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

Last Updated: June 28 2017
Article by Marty J. Solomon

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. The trend reached its height with opinions in cases like JPMorgan Chase Bank v. First American Title Ins. Co., 750 F.3d 573 (6th Cir. 2014) (affirming summary judgment for plaintiff against arguments of standing, loss causation, and improper calculation of damages), FDIC-R BankUnited v. Property Transfer Services, Inc., 2013 WL 5535561 (S.D. Fla. Oct. 7, 2013) (judgment against title insurer over arguments of notice, standing, HUD-1 being lender?s document, Fifth Amendment adverse inference, definition of dishonesty, causation, and damages), Bank of America v. First American Title Ins. Co., 878 N.W.2d 816 (Mich. 2016) (reversing summary judgment for title insurer, holding that full credit bid rule did not bar claim and that HUD-1 was lender?s document for purposes of ?handling your funds or documents? language in CPL, overruling New Freedom Mortgage Corp. v. Globe Mortgage Corp., 761 N.W.2d 832 (Mich. App. 2008)), and Bank of America v. Fidelity Nat?l Title Ins. Co., 892 N.W.2d 467 (Mich. App. 2016) (reversing summary judgment for title insurer, holding that CPLs had been properly assigned, title insurer could not rescind CPL because of lender?s faulty underwriting, title insurer was not prejudiced by late notice, title agent?s taking Fifth Amendment entitled lender to inference of fraud or dishonesty, and full credit bid rule did not bar claim).

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. See FDIC v. First American Title Ins. Co., 611 Fed. Appx. 522 (11th Cir. 2015) (affirming judgment for plaintiff on standing argument); JPMorgan Chase Bank v. First American Title Ins. Co., 750 F.3d 573 (6th Cir. 2014) (affirming summary judgment for plaintiff on standing argument).

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 Can the Title Insurer do to Investigate a CPL Claim?

The new CPL form helpfully incorporates an entirely new paragraph specifying what the title insurer may do to investigate a claim. It incorporates familiar provisions from the policy itself:

Whenever requested by the Company, You, at the Company?s expense, shall:

  1. give the Company all reasonable aid in
    1. securing evidence, obtaining witnesses, prosecuting or defending any action or proceeding, or effecting any settlement, and
    2. any other lawful act that in the opinion of the Company may be necessary to enable the Company?s investigation and determination of its liability under this letter;
  1. deliver to the Company any records, in whatever medium maintained, that pertain to the Real Estate Transaction or any claim under this letter; and
  2. submit to an examination under oath by any authorized representative of the Company with respect to any such records, the Real Estate Transaction, any claim under this letter or any other matter reasonably deemed relevant by the Company.

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:

  1. any failure of the issuing Agent or Approved Attorney to comply with Your written closing instructions that relate to:
    1. the disbursement of Funds necessary to establish the status of the Title to the Land; or
      1. the validity, enforceability, or priority of the lien of the Insured Mortgage; or
    1. 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
  1. 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.?

Defenses to CPL Claims: Notice

The old CPL forms of some states, such as California, included an absolute and enforceable limit on the time after closing in which a claim could be made. See Countrywide Home Loans, Inc. v. First American Title Ins. Co., 2012 WL 516824 (Cal. App. 1st Feb. 16, 2012) (granting summary judgment to title insurer where late notice caused prejudice, and reading policy and CPL provisions together). Some states, like Florida, included both (1) a ?prompt? notice and prejudice provision, and (2) a bright-line 90-day from knowledge of claim notice provision. See FDIC-R Indymac v. Chicago Title Ins. Co., 137 F. Supp. 3d (S.D. Fla. 2015) (granting title insurer summary judgment where lender knew of facts forming claim years before it made claim); FDIC-R WaMu v. Attorneys? Title Ins. Fund, 2014 WL 4384270 (S.D. Fla. Sept. 3, 2014) (granting in part cross motions, holding that contributory negligence was not a bar to six successful claims, but 90-day notice barred eight others). But the combination of both these provisions sometimes lead to confused analysis that mixed the two, or at least muddled the issue for judges reading those opinions. See US Bank Nat?l Assoc. v. First American Title Ins. Co., 2012 WL 1080876 (M.D. Fla. March 30, 2012) (after trial, finding partly in favor of lender but reducing damages due to prejudice caused by late 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.

Defenses to CPL Claims: Lender Negligence

Industry understanding had long been that the CPL was not mortgage insurance or an indemnity against a lender?s own negligence. See In re Taneja, 743 F.3d 423 (4th Cir. 2014) (affirming dismissal after trial where plaintiff lender was actively involved in the fraud that made up the CPL claim); 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).

But in response to FDIC CPL claims, many courts stretched CPLs to cover not just losses proximately caused by the title agent, but losses caused by lender?s negligence, fraud, or faulty loan underwriting. See FDIC-R WaMu v. First American Title Ins. Co., 2015 WL 418122 (E.D. Mich. Jan. 30, 2015) (striking title insurer?s defenses on contributory negligence through bad loan underwriting);

The new CPL form Requirement 4 limits indemnification to situations in which ?Your loss is solely caused by? the covered acts. And Condition and Exclusion 3(e) eliminates liability for losses ?arising from any? (the exact causation language so broadly construe in the unfortunate decisions above) ?fraud, theft, misappropriation, or negligence by You or by Your employee, agent, attorney, or broker.? Third, Condition 3(g) incorporates the policy exclusion for ?matters created, suffered, assumed, agreed to, or Known by You.?

Tort Liability is Eliminated and 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:

  1. The Company?s liability for loss under this letter shall not exceed the least of:
  1. the amount of Your Funds;
  2. the Company?s liability under the Commitment or Policy at the time written notice of a claim is made under this letter;
  3. the value of the lien of the Insured Mortgage;
  4. 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
  5. 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, and encouraging more appropriate reliance on agent?s bonds and errors and omissions policies to address non-title related losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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