Mortgage lenders and servicers frequently consider potential indemnity due under finally issued lender’s title insurance policies and strive to submit timely claims when a covered defect arises. These same parties should also consider whether additional indemnity is due as part of a separately issued closing protection letter (CPL), also known as an “insured closing services letter” or “insured closing letter.” Given the potential for a lender to recover its “actual loss” under the protections afforded by a CPL, which could be greater than a loss recoverable under a title policy, litigation involving CPLs is on the rise. Routinely, CPL claims and litigation arising from those indemnity claims hinge on the amount of a lender’s actual loss and the procedural question of timely notice.
A CPL provides indemnity for a mortgagee’s actual loss in connection with a closing conducted by a title insurance underwriter’s Issuing Agent or Approved Attorney. Unlike a lender’s title policy, a CPL does not limit a recoverable actual loss to the value of the property or otherwise. Instead, a CPL entitles a mortgagee to recover a broader category of damages constituting an actual loss, which is more directly connected with the amount of loan funds entrusted by a lender to an Issuing Agent or Approved Attorney. While some title insurance underwriters argue that the policy’s limits on loss also limit the actual loss recoverable under the CPL, courts have routinely enforced the CPL to award additional losses. See First American Title Ins. Co. v. Vision Mortgage Corp., FDIC v. Property Transfer Servs., Inc., and JP Morgan Chase Bank, N.A. v. First American Title Ins. Co.
Given the potential indemnity available, a lender or servicer should timely consider whether to tender a claim under a CPL. Specifically, a mortgagee should a) review its files to locate a CPL, b) evaluate the language of the CPL to determine any limitations, and c) reference the CPL in its tender of claim to the title insurance underwriter and produce a copy of the CPL in connection with the claim. Title insurance underwriters are often raising procedural lack of timely notice defenses as often as possible in the CPL context in the hopes of avoiding the necessity of paying otherwise recoverable additional losses. For instance, in Florida, title insurance underwriters have gone so far as to include a provision in the CPL requiring a notice of loss “within ninety (90) days from the date of discovery of such loss” and have argued that a lender must tender its notice as soon as a loss is possible and even if a lender does not have actual knowledge that the loss is connected to deficient or fraudulent closing services. See FDIC v. Property Transfer Servs., Inc. Mortgage lenders and servicers should familiarize themselves with these potential defenses and the protection potentially available.