CHCP Insurance & Liability Considerations 2 — Questions and Answers
Question 1: A buyer's lender requires a specific dollar amount of hazard insurance coverage. What minimum coverage amount is typically required?
- 50% of the loan balance
- The appraised value of the land only
- At least 100% of the replacement cost of improvements (Correct answer)
- The original purchase price of the property
Correct answer: At least 100% of the replacement cost of improvements
Lenders typically require hazard insurance equal to at least 100% of the replacement cost of the improvements to protect their collateral.
Question 2: Which type of title insurance policy is designed specifically to protect the lender's interest in the property?
- Owner's policy
- Loan policy (mortgagee's policy) (Correct answer)
- Leasehold policy
- Extended coverage policy
Correct answer: Loan policy (mortgagee's policy)
A loan policy, also called a mortgagee's policy, protects the lender up to the loan amount and is required by most lenders.
Question 3: What is the primary purpose of errors and omissions (E&O) insurance for closing professionals?
- To cover physical damage to the closing office
- To protect against professional mistakes that cause financial harm to clients (Correct answer)
- To insure the escrow funds held during closing
- To satisfy the lender's title insurance requirement
Correct answer: To protect against professional mistakes that cause financial harm to clients
E&O insurance protects closing professionals against claims arising from negligent acts, errors, or omissions committed during professional services.
Question 4: A homeowner discovers a neighbor's fence encroaches 2 feet onto their property after closing. Which type of insurance would most likely cover this title defect?
- Homeowner's insurance
- Flood insurance
- Owner's title insurance (Correct answer)
- Private mortgage insurance
Correct answer: Owner's title insurance
An owner's title insurance policy covers encroachments and boundary disputes that existed prior to the policy date.
Question 5: What does 'subrogation' mean in the context of title insurance?
- The insurer's right to pursue a third party that caused the insured's loss (Correct answer)
- The buyer's right to cancel the insurance policy
- The lender's right to force-place insurance on the property
- The seller's obligation to provide clear title at closing
Correct answer: The insurer's right to pursue a third party that caused the insured's loss
Subrogation allows the title insurer, after paying a claim, to step into the insured's shoes and seek recovery from the responsible party.
Question 6: Which federal law governs the disclosure of flood zone status and potential flood insurance requirements to homebuyers?
- RESPA
- The Flood Disaster Protection Act of 1973 (Correct answer)
- TILA
- The National Flood Insurance Reform Act of 1994
Correct answer: The Flood Disaster Protection Act of 1973
The Flood Disaster Protection Act of 1973 requires lenders to notify borrowers if property is in a Special Flood Hazard Area and mandates flood insurance.
Question 7: A closing agent fails to record a mortgage lien within the required timeframe, resulting in a loss to the lender. Under which coverage would the closing agent seek protection?
- The property's homeowner's insurance
- The closing agent's fidelity bond
- The closing agent's E&O insurance (Correct answer)
- The lender's title insurance policy
Correct answer: The closing agent's E&O insurance
Failure to record a lien timely is a professional error, making it a claim under the closing agent's errors and omissions insurance policy.
CHCP Insurance & Liability Considerations 2
A buyer's lender requires a specific dollar amount of hazard insurance coverage.
What minimum coverage amount is typically required?