process of careful vetting and making sure that these agencies have a reputation for meeting their fiduciary duty, thus giving their “stamp of approval”, so to speak, that the lender is safe to do business with them.
The CPL is a filed form which is approved by the Maine Bureau of Insurance and cannot be modified. It is good for 1 year from the date of the letter. However, transaction specific information such as the loan amount, name of parties, etc. can be modified or updated, if needed.
What exactly does a CPL cover? Subject to the specific exceptions and exclusions otherwise noted, the CPL covers loss solely caused by:
(a) any failure of Settlement Agent or Approved Attorney to comply with Your written closing instructions that relate to:
(i) (A) the disbursement of Funds necessary to establish the status of the Title to the Land; or
(B) the validity, enforceability, or priority of the lien of the Insured Mortgage; or
(ii) obtaining any document, specifically required to You, but only to the extent that the failure to obtain the document adversely affects the status of the Title to the Land or the validity, enforceability, or priority of the lien of the Insured Mortgage on the Title to the Land; or
(b) fraud, theft, dishonesty, or misappropriation of the Settlement Agent or Approved Attorney in handling your funds or documents in connection with the closing, but only to the extent that the fraud, theft, dishonesty, or misappropriation adversely affects the status of the Title to the Land or to the validity, enforceability, or priority of the lien of the Insured Mortgage on the Title to the Land.
The cost for a Closing Protection letter is $25 – the entire fee going to the underwriter – and coverage does limit protection to closings which take place in the State of Maine only. It should also be noted that a CPL may only be issued if the underwriter is issuing a title policy in connection with the transaction. In other words, if a title policy is not being issued for a transaction, no CPL can/will be issued for that transaction.
There are some instances where the closing and the title issuance are being handled by different approved agents/attorneys. A CPL may only be issued provided that the closing agent/attorney and the policy issuing agent/attorney both write on the same underwriter.
And of course it probably goes without saying, but only one CPL may be issued per transaction. One CPL benefits the buyer, the borrower, and the lender to the transaction.
* special thanks to Ann and Tiffany at Chicago Title for their input when putting this post together.