Closing Protection Coverage-A Somewhat Distasteful but Advised Insurance Product

I sometimes wonder, how much wealthier I would be if I never paid for title insurance, homeowner’s insurance, commercial property insurance…  In the last 25 years or so, my house has never gone up in flames, no neighbor ever came by and said they own half my property, and when I owned rental properties, no floods or hurricanes swept them away. I have definitely paid out more in premiums over the years, than the insurance companies have paid me, and I get tired being one of the reasons that many insurance companies are doing well these days. I presume many of our Blog readers feel the same way. 

On the other hand, I presume that not many of us have made the Forbes List of the World’s Wealthiest People, and if our luck changed, few of us would be able to recover from an uninsured casualty that destroyed the home we live in or other major asset. No matter how low the odds may be that our home or commercial building will be destroyed, or that after a closing we’ll find out that someone else owns our property (or has a lien against it), or has stolen our funds from escrow, it almost always makes sense to insure against the loss, unless we can afford to self-insure. The reason is that most real estate related insurance (property, title) is relatively (in comparison to the risk of loss) inexpensive, and required by any lender financing real property.

While the State of Ohio has a formal fee schedule for title insurance, title insurance for most deals should not exceed $5-6/$1,000. Title insurance is designed to protect an owner's or a lender's financial interest in real property against loss due to title defects, liens or other title related matters. If there was a recorded highway easement across your property that the title company missed, or your home got sold at a tax sale, without your seller’s knowledge, or someone forged your seller’s name to a deed and sold the property to a third party, or someone accidentally placed a lien against your property (Lot 431) when they really meant to place the lien on Lot 341, you’ll be glad you bought title insurance.

What if an independent agent for your title company was also your escrow agent (which is very common), and that agent took the buyer’s funds and retired to Mexico (becoming more and more common). You are covered, right, because you took everyone’s advice and bought title insurance?

Unfortunately, no, unless you bought “Closing Protection Coverage”. Title agents are just that, agents to sell title insurance. The title agent is NOT an agent of the underwriter for escrow, closing and disbursement of funds purposes, so the insurance underwriter is not liable for such independent agent’s fraud or failing to adhere to escrow instructions, if such coverage is not in effect.

What is Closing Protection Coverage? It is basically (via issuance of a Closing Protection Letter) insurance that will bind the title underwriter to cover you in the event of a loss due to "theft misappropriation, fraud, or other failure to properly disburse settlement, closing or escrow funds..." by the licensed agent.

Is Closing Protection Coverage (“CPC”) required? There is no requirement that CPC be procured, but, pursuant to Section 3953.32 of the Ohio Revised Code (effective January 1, 2007) Ohio law now mandates that closing protection coverage be offered to all parties in a closing transaction – the seller, the buyer, and the lender.

How much does CPC cost? Rates for Closing Protection Coverage in Ohio are now (updated in 2013) as follows:

• $40 for a lender, its successors/assigns
• $55 for seller(s)
• $20 for buyer(s)/borrower(s)
• $20 for each additional title insurance applicant.

Is CPC advised? In light of its low cost, relative to the potential loss (my initial research indicates recent closing agent fraud claims ranging from $12,000 to $27,000,000), yes.

Certainly, you can reduce the risk of fraud/negligence by using an agency that has worked well for you in previous deals. When faced with the prospect of a new agent, it is important to ask about the agency’s experience, how long they have been in business, the qualifications of its personnel, and whether or not any claims have been made against the agency in the past. While you can lower the risk by carefully selecting the agent, the only way to eliminate the risk is to buy the coverage.  You don’t have to be happy about it. Most who buy the coverage are not. In one sense, CPC can be analogized to a protection racket that Tony Soprano would be proud of. As Robert Franco, in his “Source of Title Blog” (www.sourceoftitle.com/blog) characterized the coverage, “you [agents] have to tell them [customers] that there is a chance that you may steal their money and in order to be protected from your dishonesty, they must pay extra.” 

While I sympathize with the bad taste one gets when trying to rationalize CPC, the bottom line is that you can pay next to nothing at closing, or pay out up to everything you own, later.