The Office of General Counsel issued the following opinion on December 28, 2005, representing the position of the New York State Insurance Department.
Re: Issuance of Closing Protection Letter by Title Insurance Company
May a title insurance company issue, in New York, a letter that makes such title insurance company liable for acts of its title agent that are within the scope of that title agents authority while acting on the title insurers behalf?
A title insurance company may issue, in New York, a letter that makes such title insurance company liable for acts of its title agent that are within the scope of that title agents authority while acting on the title insurers behalf.
The Department issued Circular Letter No. 18 ("CL #18") on December 14, 1992, which addressed the issuance of closing protection letters ("CPL") by title insurance companies to lenders. Apparently, such CPLs protected lenders against losses caused by improper acts or omissions by a lenders attorney in connection with underlying real property transactions. CL #18 equated such coverage to fidelity, surety or professional liability insurance and found, among other things, that "title insurers lack authority to issue a CPL [closing protection letter] to a lender insofar as that lenders attorney is concerned, because its purported protection falls beyond the scope of the monoline title insurers license and writing authority that is exclusively confined to Section 1113(a)(18) of the Insurance Law."
However, CL #18 stated that a title insurer would not be precluded from issuing an appropriate agent authorization letter that is confined to the title insurers liability as principal for the acts of its agent within the scope of that agents authority on the title insurers behalf.
The inquirer acknowledges the positions taken in CL #18 and submitted, for the Departments review and approval, a sample closing protection letter. Subsequently, the inquirer has withdrawn his request for review and approval of such sample letter and, instead, asked that we issue a general response to his inquiry.
As CL #18 stated, title insurance companies lack authority to issue a closing protection letter ("CPL") to a lender regarding the acts of the lenders attorney because the protection offered is beyond the scope of the monoline title insurance companys license and writing authority that is exclusively confined to Section 1113(a)(18) of the Insurance Law. However, a title insurance company is not precluded from issuing an appropriate agent authorization letter that is confined to the title insurance companys liability as principal for the acts of its agent within the scope of that agents authority on the title insurance companys behalf, as stated in CL #18.
The protection afforded by closing protection letters should be limited to the title insurance policy itself. One concern that was highlighted in CL #18 involved situations where the title agent that is being protected by a closing protection letter is also the lenders attorney. CL #18 stated that "[e]ven in the unusual situation where the title insurers approved attorney and the lenders designated attorney happen to be one and the same, it is unclear what a CPL purports to do beyond the title insurance policy itself. Insofar as it diverges from the title insurance policy, a CPL would constitute an unauthorized act." Any coverage that is provided under such letter must, as stated in CL #18, be limited to activities that are within the scope of the title agents duties. A closing protection letter that offers coverage that goes beyond a title agents duties would be prohibited.
For further information please contact Associate Attorney D. Monica Marsh at the New York City Office.