An Insured Closing Letter (CPL), also known as a Closing Protection Letter, is a contractual agreement issued by a title insurance underwriter that indemnifies the lender against actual losses resulting from certain misconduct by the closing agent. The CPL forms a legal contract between the title insurer and the lender, protecting against damages arising from specific claims against the agent handling the closing process.
The primary purpose of a CPL is to assure that the title company or its agent will follow the lender’s written closing instructions, properly disburse funds, and manage documents in accordance with the transaction requirements. Furthermore, it protects against fraud, dishonesty, or negligence of the closing agent in handling funds or documents related to the real estate closing.
CPLs originated in the 1960s as informal requests by mortgage lenders who were expanding their lending across the country while title insurers were building national agency networks. Over time, these letters evolved into formal, industry-approved documents, standardized by the American Land Title Association (ALTA).
It’s important to note that the CPL is issued by the title agency’s underwriter, not the agency itself. This distinction is crucial because the letter essentially insures against the potential misconduct of the title agency, necessitating a third party to issue these contracts.
Additionally, most CPLs offer protection to borrowers for loans secured by mortgages on one- to four-family dwellings. Many letters explicitly make the borrower a third-party beneficiary in purchase transactions.
The coverage provided by a CPL typically includes losses due to:
- Failure of the closing agent to comply with written closing instructions
- Misappropriation of loan proceeds
- Errors in document handling affecting title validity
- Fraud or dishonest acts by the closing agent
A CPL does not replace title insurance but rather complements it by addressing risks specific to the closing process rather than title defects.
Is a CPL considered insurance?
Despite its name, an Insured Closing Letter is generally not considered insurance from a legal perspective. Instead, it functions as a warranty letter from the title insurer that provides certain protections without constituting an actual insurance policy. This distinction carries significant legal implications regarding how claims are handled and what rights the parties have.
Unlike traditional insurance, the CPL is not governed by the same insurance and contract laws. Consequently, it is not subject to identical insurance claim procedures or statutory rights governing bad faith claims practices that typically apply to insurance policies.
Courts have reached different conclusions when analyzing the legal nature of CPLs. Some jurisdictions have applied typical insurance rules of construction, whereas others have recognized that the CPL itself is not insurance and should be treated as an ordinary contract.
In Alabama, the Supreme Court explicitly ruled in Metmor Financial, Inc. v. Commonwealth Land Title Insurance Company that closing protection letters are not insurance contracts since no premium is specifically collected for their issuance. Similarly, a Florida case (Escrow Disbursement Insurance Agency, Inc. v. American Title and Insurance Company, Inc.) suggested CPLs might not meet the definition of insurance because they do not spread risk—an integral component of insurance.
Nevertheless, some courts have held that the CPL is integrated into the title policy itself. For instance, in Fleet Mortgage Corporation v. Lynts, the court noted that closing letters are issued alongside title insurance policies, and lenders typically pay no extra consideration specifically for the CPL.
Indeed, the CPL serves as an important form of protection but should not be misinterpreted as a substitute for proper risk management practices.
When is a CPL used in real estate transactions?
CPLs serve multiple critical functions in real estate transactions, primarily as a risk management tool for various parties involved in the closing process.
Lender protection during closings
Lenders rely on CPLs as a fundamental component of their due diligence process. Under the Dodd-Frank Act, lenders may be directly liable for the acts of closers they hire when those professionals violate the law. Moreover, many lenders make the issuance of a CPL the main building block of their vetting process when approving title companies as closing agents. Almost no lender will hire a title agent without first obtaining a CPL from the agent’s underwriter. This protection allows lenders to entrust loan money to title companies with the financial backing of the underwriter.
Borrower protection in residential loans
In residential transactions, particularly those involving one-to-four family dwellings, CPLs often extend protection to borrowers. Although the purchase of a CPL is voluntary, the cost typically ranges from $31.77 to $43.68—a relatively small fee considering the protection provided. In some states, legislation mandates that title insurance companies or agents must offer closing protection to all parties associated with the transaction.
Escrow fund mismanagement scenarios
CPLs are especially valuable in scenarios involving escrow fund mismanagement. They indemnify against loss resulting from failure to properly disburse settlement funds. This protection applies when closing agents fail to follow specific written instructions, such as depositing funds in designated accounts or transferring money at specific times during transaction funding. Importantly, the title insurer’s liability usually caps at the face amount of the title policy.
Fraud or dishonesty by closing agents
First and foremost, CPLs protect against theft, misappropriation, or fraud by closing agents handling transaction funds. Courts have broadly interpreted “dishonesty” in CPL claims—in one case, the mere acceptance of a borrower’s down payment from a third party was deemed dishonest, triggering liability. Historically, title insurers have paid millions in claims related to fraudulent activities by closing agents.
How does agency affect CPL liability?
Agency relationships significantly influence the scope of liability in Closing Protection Letters. The legal framework surrounding agency determines whether a title insurer bears responsibility for a closing agent’s actions.
When the closing agent is not affiliated with the title insurer
Title insurers typically limit their liability through careful delineation of agency relationships. Courts have established that unless a CPL exists, title insurers generally have no liability for settlement agent misconduct. Most agency contracts expressly prohibit agents from conducting closings on behalf of title insurance companies. Without this contractual authorization, courts frequently rule that closings fall outside the agent’s actual authority to act on behalf of the insurance company.
When the agent is approved but not authorized for escrow
Many title insurers maintain agency agreements that specifically exclude escrow or closing activities. In Lawyers Title Insurance Corporation v. Dearborn Title Corporation, the court considered a counterclaim alleging that Lawyers Title misrepresented CPL terms by not clarifying that Dearborn’s escrow activities fell outside their agency relationship. Likewise, in Banker Relocation Services, Inc. v. TRW Title Insurance Company, the court found TRW liable based on a CPL notwithstanding an agency agreement that limited the attorney’s authority.
Court interpretations of agency in CPL claims
Courts typically analyze CPL claims through agency law principles. Actual authority stems from what a principal intentionally confers upon an agent, whereas apparent authority arises when a principal leads others to reasonably believe a third party has authority. Most courts accept that settlement agents may wear “two hats” – one as an insurer’s agent for issuing commitments and policies, another as a settlement agent conducting closings. Nevertheless, in Sears Mortgage Corporation v. Rose, the New Jersey Supreme Court held a title insurer liable even without a CPL, finding an agency relationship existed.
