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What Lenders and Lawyers Need to Know about Insured Closing Letters

Many attorneys do not know that title insurers are liable to their policy holders under two

sources of recovery:

The title insurance policy

The Insured Closing Letter

The Title Insurance Policy insures that the lender’s mortgage instrument is valid and that it is recorded in the lien position, or priority, that was contracted for with the borrower.

The Insured Closing Letter (“ICL”)assures that the lender and borrower will be “made whole” in the event of a closing attorney’s error or fraud in the closing.

Title insurance protects policy holders against losses due to defects

in title, and errors in the public records or title examination.

ICLs protect policy holders against losses due to a closing attorney’s

accidental or deliberate mishandling of closing funds or documents.

CATIC uses the American Land Title Association (“ALTA”) form ICL developed in 1987, which was revised in 1998 and 2006, for residential real estate closings.

The ICL covers attorney errors regarding:

The ICL does not cover attorney errors regarding:

An ICL provides coverage for a specific transaction, and expires one year from the closing date.

The lender must

receive a Policy Commit

ment

The ICL must be issued for a

specific transact

ion

The title insurer must be identified on the HUD,

and the insurance premium must be

collected at closing

The ICL, Policy

Commitment, and

final policy must be issued

through the same title

insurer

The lender must

receive a final title insurance policy

ICL coverage requires

The lender does not

receive a Policy Commit

ment

The ICL is changed by

someone other that

title insurer or used for

more than one

transaction

The title insurer is

not identified

on the HUD, and a title insurance premium must be

collected at closing

The ICL, Policy

Commitment, and

final policy are not issued

through the same

title insurer

The lender

does not receive a final title

insurance policy

Any one of these actions can destroy ICL coverage:

ICL coverage is destroyed/preserved

A Policy Commitment is

submitted to the lender.

A Policy Commitment is

not submitted to the lender.

ICL coverage is destroyed/preserved

The ICL is issued for a specific transaction.

The ICL is changed by

someone other that title insurer or used for more

than one transaction

ICL coverage is destroyed/preserved

The title insurer is identified on

the HUD, and the insurance

premium is collected at

closing.

The title insurer is not identified on the HUD, and

the insurance premium is not

collected at closing.

ICL coverage is destroyed/preserved

The ICL, Policy Commitment, and

final policy are issued through the same title

insurer.

The ICL, Policy Commitment, and

final policy are not issued

through the same title insurer.

ICL coverage is destroyed/preserved

The lender receives a final title insurance

policy.

The lender does not receive a

final title insurance policy.

Failure to follow the lender’s written closing

instructions

Loss of the lender’s

security or priority position

Defalcation or misuse

of loan funds

Failure to remit a

final title insurance

policy

Types of errors covered by an ICL:

Failure to follow the lenders written instructionsMay result from the closing attorney’s failure to follow written closing instructions.

Closing attorneys cannot rely on oral instructions, and must advise the lender when closing instructions conflict with HUD Regulations or local Title Standards.

Examples of failure to follow the lenders written instructions:Failing to record a Deed into a sole borrower when one spouse is a borrower but both spouses hold title.

Failing to subordinate a Homestead Declaration for both spouses when only one spouse is the sole owner and borrower.

Loss of security or priority positionErrors in recording the mortgage can give rise to both a claim under a title insurance policy and an ICL.

Examples of loss of security or priority position:

delayed recording.

failure to record the mortgage, recording mortgages in the wrong order.

recording mortgages on the Registry of Deeds that should be filed with the Registry District of the Land Court or vice versa.

recording a mortgage after a borrower has filed a Bankruptcy petition.

Defalcation or misuse of mortgage funds Defalcation or misuse of funds can also mean that a title insurance premium collected at closing has not been paid to the title insurer.

Examples of defalcation:

Miscalculating short mortgage payoff amounts.Deliberately not paying off mortgages.Failing to disburse funds in accordance with the HUD Settlement Statement.

Failure to remit a final title insurance policyMost attorneys do not know that failing to submit a final title insurance policy is the basis for an ICL claim. Without ICL coverage, the lender may look to the closing attorney for recovery

• Review of closed loan package by lender.

1

Events that trigger ICL claims are:

Recommendations for Lawyers and Lenders

Protect title insurance coverage.

• Examine titles for no less than 50 years for purchase-money mortgage closings, and for no less than 20 years for refinance transactions.

• Search Probate and Bankruptcy records.• Issue Policy Commitments only after reviewing completed title

examinations.• Amend Policy Commitments if you discover new information or need to

make corrections.

Preserve ICL coverage.

• Obtain an ICL for each transaction.• Never alter or reuse ICLs.• Name the same title insurance company on the

ICL, Policy Commitment, Line 1108 on the HUD, and final title insurance policy.

Safeguard client funds.• Balance HUD Settlement

Statements before closing. • Record mortgages

promptly after confirming receipt of funds.

• Remit title insurance premiums and disburse funds immediately after recording.

Add value and demonstrate expertise.

• Submit closing packages with original final title insurance policies promptly after closing.

• Issue Certification of Title as required under G.L.c. 93, §70.

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