The Closing Protection Letter protects the lender and/or the buyer — the insured party — if there is misconduct by the closing agent. It’s a contract between a title insurance company and a lender. The protection is for the actual loss of funds incurred due to the closing agent’s misconduct.
The CPL explains the requirements for a claim and the conditions needed to be met. It will also describe what situations are excluded from this coverage. Most make a third party beneficiary of the borrower, or homeowner/buyer.
A Closing Protection Letter usually covers failure to follow the closing instructions or fraud in handling the lender’s funds or paperwork. The letter will mostly cap the liability at the face value of the title insurance policy. Some letters will limit the amount of time to make a claim — a year is most common for this limit.
TL;DR: the CPL provides the lender with assurance the title agents will properly handle their money and documents.