Closing Protection Letters Offer Seller Protection

Closing Protection Letters are a special type of insurance which protects sellers at real estate closings.

Closing Protection Letters Protect Sellers Too

A Closing Protection Letter or “CPL” is synonymous with a mortgage real estate closing. Since a lender’s title insurance policy only insures the underlying mortgage instrument, a lender may be exposed during the period up to the point the lender’s title policy is issued. Costing around $40 and billed to the borrower, the CPL indemnifies the lender from the settlement agent’s fraud, error and negligence.

Some title insurers also offer CPLs to buyers and sellers. Seller coverage includes indemnification for actual loss of settlement funds incurred in connection with closing. However, as with any insurance product, conditions, exclusions and caps limit coverage. For example, the title insurer may limit claims to the extent the loss is a direct, proximate result of acts of theft of settlement funds or fraud by the issuing agent or closing attorney.

Obtaining a CPL may be advisable in situations where the designated settlement agent is under financial distress and the closing cannot be moved. This issue came up recently with the fairly public disclosure of a $30 million escrow fraud allegation involving a regional settlement company. If a seller wants CPL protection, it is important to:
  • Determine the title insurer insuring the closing;
  • Issue a written letter to the closing agent and insurer with specific payment instructions;
  • Receive the CPL prior to closing; and
  • Pay the CPL fee (or require the party who is requiring use of the particular settlement agent to pay).

Since financial irregularities with closing firms are not generally apparent to the public, a CPL can offer additional assurance that a seller will receive the proceeds of sale.

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