A significant change to the closing protection letter (CPL) recently went into effect. On May 20, 2016, Florida's Office of Insurance Regulation approved the new December 1, 2015 CPL with Florida modifications. A similar CPL will soon appear in most states. (1) In Florida, the form's language will be mandatory by regulation. The new CPL both streamlines the language of the previous CPL and corrects many of the problems created by caselaw developments, bringing the CPL into line with longstanding industry understandings of its purpose and scope. The laudable aim of this new form is more clarity, less misunderstanding, and, therefore, a better relationship among the contracting parties. This article summarizes the changes to the form.
The form of the Florida CPL had been set by regulation at Florida Admin. Code R. 69O-186.010. Now, the form is submitted by the underwriter and approved by the regulator. (2) Industry understanding is that the CPL was primarily an instrument to assure lenders that they could entrust settlement funds to attorneys and closing agents who also acted as title agents for purposes of issuing the title insurance policies of an underwriter. The CPL did not make the attorney or closing agent an agent of the underwriter for purposes of closing, but instead offered a strictly limited indemnity contract.
Pursuant to the CPL, 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." The idea being that, in exchange for using a title insurer's independent and typically relatively small agent, a lender would be indemnified by the title insurer for certain forms of wrongdoing by the agent as it related to the title to the land and handling the lender's loan funds. The CPL was not intended to function as mortgage insurance or substitute for an agent's fidelity bonds or errors and omissions insurance policies.
Caselaw Development in the Wake of the Mortgage Foreclosure Crisis
Before 2007, CPL claims were relatively rare, with only approximately four significant written opinions that dealt with CPL claims. 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 as a source of protection. They pursued increasingly aggressive theories of liability that stretched the coverage and scope of the CPL well beyond industry understanding. And, unfortunately, courts, in apparent deference to the FDIC, gave a much broader and more liberal reading to the CPL than the industry had intended. (3)
This trend was most hard-fought in Florida, Michigan, California, and Connecticut, but spread across the country, making bad law wherever it went.
Revisions to the CPL Form
In the wake of these developments, the American Land Title Association (ALTA) set out to revise the CPL form so lenders and the title insurance industry would have a clearer understanding as to what the CPL was intended to cover, and a fairer distribution of certain risks between them. These revisions addressed several key issues.
The header of the CPL form identifies the lender to whom the CPL offers protection. Often, old CPLs would include "and successors and assigns" language in this header. Industry understanding was that the CPL would travel with the title policy and the mortgage as they were assigned. Some caselaw followed this understanding. (4)
Yet, during the real estate downturn, the FDIC often took over for failed lenders, quickly sold their mortgage portfolios to new lenders, but purported to keep the CPL claims for themselves. This split the CPL from the policy. The new lenders often successfully foreclosed the mortgage because there was no title defect, yet 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. In addition, so-called "scratch-and-dent" lenders would purchase loans at discount prices and pursue CPL claims to turn a bad mortgage into a windfall. Unfortunately, many courts sided with lenders and the FDIC on this theory. (5)
The revised CPL addresses this issue with two new provisions. Condition and Exclusion 2(d)(A) now provides that "you [the lender] means ... the assignee of the insured mortgage, provided such assignment was for value and the assignee was, at the time of the assignment, without knowledge of the facts that reveal a claim under this letter ..." And Condition and Exclusion 8 now provides that "the company will be liable only to the owner of the [indebtedness at the time that payment is made."
These revisions will assist in preventing splitting of claims against title insurers and opportunistic scratch-and-dent lender claims.
Separately, the old CPL form offered coverage to lessees and purchasers in addition to lenders. This allowed purchasers of an owner's policy to bring CPL claims. (6) But, as an excellent textual analysis explained in Cauthorne v. American Home Mortgage Corp., 2008 WL 4316123 (E.D. Va. Sept. 15, 2008), this coverage did not extend to refinancing borrowers. The new CPL form retains, in Requirement 2(b), the language on which Cauthorne relied.
Valid Policy Issuance
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. Some courts so held. (7) Others did not, twisting industry practice and the CPL's language to reach a different result. (8)
The new CPL...