What is a Closing Protection Letter in Washington State?

A closing protection letter (“CPL”) is a written indemnity agreement requested by a lending institution or bank (“lender”) and issued by the title insurance company (“underwriter”) that will issue a loan policy insuring the lender. CPLs provide specific assurances to the lender which safeguard them in the event that dishonesty, fraud, or negligence cause failure of the escrow agent to properly disburse the closing or escrow funds in a real estate transaction. A CPL also provides assurances to the lender that their written closing instructions have been complied with.

CPLs are issued in most states and some of them restrict, limit or even prohibit their use. According to Washington State law (RCW 48.05.330) CPLs may only be issued when a title insurance company or its issuing agent is handling the closing.

Occasionally a lender will request a CPL when the closing is being handled by an outside party (i.e. independent escrow company or attorney) and not the underwriter or its issuing agent. In these cases the CPL can only be issued after a sub-escrow is opened and the underwriter or its agent has been instructed to accept lender loan funds, collect title related fees and premiums, the sub-escrow fee, payoff all liens that appear in the preliminary title commitment (i.e. “title report”) and forward the balance of funds to the outside party. The CPL does not protect against acts of the outside party.

Closing protection letters are largely misunderstood and misused. A CPL is not insurance and its application is limited. However, the lender”s title insurance policy does contain provisions which, among other things, insure the lender that it has an enforceable and valid lien on the subject property. Furthermore, the escrow agent must also have errors and omission insurance which provides protection against fraudulent or dishonest acts as well as unintentional errors and omissions.

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