Closing Protection Letters and Junior Loan Policies (You Get What You Pay For)

by Steve Zablocki, Underwriting Counsel

A closing protection letter (also called an “insured closing letter” or “CPL”) creates a contract between the title insurance underwriter and lender or buyer where the underwriter agrees to indemnify the lender or buyer for actual losses caused by certain kinds of misconduct by the closing agent.

In most cases, the CPL insures against loss caused by:

1. Any failure of the Issuing Agent to comply with the lender’s written closing instructions that relate to the disbursement of Funds necessary to establish the status of the Title to the Land; or the validity, enforceability, or priority of the lien of the Insured Mortgage

2. Obtaining any document, specifically required by the Lender, 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

3. Loss caused by fraud, theft, dishonesty, or misappropriation of the Issuing Agent in handling the Lender or Buyer’s 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

An ALTA Residential Limited Coverage Loan Policy (or Junior Loan Policy or “JLP”) provides limited coverage on a residential mortgage. It is available for mortgages other than the financing of the acquisition of the property (mortgages other than purchase money mortgages). It includes up to $300,000 and is not available for a mortgage exceeding $300,000.

The Junior Loan Policy covers certain limited title risks including that the grantee identified in the policy is the last grantee of record, that all outstanding liens having priority over the insured mortgage are shown as exceptions on the policy and all pending unpaid taxes and assessments are disclosed.

Can you issue a CPL to a lender where you are only issuing a Junior Loan Policy? Usually, no. The JLP is not an insurance product in the conventional sense. Rather, the JLP is simply an insured search. That is, you checked the public records and you’ve revealed items of title.

As a practical matter, issuing a CPL is not compatible with a JLP. You are not following closing instructions. You are not insuring priority. You are not insuring that the lender has first or even subordinate lien status as outlined in any closing letters. Further, you are not insuring that their mortgage is enforceable. Moreover, issues of fraud, theft of handing of funds is not insured.

If you are asked to issue a CPL where you are issuing only a Junior Loan Policy, give your underwriter a call.