What is a Closing Protection Letter and What Can It Do for Me?

Title Insurance is generally sold by local branches of a national title insurance underwriter, local agents or approved attorneys.   National title insurance underwriters have local offices in most major metropolitan areas.  Examples of national title insurance underwriters are First American Title Insurance Company, Stewart Title Guaranty Company, Chicago Title Insurance Company, and Old Republic Title Insurance Company.  Independent local title or abstract companies or approved attorneys  will have signed agency contracts with a national title insurance underwriter to act as their agents in the area.

In most states, local branches, agents and attorneys will often perform other services in connection with the issuance of a title insurance policy.  One of these services is called “escrow”, where the branch, agent or attorney will accept delivery of the documents (such as deeds and mortgages) and the funds from the parties to the real estate transaction and hold them until all requirements necessary for the transaction to be completed have been satisfied.  Then the branch, agent or attorney will “close” the transaction by recording the documents and transferring the funds to the proper parties, and issue the title insurance policies.  These branches, agents and attorneys, when performing escrow duties, are considered fiduciaries of the parties to the transaction, and must follow all escrow instructions.

When a local agent or approved attorney is handling the escrow services, the parties to the transaction may want the national title insurance underwriter to verify to the parties that the local agent or attorney is authorized to issue the title policies on behalf of the underwriter, and to provide additional comfort to the parties as to the agent’s handling of the escrow funds.  The title insurance underwriters can do this through the issuance of a “closing protection letter”, or sometimes called an “insured closing letter,” addressed to the title insurance applicants.  The closing protection letter, issued by the title insurance underwriter on behalf of the local title agent or attorney, makes the national title insurance underwriter’s financial resources available to the lenders and purchasers in the event that the local agent or attorney commits negligence, theft or fraud in the handling of the escrow or closing funds, causing loss to the addressee under the letter.

Closing protection letters specify in writing the responsibilities undertaken by the national underwriting company on behalf of the title agent or attorney handling the escrow services, and run in favor of the insured under the proposed title policies to be issued in connection with the specific transaction.   Closing Protection Letters are only available when title insurance will be issued to a purchaser or lender in the specified transaction, and it is important to note that the coverage under a Closing Protection Letter is limited in accordance with its terms.  It is customary for lenders to require a closing protection letter when their funds are being handled by an agent or attorney.

The American Land Title Association (“ALTA”) Closing Protection Letter provides that the title insurance underwriter will indemnify the addressee of the Closing Protection Letter for loss arising out of the failure of the issuing agent or approved attorney to comply with written closing instructions to the extent that they relate to the status of title or priority of the lien of the mortgage on the land to be insured by the title insurance policy; or the fraud, theft, dishonesty or negligence of the issuing agent or approved attorney in handling the funds or documents in connection with the closing, as relating to the status of the title in land or priority of the mortgage on the land.  Please refer to the ALTA form for the exact language.

To find out more about the ALTA Closing Protection Letter (revised 12-1-2011), contact anyone at GRS Title Services, or the American Land Title Association,  www.alta.org.

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