AGENTconnect THE COLORADO AGENCY NEWSLETTER
Issue #14 | December 2016
CLOSING PROTECTION LETTERS A COLORADO PERSPECTIVE By: John T. LaJoie, Vice President and Senior Operations Counsel, First American Title Insurance Company
The Colorado Department of Regulatory Agencies, Division of Insurance (the “Division”) has been active over the past year in the regulation of title insurance products and the services provided by independent title insurance agencies. This includes New Regulation 8-1-3, that contains subsection 5. 11. a. effective on January 1, 2017 relating to the issuance of closing protection letters. This article outlines the need for closing protection letters to address what we perceive to be the primary goals of the Division and provides a recommendation for future action. As with any insurance department, the primary objectives of the Division are to protect insurer solvency and the interests of consumers who obtain title insurance from insurers and settlement services from independent title agencies. While the settlement services provided by title agencies are outside the scope of the relationship between the title insurer and its policy-issuing title agent, with the exception of only a few states, regulators permit title insurers to issue closing protection letters that provide limited indemnification for title-related loss based upon the actions of the issuing agent in the settlement process. The American Land Title Association (ALTA) adopts forms for closing protection letters and publishes those forms on its website (www.alta.org). While title insurance is a monoline form of insurance, meaning that title insurers are limited to issuing title insurance, most states, including Colorado, allow title insurers to issue closing protection letters that provide indemnity for specified acts of title agents on the condition that the protection provided therein is limited to loss related to 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. The specified acts include the failure of the issuing agent to comply with the lender’s written closing instructions and fraud, theft, dishonesty or misappropriation of settlement funds by the issuing agent. These limitations are in place to comply with monoline restrictions and to protect insurer solvency, which as stated above is a primary objective of insurance departments generally.
It’s apparent from the acts of the Division that it’s balancing these limitations with its other primary objective, which is the protection of consumers. While the ALTA-adopted closing protection letter form issued to lenders provides protection for the borrower in transactions involving one-to-four family residential transactions, the Division authorized title insurers to issue closing protection directly to buyer/borrowers and sellers by promulgating New Rule 8-1-3, Section 5, Subsection 11. a. This Subsection permits the issuance of closing protection letters that satisfy the following standards: Any closing protection letter issued substantially conforms to an American Land Title Association (“ALTA”) promulgated form, which may include amending such form to be applicable to a seller; The Division also apparently recognized the need for consumers to be aware of the availability of closing protection letters, as new Subsection 11. f. includes a requirement for a notice to the consumer on the commitment disclosure statement of the availability of a closing protection letter. The New Regulation also provides for a charge for closing protection letters, which is in line with the existing practices of at least 28 states and is pending in other states. Finally, the New Regulation allows for closing protection for sellers based upon modifying an ALTA form so as to protect sellers from title-related loss relating to the misappropriation of funds by the settlement agent. The availability of closing protection for the seller is not new in Colorado, as the Division has previously authorized closing protection for the seller in its Bulletin No. B-5.31, stating: Continued on next page
The information contained in this document was prepared by First American Title Insurance Company (“FATICO”) for informational purposes only and does not constitute legal advice. FATICO is not a law firm and this information is not intended to be legal advice. Readers should not act upon this without seeking advice from professional advisers. First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American, the eagle logo, First American Title, and firstam.com are registered trademarks or trademarks of First American Financial Corporation and/or its affiliates. AMD: 12/2016
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