New ALTA Closing Protection Letter With Florida Modifications Corrects Unfortunate Case Law

The new American Land Title Association (ALTA) Closing Protection Letter (CPL) form recently took effect in Florida.

The new form both streamlines the previous CPL’s language and addresses and corrects many of the problems created by recent bad case law. It brings the CPL into line with longstanding understandings of CPL’s purpose and scope within the title insurance industry. The clear and laudable aim of this new form is to create a better relationship among the contracting parties with clearer language and more sensible limitations on liability. This article summarizes revisions, with particular focus on those areas that address case law that led us astray.

The History of CPLs and Claims Under Them

Since 1991, the form of CPL used in Florida had been set by regulation found at Florida Admin. Code r. 69O-186.010. Now, the form is submitted for approval by the title insurers and approved by the regulator. See Fla. Stat. § 627.777. The form is largely consistent with those used in most parts of the country. Industry understanding has long been that the CPL is designed to assure lenders that they can trust attorneys and closing agents with settlement funds by offering a strictly limited indemnity contract backed up by the title insurance underwriter. In the letter, title insurers agreed to indemnify lenders for actual loss caused by the failure to follow certain written closing instructions, or the loss of settlement funds caused by “fraud or dishonesty” in “handling [the lender’s] funds or documents.” In exchange for using a title insurer’s independent and typically relatively small agent, the title insurer indemnifies the lender against defalcation risks and wrongdoing by an agent who would be difficult to pursue financially. All parties thus expected prompt claims, and did not intend CPLs to function as mortgage insurance, or substitute for agent’s fidelity bonds or errors and omissions insurance policies. Before 2007, CPL claims were relatively rare and generally confined to defalcations and title defects resulting from failure to follow written closing instructions that, for whatever reason, were not covered by the title policy. CPL claims were rarely litigated. Indeed, before 2007, only four significant written opinions dealt with CPL claims. See Herget Nat’l Bank of Pekin v. USLife Title Ins. Co. of New York, 809 F.2d 413 (7th Cir. 1987) (affirming partial j.n.o.v. for defendant where CPL provided reimbursement only for loss of “settlement funds,” not any form of consequential damages); Federal Agricultural Mortgage Corp. v. It’s A Jungle Out There, Inc., 2005 WL 3325051 (N.D. Cal. Dec. 7, 2005) (granting summary judgment to title insurer on issue of written versus oral closing instructions, and on one-year absolute claim bar); First Financial Savings & Loan Assoc. v. Title Ins. Co. of Minnesota, 557 F. Supp. 654 (N.D. Ga. 1982) (granting summary judgment to title insurer where CPL limited losses to actual loss of funds transmitted by lender); First American Title Ins. Co. v. Vision Mortgage Corp., Inc., 689 A.2d 154 (N.J. App. 1997) (affirming summary judgment for lender on CPL claim but noting in dicta that causation requirement would prevent award of damages where mere drop in property value was the cause). When the real estate bubble burst in 2007, however, CPL litigation exploded. Since then, more than 64 significant written opinions around the country have addressed CPL issues. Desperate to recoup massive losses on fraudulent mortgages, lenders and the FDIC (acting as receiver for failed lenders) turned to the CPL for protection. They pursued increasingly aggressive theories of liability that stretched the coverage and scope of the CPL well beyond industry understanding. Unfortunately, courts largely gave a much broader and more liberal reading to CPLs than the industry had intended in apparent deference to the FDIC. This trend spread across the country, making bad law wherever it went.

The New CPL Form

ALTA revised the CPL to more clearly reflect what it was intended to cover. The new CPL more fairly distributes risk between lender and title insurer. Who is Covered? The CPL form header identifies the lender to whom the CPL offers protection. Often, old CPLs included “and successors and assigns” language in this header, so that the CPL would travel with the title policy as it was assigned. But after the real estate bubble burst, the FDIC often took over for failed lenders and quickly sold their mortgage portfolios to new lenders, but purported to keep the CPL claims for themselves. The FDIC would pursue the title insurer under the CPL for lost profits or loss of “book value,” alleging that the loan should never have been closed in the first place, even when there was no defalcation or title defect. The revised CPL solves this problem with new Condition and Exclusion 2(d)(A), eliminating claims by “scratch and dent” lenders who buy loans on the cheap after a CPL claim is discovered, and new Condition and Exclusion 8, providing that “The Company will be liable only to the owner of the Indebtedness at the time that payment is made.” The introductory paragraph of the old CPL form specified that a lender was protected only when “title insurance of [the Company] is specified for your protection in connection with closings of real estate transactions in which you are to be the lessee or purchaser of an interest in land or a lender secured by a mortgage (including any other security instrument) of an interest in land. . .” Thus, if title insurance from the underwriter had not been validly bound, title underwriters correctly argued that CPL coverage was void. See Capital Mortgage Assoc., LLC v. Hulton, 2009 WL 567057 (Conn. Sup. Feb. 13, 2009) (judgment in favor of title insurer where lender bought title insurance from third party, not from title insurer). But some courts seemed to ignore this appropriate limitation. See Mortgage Network, Inc. v. Ameribanc Mortgage Lending, LLC, 895 N..2d 917 (Oh. App. 10th 2008) (reversing summary judgment and holding that title insurer could be liable on apparent agency theory even if it never received premium and no valid policy was issued). The new CPL form’s Requirement 1 solves this problem by specifying that CPL protection is available only when “The Company issues or is contractually obligated to issue a Policy for Your protection in connection with the real estate transaction.” What Conduct is Covered? Although the old CPL narrowly limited coverage, some courts stretched CPL coverage virtually out of recognition, treating it as a “life of the loan” insurance policy covering almost any form of dishonesty, negligence, or theft. Increasingly, lender’s closing instructions included broad anti-fraud instructions requiring written approval from the lender to proceed when even the slightest whiff of impropriety arose. Courts seemed to read all of these provisions into the CPL, no matter whether they were title matters or related specifically to the lender’s funds. See FDIC-R BankUnited v. Property Transfer Services, Inc., 2013 WL 5535561 (S.D. Fla. Oct. 7, 2013) (judgment against title insurer over arguments on HUD-1 being lender’s document, definition of dishonesty, causation). The new CPL form brings coverage back in line with longstanding industry understanding, covering only:
    • (a) any failure of the issuing Agent or Approved Attorney to comply with Your written closing instructions that relate to:
    • (i) (A) the disbursement of Funds
necessary to establish the status of the Title to the Land
    • ; or
    • (B) the validity, enforceability, or priority of the lien of the Insured Mortgage; or
    • (ii) obtaining any document, specifically required by You,
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
    • ; or
    • (b) fraud, theft, dishonesty, or misappropriation of the Issuing Agent or Approved Attorney in handling Your 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.
(emphasis added). New Condition and Exclusion k now eliminates liability for loss caused by “investor or secondary market standards or requirements, including any failure of the Issuing Agent or Approved Attorney to comply with Your closing instructions relating to such investor or secondary market standards or requirements.”

Notice

The new CPL form introduces a two-year from closing claim bar that explicitly does not require prejudice. It also preserves a general duty of prompt notice, and reduction of liability if later notice prejudices the title insurer.

Limitations on the Scope of Agency Are Made Explicit

Courts have long understood that, far from showing the title agent was an all-purpose agent of the underwriter, the CPL actually showed the opposite, otherwise the letter would serve no purpose. See Proctor v. Metropolitan Money Store Corp., 579 F. Supp.2d 724 (D. Md. 2008). This is now made explicit in the new CPL form. In addition to consistent recent changes to the title insurance Commitment form, the new CPL forms limits causes of action to the contract, eliminating tort claims:
    The issuing agent is the Company’s agent only for the limited purpose of issuing policies. Neither the Issuing Agent nor the Approved Attorney is the Company’s agent for purpose of providing closing or settlement services. The Company’s liability for Your loss arising from closing or settlement services is strictly limited to the contractual protection expressly provided in this letter. Other than as expressly provided in this letter, the Company shall have no liability for loss resulting from the fraud, theft, dishonesty, misappropriation, or negligence of any party to the Real Estate Transaction, the lack of creditworthiness of any borrower connected with the Real Estate Transaction, or the failure of any collateral to adequately secure a loan connected with the Real Estate Transaction.

Limitations on Damages

The old Florida form provided for indemnification of “actual loss” that was “arising from” a covered matter, with an upper limit of the policy amount. The new form helpfully limits the underwriter’s indemnification exposure by defining the indemnification offered as being only for “actual loss of Funds” in the introductory paragraph, and by adding these specific limits on liability: The Company’s liability for loss under this letter shall not exceed the least of: (a) the amount of Your Funds; (b) the Company’s liability under the Commitment or Policy at the time written notice of a claim is made under this letter; (c) the value of the lien of the Insured Mortgage; (d) the value of the Title to the Land insured or to be insured under the Policy at the time written notice of a claim is made under this letter; or (e) the amount stated in Section 3 of the Requirements.

Arbitration

Finally, the new CPL form adds a voluntary arbitration provision that takes effect if both sides agree. If the transaction involves a one-to-four family home and the claimant is a purchaser or borrower, the company agrees to pay the arbitration costs.

Conclusion

The new Florida CPL form restores the balance between the lender’s desire to have trustworthy title agents, and the limited nature of the title insurance business itself. It should prove beneficial to both lenders and title insurers, helping to keep claims prompt and reasonable, and ultimately keeping title insurance premiums down.

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