Insurance against mechanic's liens is a significant source of claims. This bulletin is issued to remind you of required procedures and recurring issues relating to mechanic's liens.
Mechanic's liens can encumber real property even though they may not be recorded in the public records. Many state statutes provide that mechanic's liens can relate back in time to the first day that the work was performed. In addition, some statutes provide that all mechanic's liens of all potential lienors relate back in time to the commencement of the first work performed by anyone on the property. This statutory preference has the potential to obtain priority over the insured interest. Therefore, in most states, commitments and policies should contain a general mechanic's lien exception for "Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records."
In general, in order to provide insurance against mechanic's liens, where requested, by deletion or modification of the general mechanic's lien exception, you must confirm that no lienable work was performed during the applicable lien period or that all such work has been paid in full.
This is generally done by:
(A) if there has been no recent construction, the Company receives a satisfactory affidavit and indemnity executed by the owner stating that no improvements have been made to the premises during the applicable lien period, or
(B) if there have been only minor repairs during the applicable lien period, the Company receives a satisfactory affidavit and indemnity executed by the owner describing such repairs and stating that all such work has been paid in full. The Company may, at its option, also require proof of payment of all such work, or
(C) if there has been recent construction, the Company receives a satisfactory final affidavit and indemnity, proof that all work and materials from which a lien may arise have been paid in full (e.g., lien waivers, copies of paid bills, etc.), and a list of all contractors, subcontractors and suppliers. In addition, the Company, at its option, may also require filing of a notice of completion and receipt of satisfactory financial statements, if applicable. With respect to any of the foregoing, if doubt exists as to whether work was performed and/or completed, you should also require an inspection of the premises. These general guidelines are subject to modification by your underwriter to conform to local practices and requirements.
Insuring against mechanic's liens during construction, where permitted, requires special attention. If the project involves a construction loan (i.e., pending or proposed improvements), contact your underwriter regarding additional requirements, exceptions and procedures. In some states, recording of the construction mortgage is sufficient to establish priority. In some states, you must require an inspection to verify that no work was begun prior to recording. However, in some states, particularly where the construction mortgage cannot obtain priority over mechanic's liens or where priority has been lost, the Company requires compliance with special procedures, such as a pending disbursement clause in the policy, indemnities for possible mechanic's liens, satisfactory financial statements, and proof that all work performed to date has been paid in full.
This bulletin also highlights several topical bulletins that address important recurring issues relating to mechanic's liens. Please be mindful of these issues in connection with your transactions, and in particular in connection with recent construction. Please refer to these bulletins periodically. Please also refer to your local underwriting bulletins and state-specific practices and standards, as well as the general resources available in Virtual Underwriter.
SLS2007007: Insuring Around, Over, or Against Outstanding Enforceable Recorded Defects, Liens, and Encumbrances. This bulletin reminds you that you should not insure over an enforceable mechanic's lien claim without approval from an underwriter.
SLS2008003: Mechanic's Liens. This bulletin outlines "red flags" that may be a warning of potential mechanic's lien problems.
SLS2008006: Builder Transactions and Mechanic's Liens. This bulletin discusses procedures to be followed when insuring a builder sale or builder construction financing.
SLS2008021: Foreclosures and Mechanic's Liens. This bulletin discusses the relationship between mechanic's liens and foreclosures, and emphasizes the need to confirm that all mechanic's liens have been properly foreclosed.
SLS2008024: Vacation Homes and Mechanic's Liens. This bulletin discusses the importance of vigilance with respect to mechanic's liens affecting high-end vacation homes.
MU2008009: Mechanic's Liens on Condominium Projects. This bulletin discusses the potential impact of a project's mechanic's liens on individual units and mortgages. The same concept applies to phased subdivision construction.
If you have questions relating to this bulletin or any of the referenced bulletins, please contact Stewart Legal Services or your local underwriting personnel.
For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.