The defendant, a residential mortgage lender brought an action against the title insurer for indemnification under a closing protection letter for losses caused by an alleged sham sale to a straw buyer at an inflated price.
Under the closing protection letter, Lawyers Title agreed:
(189) However, given the language in the closing protection letter, the trial court found that "the concept of constructive fraud was not applicable in this case." (190) While the closing protection letter "indemnified New Freedom against the issuing agent's '[f]raud or dishonesty'," the trial court interpreted "fraud" to mean actual rather than constructive fraud, given the fact that the contract did not simply allow for rescission, but instead required Lawyers Title to pay damages to New Freedom in an amount representing New Freedom's actual losses resulting (191) from the issuing agent's conduct.
However, other courts and state insurance departments have concluded that closing protection letters are not insurance.