- September 14, 2010
- All Issuing Offices
- Considerations when insuring a sale from a lender while there is a pending mechanics' lien claim
Due to increased claims, the Company is often asked to insure a sale of land by lenders we insured and who have taken property back in a foreclosure. In many states lenders that had lost priority to mechanics' liens have open claims because we insured them in a first priority position. We typically perform an underwriting analysis to determine if we are increasing our liability or are losing any policy defenses. If the answer is no, we are generally willing to insure and provide affirmative coverage over the pending mechanics' liens. We are in essence swapping one insured for another without resolving the claim yet. When doing this, we must be aware of the potential consequences of letting our original insured lender off the hook for remaining liability.
As you encounter situations similar to the examples below, keep in mind that because a claim is pending and we are insuring over known risks, issuing offices must obtain approval from a Stewart underwriter who will consult with claims counsel.
Recently, we agreed to insure a buyer in a scenario similar to the above. One of the defenses the Company asserted against the lien claimant was that, as the general contractor, they had executed an indemnity to the Company and we argued that under the doctrine of setoff, they couldn't indemnify us and maintain a lien on the property we had insured the lender having a priority lien position in. After the deed from the bank to our new insured, the lien claimant argued that because the bank limited its warranties of title to exclude the lien, we can no longer use the indemnity against them. Since the bank has no more liability, the lien claimant is arguing they have no obligations under the indemnity.
Another situation arose in a claim where a general contractor gave the lender a guarantee of completion and performance. Because the guarantee assures the lender the project will be free and clear of all mechanics' liens and subordinates the guarantor's lien rights to the lender, we are requiring the lender to remain liable to their buyer on the lien issues by warranting title against them.
There are many potential fact patterns and the examples present just two. Mechanics' liens claims are prevalent right now, but the analysis the examples represent could apply to many situations when we insure a transaction while claims are pending. Therefore, approval must be obtained from a Stewart underwriter who will consult with claims counsel.
Please comply with Stewart Bulletin SLS2008021.
If you have any questions relating to this or other bulletins, please contact Stewart Legal Services or your local underwriting personnel.
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