Once a home is secured for purchase, the lender requires title insurance, which must be secured before the transaction closes. When selecting a title insurance company, you will be given the option of which coverages to choose.
A closing protection letter is one of these, which a title insurance company will provide to the lender, buyer, and seller.
What is it? And is it necessary?
A closing protection letter (CPL) is issued by the title underwriter. This document ensures that the underwriter will protect its client from any mistakes made by the title agent who handles the escrow accounts associated with the transaction.
The title agent is responsible for handling large sums of the lender’s and buyer’s money, and mistakes can be made. For example, a mistake could be if the agent misplaces or mispurposes the funds in your escrow account. There is also the risk of an agent being dishonest or fraudulent.
In any case, where a mistake is made on behalf of the agent, the closing protection letter is drawn up so that the title underwriter will protect a specific party to suffer no actual loss.
Put simply, a closing protection letter is a form of insurance intended to provide coverage to specific parties of the transaction. Each party will decide whether or not it is necessary. However, a lender will rarely hire a title agent without the issuance of a CPL, and the burden of the fee is typically placed on the buyer.
It is natural to feel a little uneasy about an insurance company handing you a document intended to protect you from them, but charge you for that document. But keep in mind that this is something they are legally required to do.
Also, not all accounts where these documents are put into effect are fraud or dishonesty. Human error does occur, and without this document, an honest mistake can cost you thousands of dollars.
What should the closing protection letter include?
All CPLs are transaction-specific and what they offer coverage for depends on the insurance being issues. However, there shouldn’t be much deviation from one contract to the next. Please, reference the image below for an indication of what a CPL should look like. [Read more…]