A document assuring reimbursement for financial losses stemming from certain forms of misconduct or negligence by a settlement agent in a real estate transaction. It is issued by a title insurance underwriter and protects the lender and/or the buyer against losses such as theft of funds or failure to follow closing instructions. For example, should the settlement agent misappropriate funds provided for the purchase of a property, this letter would provide coverage up to a specified limit.
The significance lies in mitigating risks associated with potential settlement agent malfeasance, providing financial security and confidence in the completion of the transaction. Historically, lenders and buyers bore the full brunt of losses caused by dishonest or incompetent settlement agents. The introduction of this instrument shifted the burden of risk to the title insurer, promoting greater stability and security within the real estate market. It also streamlines the closing process by assuring parties that identified risks are addressed by a responsible insurer.
