Mechanic's liens, statutorily designated as Construction Liens in North Dakota, are a significant source of claims. This bulletin advises you of required procedures relating to Construction Lien coverage only on Loan Policies during construction (including rehabilitation, renovation, and the like). It should be read in conjunction with other National and state-specific Bulletins and guidelines relating to mechanic's liens and construction liens.
(A). Do not delete the general mechanic's liens exception from the Loan Policy during construction without underwriter approval.
(B). Include our Pending Disbursement Clause PDCX16 as described in paragraph B below if the Loan Policy is issued during construction.
(C). Other forms of coverage, including an acceptable Down Date Endorsement, are described in paragraph C below.
(D). Any Future Advance Endorsement must contain a mechanic's liens exception as described in paragraph D below.
A. The General Mechanic's Liens/Construction Liens Exception
All commitments and policies must contain a general mechanic's liens/construction liens 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."
Before or during construction, or if you are unable to determine that no construction has been or will be performed, you may not delete the general mechanic's liens/construction lien exception from a Loan Policy without underwriter approval.
B. Pending Disbursement Clauses/ Endorsements
You must use pending disbursement clause PDCX16, either inserted as an exception or added as an endorsement, in all Loan Policies issued prior to and during construction or if loan proceeds will fund construction. You may not modify this clause. An underwriter must approve use of this clause. You also should determine that the mortgage complies with state law for future advances.
PDCX16 ND STGC Loan Policy - Construction - North Dakota:
Pending disbursement of the full proceeds of the construction loan secured by the construction mortgage described in Schedule A, this Policy insures only to the extent of the amount actually disbursed in good faith for the payment of materials or labor for improvements, but increases in the amount of each disbursement made in good faith for the payment of materials or labor for improvements, and without knowledge of any defects, liens or encumbrances on the title, up to the face amount of the Policy. The Company in no way guarantees the sufficiency of the mortgage proceeds as adequate to complete improvements, or against loss because of the failure of the Insured to disburse the entire amount of proceeds of the loan secured by the lien of the Insured Mortgage. This Policy does not insure against the lack of priority of the lien of the Insured Mortgage as it secures Indebtedness other than amounts disbursed by the Insured in good faith for payment of materials or labor for improvements on the Land over any statutory lien for services, labor or material arising from construction of any improvement or work related to the Land. At the time of each disbursement of the proceeds of the loan, the title must be continued down to that time for defects, liens or encumbrances on the title intervening or recorded between Date of Policy and the date of the disbursement.Nothing contained in this paragraph limits any exception or any printed provision of this Policy.Notwithstanding any other language contained in the Covered Risks or any other insuring provisionsof this Policy, the above provisions are the sole provisions applicable to coverage for loss or damage resulting from construction liens or claims not of record.
C. Other Forms
(1)Use of any other form of pending disbursement clause, or any other endorsement providing mechanic's liens coverage, or issuance of a "clean" policy (i.e., where the general mechanic's liens/construction lien exception is deleted but no suitable pending disbursement clause has been inserted, although Exclusions will apply) requires approval of the Senior Underwriting Committee.
(2)Down Date Endorsement. During construction, upon satisfaction of the requirements stated in the pending disbursement clause, you may issue an endorsement dating down the Date of the Policy and increasing the Amount of the Insurance. You should use STG Construction Loan Endorsement 1. Any other form of Down Date must be approved by an underwriter.
D. Future and Future Advance/ Revolving Credit Endorsements
You may not issue a Future Advance/ Revolving Credit Endorsement (such as ALTA Endorsement 14-06, 14.1-06, or 14.2-06) on a Loan Policy insuring a construction loan mortgage unless the endorsement includes a mechanic's liens/construction liens exception, such as the general mechanic's lien exception.
If you have questions relating to this bulletin or any of the referenced bulletins, please contact Stewart Legal Services or your local underwriting personnel.
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