What Is an Escrow? Definition

An escrow is defined as a sum of money held by a third-party during a transaction. It is basically a way of demonstrating that money is ready to be paid but will only be released when certain conditions are met. 

An escrow can also refer to a company that provides escrow services.

What is an escrow? Escrow process flow

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What Are the Most Common Examples of Escrows?

The most common type of escrow occurs in home mortgages. Mortgage terms usually require the homeowner to pay property tax and buy insurance, yet there is no guarantee that the homeowner will do these things. 

An escrow is a separate account into which money is deposited in order to provide assurance that the mortgage terms (property tax and homeowner’s insurance) will be satisfied. 

An escrow also occurs in a variety of transactions, both online and offline, where final payment is reserved until specific goods or services have been delivered. Examples include:

•    Deposits on rental properties that are returned at the end of the rental term.
•    The ability of an ATM to return deposited funds to the customer if the machine’s counting is not accepted.
•    A legal settlement in which the defendant pays money into an escrow fund, which is then distributed to the plaintiff, thereby relieving both parties of the need to transact directly.

What Is an Escrow Company Required to Do?

An escrow company is responsible for making sure that funds are used for their intended purpose.

For instance, legal settlements often involve the payment of medical bills.

An escrow would be obligated to make sure that the recipient used the funds received to pay medical bills.

Although escrow companies are often entrusted with large sums of money, they are not necessarily legal trustees.

The exact legal nature of the relationship between escrow companies and transacting parties will depend on the specific terms of the agreement. 

Escrow companies are, however, subject to standards of gross negligence. 

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