Many lenders routinely request closing protection letters. A
closing protection letter, sometimes referred to as an insured
closing letter, is a document issued by title insurance
underwriters that sets forth an underwriter's responsibility for
negligence, fraud and errors in closings performed by agents and
approved attorneys. It indemnifies the indemnitee against loss or
damage arising from a breach of certain fiduciary duties owed by
the closing agent to the parties to the transaction. This document
is necessary because the agency /principal relationship between
an underwriter and a policy issuing agent or approved attorney is
limited to the issuance of a policy and does not extend to escrow
functions.
If a problem arises out of the closing, through error or fraud, the parties would normally be able to look only to the closing agent for recovery. Cameron County Savings Association vs. Stewart Title Guaranty Company, 819 S.W. 2d 600 (Tex. App. 1991). (The fraudulent or negligent acts of an agent in the conduct of a closing cannot be charged against the underwriter simply because the agent has been authorized to issue the insurer's policy in the transaction.) This limitation has concerned many national customers, in part justifiably due to New Mexico Regulation 30-BI-a(21) of the "Definitions:" where it states that unless a closing protection letter is issued, "it is prohibited for title insurance agents, title insurers or third party fiduciaries to guaranty the collectability of funds or indemnify their financial institutions from loss due to uncollected funds."
In response to this concern, the closing protection letter has evolved. Many forms of the letter exist, including forms promulgated for use in New Mexico (NM8), Texas [Insured Closing Service and Purchaser/Seller Insurance Closing Service Letter(s)] as well as the more commonly used American Land Title Closing Protection Letter (Revised 3/27/87) outside of those states.
The basis for the Texas ICS letters stems from the published rates, rules and forms promulgated by the Texas State Board of Insurance (Rule p-35), wherein it is stated that "No Title Insurance Company, Title Insurance Agent, Direct Operations, Escrow Officer, nor any employee, officer, director or agent of any such entity or person, shall issue or deliver any form of verbal or written guaranty, affirmation, indemnification, or certification of any fact, insurance coverage or conclusion of law to any insured or party to a transaction other than: (i) statement that a transaction has closed and/or has been funded, (ii) issuance of an insurance closing service letter, or any insuring form or endorsement promulgated by the State Board of Insurance, or (iii) certification of copies of documents as being true and exact copies of the original document or of the document recorded in the public records."
In regard to the ALTA Closing Protection Letter, the ALTA has helpfully published an "Explanation" which reads as follows:
ALTA Closing Protection Letter - A Revised Explanation
As title insurance companies spread across the country, they
transacted business through issuing agents as well as through
their branch offices. Where they did not have title examination
facilities in their offices or agencies, they relied on so-called
"approved attorneys" for title evidence.
In approaching their customers-especially national customers-for business, title insurers asked that orders for policies be sent not only to their branches, but also to issuing agents or through approved attorneys. These issuing agents and approved attorneys furnished loan closing services, and it was suggested that the national lender or purchaser get title insurance protection in the locality, as well as escrow closing service, from the issuing agent or approved attorney. Customers naturally raised the question as to what liability, if any, the title insurer might have outside of its policy, for loss suffered due to the issuing agent's or approved attorney's mishandling of the funds in closing the transaction.
It was evident that the approved attorney was not appointed by the title company as its agent for any purpose but was merely approved as being an acceptable source of a title opinion on which the insurer would rely for issuance of its policies. The issuing agent was expressly authorized by contract to act only as agent for issuing title policies. Therefore, it became apparent that neither closing media has express authority to handle closings as an agent of the title insurer with the resulting liability for negligence or fraud.
The doctrine of apparent authority was not very helpful either, since that legal precept depended on the lender or purchaser being able to prove that he had justifiably relied on the conduct of the title insurer to mislead him into thinking that the issuing agent or approved attorney was closing the transaction as an agent of the title company. This made the liability of the title insurer for such closings uncertain since each case turned on the facts and the law as applied in different jurisdictions.
For these reasons, investors in real estate asked for definite undertakings from title insurers setting forth in writing the extent of their responsibility for errors in closing on the part of their issuing agents and approved attorneys. The title companies responded with numerous forms of closing protection letters furnishing coverage in different degrees. The result is that a national lender, for example, has received closing indemnities differing in protection not only from insurer-to-insurer, but from state-to-state or from time-to-time as issued by the same insurer. The Executive Committee of the American Land Title Association decided it would be helpful to promulgate an association form which would provide a carefully drafted statement, which on due consideration, might be acceptable to insurer and insured.
The opening paragraph of the ALTA Closing Protection Letter furnishes protection to purchasers, lessees and lenders when closings are conducted by the title company's issuing agents or approved attorneys. Under Paragraph 1, the protection is against loss or damage arising from failure to follow the addressee's written closing instructions. The failure may relate first to instructions dealing with the status of the title to the land or the lien of the mortgage. This item includes the obtaining of documents necessary to establish such status of title or lien.
Secondly, the instructions covered may also relate to the obtaining of any other documents, even though they do not relate to status of title or lien, but not to instructions requiring the issuing agent or approved attorney to determine whether these other documents are necessary or whether they are properly drafted. In other words, under Item 1.(b), instructions to obtain a certain type or form of non-title document are covered, but instructions to ascertain that a non-title document is valid, enforceable or effective are not covered.
Thirdly, instructions which relate to the collections and payment of funds due the addressee are covered, regardless of the type of funds or from where they are to be collected.
In an effort to provide protection to the homeowner, the letter, when addressed to a lender, will be deemed to have been addressed to its residential borrower, thus covering the homeowner as if he had the letter. Paragraph 2 protects against dishonesty in handling the addressee's funds or documents. Any fraudulent use of money or of documents belonging to the addressee would be covered.
Item A.1 of the Conditions and Exclusions excludes liability when the addressee, after issuance of a binder or commitment, issues instructions to an approved attorney requiring title insurance coverage different from the coverage committed for in the binder or commitment. The approved attorneys, unlike issuing agents, may not be knowledgeable regarding title insurance underwriting and should not be in a position to commit for additional coverage by closing the transaction. The title insurer should be requested to amend the binder or commitment prior to closing. However, instructions relating to removal of specific exceptions or compliance with requirements are covered.
Under Item A.2, the title insurer is not liable for bank failures unless the closing funds are deposited in a bank different from the bank specified by name. Item A.3 makes it clear that if the title insurer does not have liability for mechanics' liens in its title insurance documents, then it does not incur such liability in the Closing Protection Letter.
Paragraph B. conditions the coverage on the addressee having
received a commitment or binder before he permits an approved
attorney to close the transaction. This ties in with Item A.1 and permits
the lender or purchaser to know what title insurance coverage he
can obtain before he authorizes the attorney to disburse his
funds. Item C., D. and E. are standard indemnity contract provisions
and are self explanatory.
Paragraph F. makes the letter inapplicable to states as
indicated by the company.
The protection furnished by the letter becomes effective when the
addressee signs and returns the letter. It can be canceled only
by written notice.
The last paragraph cancels previous letters except as to instructions already sent or sent within 30 days. If the customer requires a closing protection letter regarding a particular issuing agent or approved attorney, the name may be inserted in the letter in place of the general reference.
As To Other States
The ALTA form Closing Protection Letter itself, and companion
caselaw, extend the coverage to purchasers as well as lenders. In Sears
Mortgage Co. vs. Rose, 634 A.2d 74 (N.J. 1993), a closing
attorney appropriated $107,000 in cash furnished by the purchaser
to pay off an existing mortgage. The Supreme Court of New Jersey
reversed the lower court which had held that the attorney had
been retained by the purchaser, and therefore the title insurer
owed no duty to the purchaser for a breach of the fiduciary duty
the attorney owed the buyer. The Supreme Court held that the
insurer owed to the purchaser the same duty of good faith it owed
the lender under the closing protection letter and held the
insurer liable. Similarly, in Client's Security Fund of the
Bar of New Jersey vs. Security Title and Guaranty, 634 A.2d
90 (N.J. 1993), the Court held that this duty flowed to a
refinancing owner even though the attorney was retained by the
owner. There the attorney had absconded with $90,000 which was
supposed to pay off the previous mortgage.
Another state, Florida, has its own promulgated letter whereas
the state of Kansas does not allow the use of such letters. The
Department of Insurance of the State of South Carolina has
decreed that an ICL constitutes the issuance of surety or
fidelity insurance and since title companies are single line
insurance companies, they had no right to issue the letter. On
June 13, 1988, the U. S. District Court for the Northern District
of Georgia, Atlanta Division, handed down the decision of First
Georgia Bank of Louisville v. Title U. S. A. Insurance
Corporation (uncited) wherein it was decided that insured closing
letters constituted fidelity of insurance.
In particular, differences exist between the Texas Insured
Closing Service letter and the ALTA Insured Closing Service
letter, namely: the ALTA letter furnishes protection to
purchasers, lessees and lenders when closings are conducted by
the title company's issuing agents or approved attorneys whereas
the Texas letter protects lenders against only a company's
licensed agent. Texas has a separate letter for Buyers and
Sellers. In Texas, a claim must be received by the company within
12 months after the discovery of non-compliance with the lender's
instructions and in any event within 2 years from the date of the
mailing of written closing instructions. The Texas letter does
not assume any responsibility for the preparation of documents
necessary for the closing. Furthermore, it restricts the
company's liability as to usury, consumer credit protection, truth-in-lending,
or similar laws on account of the "Flood Disaster Protection
Act of 1973" or the "Real Estate Settlement Procedures
Act of 1974."
In Arizona, the promulgated letters issued are virtually the
same as the ALTA insured closing letter except that there are
three separate letters for lender, buyer and seller.
The State of Virginia by authority of the Virginia Bureau of
Insurance approved as of 11/13/95 another form of ICL which while
not required, is the only form that the Bureau has approved as complying
with Virginia Law. Under the new ICL, only disbursements that
relate to the condition of title to the property or the status of
any lien are correct.
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1996, Title Resources Guaranty Company
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Last modified by EF on May 15, 2006