Ohio Revised Code § 3953.32
In 2007, the section 3953.32 became part of the law of Ohio in apparent response to abuses by a particular Central Ohio title agency and perhaps others. The law mandates that at the time the title insurance agency receives an order, it must offer closing protection to any, “…lender, borrower, and seller of the property…” The closing protection shall indemnify against loss of settlement funds resulting from specific acts of the title insurance agent. They include, “(1) Theft, misappropriation, fraud, or any other failure to properly disburse settlement, closing, or escrow funds; and (2) Failure to comply with any applicable written closing instructions, when agreed to by the title insurance agent.”
The fees charged in conjunction with Closing Protection are nominal, but do constitute necessary consideration to create the contract between the title insurance company and the protected party. So if the cost is nominal, the question is whether to buy it or not? In every closing where I represent a buyer or a seller, that is the question. Often times there are real estate agents involved and I routinely hear them advise their clients not to buy the Closing Protection. While at the same time I am advising my clients to accept the offer and to purchase the Closing Protection. Who is right? Which advice should you follow, or provide (in the case of real estate agents/brokers or attorneys)?
My basic overview is that like all insurance, you hope you will never need it. We all have home insurance, but how many have experienced a home fire? While I don’t expect an issue to arise with the title agent’s performance, if there is an event that would be covered by Closing Protection, it is likely to be of significant consequence, simply due to the amount of money involved in real estate transactions.
It is important to understand some of the functions of the title agent. They are responsible for handling all the money in a transaction. They send mortgage payoffs, pay taxes when close to due dates, disburse funds to various entities such as contractors making repairs prior to sale in response to requests to remedy, and record important documents such as deeds and mortgages. In return, they charge a settlement fee and receive a portion of the title insurance premiums.
Given the unique position of the title agency in the transaction and the responsibilities that come with that position, it is difficult to find a reason not to accept the offer of Closing Protection. If a title agency were to go out of business the day after the closing and something is not done, such as paying off the seller’s mortgage, what would a seller do? What recourse is available without the Closing Protection? The seller could sue the defunct title agency but the time, effort and money to do so, combined with the likely inability to collect on a judgment, render that option unreasonable. Perhaps the seller could liquidate other assets to pay off the mortgage, but that would be like paying the mortgage twice, as the payoff was deducted from the sale price to reach the bottom line for the seller. While the odds are not high of a title agent committing one of the defined acts, why have the risk at all if it can be easily and economically mitigated? That is the purpose of Closing Protection and that is why I recommend it to all of my clients.