Tuesday, February 17, 2009

Mechanics' Liens in Title Insurance

Mechanics' liens present a unique problem for title insurers. A mechanics' lien is established of record by the filing of a Notice of Lien, Claim of Lien or similar document. The priority of the lien, in many states, however, may date from the time of commencement of the work for which the lien is filed. Therefore, if work is commenced before the issuance of a title policy but the lien is filed after the date of policy the title search will not disclose and the policy will not reflect the existence of a lien that is, in fact, prior to the interest insured by the policy.

Many title policies except coverage of this risk with language that excepts to matters not shown in the public records as existing liens at the date of policy. The title insurance company may provide mechanics' lien insurance to the lender by issuance of a loan policy:

- Without exception, based upon priority of the mortgage over subsequently recorded mechanics' liens, because state law requirements are met (state law may provide that the construction mortgage has priority unless a notice of commencement is recorded before the mortgage, or a mechanics' lien is recorded before the mortgage, or visible commencement of construction occurs before the mortgage is recorded).

- With exception to unrecorded mechanics' liens (in many jurisdictions mechanics' liens have priority over or parity with the mortgage, in all or many cases, such as construction loans, or where visible commencement began before recordation of the mortgage).

- With a pending disbursement clause (which may limit priority coverage to authorized disbursements, or construction performed before a specified date). Pending disbursement clauses will vary. They may provide that the coverage increases as disbursements are made in good faith without knowledge of objections or other matters, they may include requirements for waivers and affidavits stating bills have been paid for the last draw, and they may require a continuation of the title examination.

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