AUGUST 2014 BAD FAITH CASES: “CLOSING PROTECTION LETTER” ISSUED BY TITLE INSURANCE COMPANY IS AN INDEMNITY AGREEMENT, BUT DOES NOT CONSTITUTE INSURANCE FOR PURPOSES OF BAD FAITH STATUTE (Philadelphia Federal)

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In Bancorp Bank v. Lawyers Title Insurance Corp., the court had to decide whether a “closing protection letter” (CPL) was title insurance, and thus subject to the bad faith statute. Under Pennsylvania law, a closing protection letter is defined as “an agreement by a title insurance company to indemnify a lender, or in some cases a purchaser, for loss caused by a settlement agent’s fraud or dishonesty or by the agent’s failure to follow the lender’s written closing instructions.”

The court, after detailed analysis and a review of national case law found: “In this case, the CPL does not protect against losses which arise from liens, encumbrances, or defects which render title unmarketable. Therefore, it did not constitute “title insurance,” as defined by Pennsylvania law. The court had earlier observed that not every indemnity agreement is an insurance agreement, and “[w]hile the CPL may be an indemnity contract, it is not an insurance policy. Because a claim of bad faith denial of insurance benefits can only arise under an insurance policy, [the insurer] cannot maintain this claim [for bad faith].”

Date of Decision: July 8, 2014

Bancorp Bank v. Lawyers Title Ins. Corp., CIVIL ACTION NO. 13-6103, 2014 U.S. Dist. LEXIS 92151 (E.D. Pa. July 8, 2014) (Slomsky, J.)

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